Dani Rodrik on Simon Johnson

Of Johnson’s widely cited and highly regarded Atlantic piece, Rodrik writes:

Simon’s account is based on a very simple, and I believe misguided, theory of politics and economics.  It is an odd marriage of populist and technocratic visions.  Countries fail because political elites always end up in bed with economic elites.  The solution, apparently, is to let the technocrats (read the IMF) run your affairs.

On the whole, I think I side more strongly with Rodrik than Johnson. (I find it hard to have a firm opinion in these matters.) That said, perhaps it’s “populist” to think political elites always end up in bed with economic elites, but it seems, as a matter of fact, they often do. My opinion is that a certain “populist” enthusiasm for democracy, in the absence of strong legal and cultural constraints on government action, almost inevitably delivers a great deal of regulatory capture–that is, tucks political elites snugly in bed with corporate elites. Isn’t that a cynical vision? Moreover, when the incentives of insufficiently-limited democracies lead to this kind of result, supra-national technocratic institutions can in fact act as a salutary check on governments precisely because they are undemocratic.

Free Exchange’s Washington blogger seems to have something like this in mind:

Of course, the IMF can’t hold America’s feet to the fire in the way that the WTO can. But the WTO achieved that power, in part, because American leaders wanted an outside force to be able to tie their hands, so they could shrug at angry voters and say, “Sorry, them’s the rules”. I wouldn’t be surprised to see national leaders constrained in crisis response by domestic politics seeking to empower the IMF in the near term.

That’s a really interesting thought. Now, I am not, and have never been, the biggest fan of the IMF and Rodrik is right that it’s weird for Johnson to talk about the Fund as if everyone knows all about its totally awesome track record. That’s just a little too convenient for Johnson, an old IMF hand. Nevertheless, it’s not crazy to look for a disciplining force external to national democratic politics when the interest group dynamics of national democratic politics has helped create the problem and persist in blocking the solution.

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25 thoughts on “Dani Rodrik on Simon Johnson

  1. Hmm … really interesting. Although .. Rodnik: “Countries fail because political elites always end up in bed with economic elites. The solution, apparently, is to let the technocrats (read the IMF) run your affairs.”In Johnson's defense, not all countries are created equal. And I can't see the US 'failing', in Rodnik's dramatic phrasing.But frankly? Shorter Simon Johnson: “Follow the Golden Rule. Them with the gold, makes the rules.”

  2. Shorter Simon Johnson: “Follow the Golden Rule. Them with the gold, makes the rules.”Or John Jay: “The people who own the country ought to govern it. ” One of rare instances in which I sympathize with the Federalists, along with Andrew Hamilton's “Your people, Sir, are a great beast.”

  3. Right. I mean, the problem with American conservatism, more than any other, is that conservatives have become so anti-leftist, and so inclined to see socialism in every situation, that American conservatives can't admit just simple power politics. It's weird; one of the simplest, oldest stories in the world– people who have money and power use their money and power to keep those without it from getting it– get's relegated to the status of conspiracy theory. But that's not just American life, that's human life, and struggling against that sort of thing is one of the basic human struggles for real liberation. But it's the left who tend to make those critiques, and the right is anti-leftist more than it's anything at all, so for too many conservatives, there's just no such thing as the illegitimate use of economic power.Sadly, the problem with American liberalism is that it is becoming convinced that the only way to be serious is to give up on these kinds of critiques as well.

  4. But surely the most economically damaging aspects of the modern welfare state are the universal entitlement programs, and it's hard to explain those by positing rent-seeking elites.Indeed, those same elites are paying far more for said welfare state – medicare, medicaid, social security – than they are getting out of it.

  5. Freddie–what were you referring to when you mentioned “people who have money and power use their money and power to keep those without it from getting it”?

  6. You know, Freddie's comment reminded me of something I've wondered for some time. Everyone is supposedly rent-seeking, right? Maximisation and all that. But the process of rent-seeking itself costs money. Why shouldn't we expect an equilibrium where rich elites successfully gain more economic rent?

  7. Many rent-seeking companies are forced into the game to remain viable — they would probably invest that money into something more profitable without the feeding trough to pay for.

  8. Well, to take just one example, the ability of moneyed interests to lobby economically and make campaign contributions that lead to the passage of bills that benefit fewer people over more. Take, for example, a powerful local business interest who uses his money to influence the local zoning board to make it impossible for smaller competition to move in. Happens all the time. Maybe more people want the competitor in the community. Then it's undermining democracy. Maybe the competitor could provide a better economic service or achieve better profits. Then it's undermining the market. Now, I find this sort of thing to be true in any system, not just the democracy/capitalism fusion which we (and I include myself) prefer. But you get a lot of people who just deny that this sort of thing happens, which is bizarre to me.Economic power can trump democratic power in our system, and in fact it happens all the time. The appropriate and ethical way to prevent that sort of thing is a big question, of course. But there are certainly many means that those with economic power have to undermine what we consider social legitimate transactions. Some of them are actually illegal, but many of them are just unfair.

