Trust Us!

Few experts in our society could pull off saying:

Emergency!!!  We will suffer terribly if you don’t spend a trillion dollars right now overpaying for stuff from our friends!  No, you don’t have time to study the problem, nor will we present an analysis for your review.  No, other experts in our field cannot actually see this problem, and there will never be data showing the problem really existed.  You just have to trust us and give us the trillion right now!!

US military experts said something similar on Iraq weapons of mass destruction, but at least they admitted we’d eventually be able to see if they were wrong (as they were).  Medical experts implicitly say something similar about the health value of the second half of medical spending that costs a trillion dollars a year, even when our best data show little value, but this is a steady problem not a sudden new problem.  Global warming experts have been trying, so far without much success, to get us to spend similar amounts on their problem, even though other experts can supposedly verify it.

Given how much less respect and deference economists get on most policy topics, relative to docs, physicists, or generals, I’m surprised to see some economists just got away with this sort of thing.  The US has given top government economists, such as Paulson and Bernanke, well over a trillion in mostly blank checks to spend saving their Wall Street friends from ruin, supposedly to prevent another great depression.  But it seems economists looking today at the data available then just can’t find clear evidence a massive buyout was needed.

Alex Tabarrok has been reviewing the evidence here, here, and here.  Tyler responds, but as Bryan notes, not effectively.  Yes we are heading into a serious recession after housing over-investment, a recession exacerbated it seems by these dire warnings.  And yes many (but not all) New York investment banks were dying from terrible housing investments.  But the rest of banking and insurance industries seem to be doing all right, and economic theory certainly doesn’t clearly say the economy will die if we let some investment banks go bust. 

Now none of this proves Paulson and Bernanke don’t have secret info they’ll never be able to divulge, and deep wisdom they’ll never be able to explain, showing we must help their friends.  But is this feeding frenzy really what you’d expect that to look like?:

The Treasury Department is dramatically expanding the scope of its bailout of the financial system with a plan to take ownership stakes in the nation’s insurance companies, …  Insurers … have pushed the Bush administration to include them in the plan. … Government officials worry that the collapse of a major insurer could further destabilize the financial system …  The new initiative underscores the growing range of problems that Treasury is scrambling to address with the $700 billion allocated by Congress this month. The shape of the plan has changed repeatedly since … Paulson Jr. introduced it last month as an effort to rescue banks by buying their troubled mortgage-related assets. That original mandate has now been pushed aside by a plan to take equity stakes in banks and insurance companies, and other businesses are lobbying to be included.  The government has been forced to expand the plan partly because the federal guarantees previously given some institutions, such as banks, have put other companies and financial sectors at a disadvantage, making them less attractive to uneasy investors.

Added 26Oct:  Tyler offers more data.   
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  • I similarly found Tyler Cowen’s reasoning very unconvincing.

    the second half of medical spending
    How did you arrive at that estimate?

  • TGGP, I added a link at the medicine phrase.

  • Andrew C

    “Global warming experts have been trying, so far without much success, to get us to spend similar amounts on their problem, even though other experts can supposedly verify it.”

    There is a bit of a disconnect, isn’t there? As a physical scientist I find the level of certainty expressed about the financial crisis incomprehensible. Not sure what you mean by ‘supposedly’. It seems that the standard of evidence required to validate a theory, model or hunch in economics to the point that governments act is substantially lower than in the physical and medical sciences.

    Perhaps economists don’t get respect or deference in discussions about policy, but when it comes to influencing governments’ decisions about actual policy it seems to me that economists are the most listened to experts. The heads of institutions like reserve banks and competition regulators are invariably economists. To use your global warming example, at least in the UK (Stern) and Australia (Garnaut) governments have only made commitments to action following advice from senior economists.

  • MikeF

    Tabarrok’s (compelling!) claims are not evidence that the bailout “wasn’t needed”. On the contrary, it’s very possible that the bailout has provided confidence to banks that would be otherwise be less willing to lend. Of course, we’ll never know how things are going in the universe where the bailout didn’t pass…

  • modern macroeconomics is founded on the fallacious theses presented in General Theory of Employment, Interest and Money. Most especially chapter 24.

