He therefore did his usual thing: he wrote (two books and apparently much else) on the subject. The books adopt the contagion theory pushed by one of his arch villains, Federal Reserve chairman Ben Bernanke. Unfortunately, Posner’s efforts display every possible inconsistency — with prior writings and between the two books, and even within the 2009 book itself. In short, both books are uncharacteristic and unworthy of him.
Overview The first book, A Failure of Capitalism, is a hastily written, short effort padded by small pages, large type, and wide line-spacing. The result is mainly a recitation of pro-intervention arguments that were used to defend government-bailout actions that were then being implemented.
The book is confusing about the cause of the crisis. On p. xii, a sentence asserting a market failure is inserted into a paragraph devoted to government errors. The book stresses the role of loose Federal Reserve policy and asserts that supposedly excessive risk-taking by financial institutions was a rational response to loose money and inadequate regulatory controls. Only scattered, inadequately developed sentences note the role of home ownership–promoting government policies. What dominates is the revival of questionable macroeconomic theories and a muddled argument about tightening financial regulation.
Given the poor effort of the 2009 book, it is not surprising that Posner would make a second attempt a year later. A Crisis of Capitalist Democracy is better developed but ultimately more unsatisfactory. The old Posner is present in it, but in unresolved conflict with the new. Over half of Crisis is devoted to a revised and updated review of the crisis. The rest consists of ruminations on related topics, such as the Obama administration’s financial regulatory reforms (which Posner rightfully deems misguided), an explanation of the crisis that is entitled “The Fragility of Finance,” a rambling effort to revive Keynes’ reputation, a similarly problematic review of uncertainty, another attack on macroeconomics, Posner’s alternative “Reforms You Can Believe In” (some of which, he concedes, he does not fully believe in), and the implications of globalization. He also writes of his concern that the Obama administration’s ambitious program will produce unmanageable strains on the nation’s economy.
Playing economist In Crisis, Posner poorly develops two of his own insights. The first is one that brought him fame: that because of both inherent limitations of government and political pressures, regulation and other interventions are questionable exercises. Finally, on p. 173, he digresses to apply his skepticism to the Obama administration’s financial regulatory reform proposals, but he does not appreciate that this skepticism should extend to many of his arguments in the book.
He presents a long list of valid criticisms of regulation. However, worse than ignoring the inherent problems of information, Posner keeps calling for better information. In parallel, he combines concerns about the drawbacks of creating new organizations with proposals for adding more government agencies. This shift of policymaking to agencies was discredited in the 1970s energy debates in which I was involved. Back then, the solution to the nation’s energy woes was said to lie in the creation of a new department, complete with an “independent” data-gathering agency. It proved worse than nothing.
In Failure, Posner observes, “The very existence of warring schools within [macroeconomics] is a clue that the field is weak, however brilliant its practitioners.” Yet he ignores that warning sign, and in both books dabbles in macroeconomics, presenting controversial macroeconomic positions as clearly valid, and arguing vigorously for interventionist countercyclical policy. His discussions neglect the several schools of macroeconomics that stress the inherent limitations of knowledge, and their corollary skepticism of government’s ability to anticipate and counteract fluctuations. Crisis does criticize the Federal Reserve for bad action, but never recognizes that this may be an inherent fault that supposedly better policymakers could not correct.
Posner does not help his discussions by claiming that economists who support countercyclical policies do so because they are “liberals,” while other economists who oppose such policies do so because they are “conservative.” The other two possibilities are at least as plausible — the position defines the ideology or the appraisal of instability determines ideology.
His review of macroeconomics worsens the situation. He botches treatment of comments given him by Robert Lucas, who won the Nobel Prize in Economics for his work on the implication to macroeconomics of the assumption of rationality. Posner joins the crowd in misunderstanding Lucas’s point that no pure theory can ever capture the complexities and misunderstandings that occur in practice. Thus, a curious situation prevails in which Lucas and similar writers thought that they were strengthening the case for Milton Friedman’s call for reliance on automatic rules, but even Friedman thought they were exaggerating rationality. Exaggerated rationality, in fact, is the crux of coherent economic theory. Only empirical analysis can handle the complexities in practice. Friedman, who preferred incremental changes, called for preserving central banks but wanted them to follow rigid rules on monetary policy. Friedrich Hayek advocated allowing competitive money issue by private banks, so that success would depend on providing money of dependable value. Others call for the specific monetary rules of the gold standard.
A related problem is that Posner adopts and runs with another dubious Bernanke concern: deflation. Economies can adapt to predictable changes in price levels, but the concern is that individual wages and prices will respond too slowly to unexpected price changes, resulting in reduced output and employment. Deflationophobes like Posner rarely distinguish between the price drop itself and the possible resulting impacts.
Government to the rescue Posner in both books adopts the positions that capitalist economies are unstable; crises are contagious and must be stopped before the economy collapses; and, with proper guidance, governments can and will adopt sound corrective policies. His skepticism about macroeconomics and intervention should have inspired more caution.
Crisis more clearly expresses the position that officials such as long-time Federal Reserve chairman Alan Greenspan and academic economists are the true culprits. While the attack on government is correct but too narrow, Posner’s scapegoating of the economics profession conflicts with his recognition of the diversity of academic views. Over the past decade, those views have ranged from calls for more vigorous stimulative measures to warnings of a housing bubble. Politicians would thus have to choose which of those views is correct, and what policies would be appropriate and effective. The anti-intervention case is that politicians lack the information and motivation to select correctly.
Particularly in Failure, Posner spins a largely mythical tale of deregulation as the chief cause of the financial crisis. The factually valid part of his story is that Depression-era limitations on specific practices of financial institutions were lifted. He omits that these restrictions were unwise and, as usually occurs, had already been circumvented by the time they were withdrawn. Thus, in a case mentioned by Posner, restrictions on interest-paying bank accounts inspired the mutual fund industry to develop money-market funds with check-writing privileges, a close substitute for interest-paying bank accounts. Lifting that restriction was appropriate. The other part of the charge, right from Obama’s campaign rhetoric, was that the supposed free-market outlook of the Bush administration produced increased laxness in regulation. Yet Posner (and President Obama) does not consider the alternative that regulators are inherently incapable of recognizing and alleviating dangers.
Moreover, it is not until p. 254 of Crisis that Posner discusses direct government influence on the mortgage debacle — a topic the he ignored in Failure. He starts with an unnecessary disparaging remark: “[I]t is at this point that the political right swings into action.” (In both books, Posner tends to use “conservative” and “right wing” to describe advocates of limited government, whom he consistently disparages.) He finds mortgage intervention unwise, but not a key factor. This is inconsistent even with what he presents, let alone what others have concluded.
In both books, Posner’s dedication to calling the downturn a “depression” aggravates misunderstanding of established procedures. The National Bureau of Economic Research produces a chronology of economic turning points — the start and end of downturns. As Posner eventually notes (Crisis, p. 218), the dating of recessions is based on informed appraisal by an NBER committee of prominent economists of critical economic data, rather than a mechanical rule. The NBER and other observers measure the severity as well as the duration of these downturns. However, no effort is usually made to distinguish between “ordinary” recessions and depressions, or to characterize explicitly when the upturn in any sense is “sufficient.” Thus, Posner was free to develop criteria for what constitutes a depression. In Failure, he is content with a single concept: an anxiety-producing downturn; in Crisis, he argues that “depression” is preferable to “recession” as a term because “recession” is a euphemism; in a footnote, he reiterates 10 justifications for this view that he had published in previous work. This seems a way to justify his hasty use of “depression” in Failure. He undermines his case by the silly analogy that the wars in Korea and Vietnam were called “fights.” The correct euphemism was “conflict,” and even that was not widely used.
Such little lapses are too frequent. For example, he twice mentions the U.S. adoption of tariffs on tires from China and, in the second discussion, claims they were based on “a heretofore unused law” on which, in fact, an extensive literature exists because of the law’s frequent misuse.
Politics and Posner His worst is near the end of Crisis. He gratuitously attacks the belief of “right-wing extremism” that Keynes was a fascist. As Posner observes, these attacks on Keynes are based on one sentence in the foreword to the German edition of the General Theory observing totalitarian states were better positioned to implement Keynes’ ideas. This clearly was meant as a statement of fact, not of approval. Regardless, Posner’s concern is irrelevant. It alternatively may be a means subtly to discredit the free-market economists whom he cites and their rejection of Keynes. However, these economists have nothing to do with terming Keynes a fascist. Few of these truly extremist Keynes bashers are professional economists — the chief exception being the notoriously extreme Murray Rothbard. By reviewing this, Posner comes perilously close to using the same tactic on free-market economics.
The more fundamental problem is that Posner attacks fringe hysteria about Keynes while evading essential problems. The General Theory is notorious for its rambling, unsystematic approach. Observers have seized on parts of the arguments as particularly essential and, depending upon their inclinations (which often are not always ideological), decided that this justifies either praising or damning Keynes. Posner, for example, likes Keynes’ advocacy of active countercyclical policy and the stresses on psychology and its shifts.
Posner puts himself in an uncomfortable balancing position. He fears the instability of free markets. He also has deep concerns about the reliability and competence of government and about a White House that systematically rejects such worries. He inadequately treats the long-term problems of the expectational and financial implications of the intervention. The apparent, but underdeveloped, argument is that economic instability is so great that even defective governments can and should intervene in a crisis. He recognizes the unrealism of those confident in the effectiveness of government. The strong argument that market adjustment works better than feasible government intervention is summarily rejected. As noted, no attention is given to arguments about the impossibility of successful active management and the desirability of stable, automatic policies. In a throwaway line in Crisis, he notes his views “are not definitive.” While true, it is totally inconsistent with the bulk of both books.
The two books, then, are botched efforts by Posner to adjust his outlook, unjustified by either the events treated or his exposition of them. The vigorous interventionists whom he criticizes simply assume away poor performance. Advocates of limited government then validly counter that this ignores the inherent drawbacks. Posner is attempting to reconcile such skepticism with a desire for action. If this is not an impossible task, Posner has not proved otherwise.