  • Ian C.

    The whole point of democracy is to slow down decision making, to use criticism to reduce the odds of really major mistakes. And here we have one of the biggest decisions in a while and the President himself urged it to be passed much discussion.

    I don’t know whether it was corruption or not, but I do know it’s not the way they are supposed to make decisions.

  • Whatever Happened to Gridlock?

    Until recently, the nice thing about American democracy was that it was hard for policy to rapidly get worse. What happened? Robin Hanson points to the amazing epidemic of deference to doom-saying economists. Is that the real story?&n…

  • Why do you call Paulson an economist? Wikipedia describes him as an investment banker with degrees in English and Business Administration. It doesn’t seem surprising that an investment banker has more influence than economists.

  • trust me, super dangerous!

  • Douglas Knight

    Peter McCluskey,
    I believe that the news media and (less confidently) the government treat Bernanke & Paulson interchangeably, which somewhat addresses your point. Moreover, it’s not just about raw power, but about areas of expertise. If Paulson came out against rent control, would that matter any more than that economists claim a consensus? (Actually, I don’t think it’s that politicians reject economists’ opinions on rent-control as being out of their expertise, so much as politicians don’t notice that economists have any opinions outside what politicians recognize as their expertise. Obama is striking in noticing how economists view themselves.)

    Mainly, I wonder if “experts” is a just a completely wrong choice of category, though I have nothing better to suggest.

  • Bill Woolsey

    Paulson holds a poltical position and is from Wall Street. But Bernanke is an academic
    with a “nonpolitical” job. If the Fed had used open market operations and let FDIC wind up failed banks, with the “bailout” being a bailout of FDIC, would this make it
    less likely that Bernanke would be reappointed? Assuming recovery starts before 2010,
    he would certainly be respected among academics if he wasn’t reappointed due to
    pressure from… failed Wall Street firms (how much pressure could they impose?)

    Do you think he is looking foward to a high paying job at a money center bank?

    I just don’t get the “Bernanke is bailing out his friends” story.

  • billswift

    If Krugman, who is really nothing but a journalist, can win the Nobel Prize for economics, then is there really much to economics in the first place?

  • Andrew, I wasn’t trying at all to dis global warming scientists.

    Peter, I’m talking about public perceptions, which may not distinguish finance from economics.

    nazgulnarsil, cute comic.

    bill, Krugman is far more than a journalist.

  • Doug S.

    Krugman is a professor of economics at Princeton University and got the Nobel Memorial Prize in Economics for work published in 1979, 1980, and 1991. He may be most famous for his op-ed column in The New York Times, but he is a serious academic economist.

  • Doug S.

    Robin: A thought occurred to me about medical spending. There exists a classic economic model that would be consistent with medical spending being completely uncorrelated from health outcomes – that of a monopoly with the ability to implement price discrimination. (In other words, it’s exactly what you’d expect if people paid widely varying amounts of money for the same average quality of treatment.)

  • josh

    Certain groups were eager to accept the claims of the experts as it lowered the status of groups they don’t like, ie republicans, wall street bankers, “fat cats”, etc.

    Certain groups were eager to accept the claims because they get a whole lot of money.

  • Mr. Language Person

    I think you want the word “exacerbated”, not “exasperated” in the fifth paragraph. Well, anyway, _I_ want that word there, because it is more correct.

    “Exasperated” means “made more angry or annoyed”, while “exacerbated” means “made more severe or intense”. They’re similar in both sound and meaning, thus easily conflated.

  • Mr. L, made the change you suggest.

    Josh, you all can lower my status for lots less than a trillion; heck I might go as low a billion.

  • Cyan

    Mr. Language Person,

    I was going to suggest the same change when the post went up, but then I checked and discovered that “exasperate” is listed (occasionally as “archaic usage”) essentially as a synonym of “exacerbate”.

  • Scope insensitivity surely plays a role here. Reading one more zero on the end of a number doesn’t have ten times the emotional impact.

  • josh

    What Eliezer said. Also, how much more in taxes should a typical person expect to pay in their lifetime as a result of this?