  9. Just so we're clear on the scale here. The Social Security Trust Fund, at the end of 2006, stood about $2.4 Trillion in surplus. US Total Spending on Medicaid (2006) was $0.3 Trillion, and on Medicare, it was $3 Trillion. The total wealth of US households fell by $11.2 Trillion in 2008, as a consequence (largely) of recklessness by these “rent-seeking elites”.In other words, this year's losses due to the fecklessness of the “rent-seeking elites” is about twice the total “transfer” in terms of entitlement programs. Yes. I'm mixing assets (Social Security) and transfers (Medicare/Medicaid). But the scale makes the point. It isn't by any means clear that “the most economically damaging aspects of the modern welfare state are the universal entitlement programs”. Arguably they act as stabilizers. You might argue that what these programs represent is an unacceptable intrusion into individual liberty. But to claim they're more damaging than the consequences of recklessness – that's a stretch.

  10. Much of that US household wealth was fictional. There was a giant housing bubble.The real issue was bad assets. You know what those bad assets were? People who took out mortgages they couldn't afford. You can call those people 'elites' if you want to (and I somewhat do since I rent), but I don't think many people will agree.

  11. The bigger and more involved in our lives government is, the more incentive there is for business to get into bed with government.

  12. For everyone buying a mortgage they could not afford, there was someone selling a mortgage that could not be afforded. And then selling mortgages, bundling mortgages, persuading a ratings agency to mark tranches of these bundles as AAA, selling these tranches to other people who borrowed money to buy 'em, selling insurance to everyone in case the deal went bad, and everyone kidding themselves it wasn't a lie and pulling down big money as long as the grift went on. The people who bought the mortgage/house have had their lives disrupted, and their credit rating ruined. Now they're losing their jobs. The people who sold the mortgages are leveraging their bonuses to buy up foreclosed homes at firesale prices.None of which is in any way related to Craig's assertion that “the most economically damaging aspects of the modern welfare state are the universal entitlement programs”, by the way.

  13. The bigger and more involved in our lives government is, the more incentive there is for business to get into bed with government.To which I would sing “Amen!” and offer the following corollary. The smaller and less involved in our lives government is, the more opportunity there is for business to get involved. Ideally, I would pox both their houses. In practice, it's prudent to play one against the other.

  14. When you are trying to compare absolute numbers it does. Much of that loss in US household wealth was bound to happen at some point. Housing values were very over-inflated.The elites were stupid for giving money to the stupids (and that includes poor and middle-class alike while throwing in a few wealthy). As someone who is neither an elite nor stupid, but a responsible adult making rational financial decisions, I don' t feel very sorry for any of these people.Giant welfare entitlements are a huge problem because they represent an attitude that people should have all sorts of things given to them (instead of earned). Do you really think it's that big a stretch from Medicare to telling Fannie Mae and Freddie Mac to make sure loans went to people making under the median income in an area? This is the exact thought process of people like Barney Frank. One entitlement program begets another program and on and on.

  15. With some additional provisions:1. Businesses face competition.2. Businesses can go out of business.Neither of those happens with government and both of those have a large impact on efficiency.

  16. 2. Businesses can go out of business.At which point they are replaced by another business, which is equally rapacious. A new logo is not a new soul.I care less about efficiency than I do about liberty.

  17. As someone who is neither an elite nor stupid, but a responsible adult making rational financial decisions, I don' t feel very sorry for any of these people.Spoken like a true master of the universe! Really. These words reek of the very hubris that led to the trouble in the first place. What is more soulless and “rational” than a Black-Scholes valuation of a CDO on a AAA rated tranche of a bundle of MBSs? And … (sing it with me sisters and brothers).. they was wrong, wrong wrong … Everything we've come to learn about the way the human mind works suggests that it's NOT 'rational', but instead the motor is powered by greed and fear, the wind screen is smeared with doubt and self-delusion, the steering suffers from “long and variable lags”, and the brakes were installed by madmen and are maintained by drunks. Do you really think it's that big a stretch from Medicare to telling Fannie Mae and Freddie Mac to make sure loans went to people making under the median income in an area? The problem is no longer confined to people who took sub-prime loans, and hasn't been since mid 2008. Besides – the primary sources of these non-prime loans wasn't Freddie and Fannie. It was firms like Countrywide.

  18. Two comments:1) The current crisis was largely caused by the Fed, which kept interest rates too low for too long. And Congress, which subsidized house purchases. Without these two factors you wouldn't have had the bad mortgages for the dumb bankers to slice and dice. So sure, what they did was incredibly stupid, but how was it the result of rent-seeking – that is, what favours did the investment banks get from the government prior to TARP? 2) Looking at the current surplus of SS and Medicaid/Medicare is not germane. What matters are the long-term liabilities. And my understanding (please correct me if I am wrong) is that these are huge.

  19. I don't want to bail out any of these idiots. Let the stupid banks fail (and the smarter ones take over) and let the stupid mortgages fail (they can move into my apartment and I can buy their house at a rate closer to market value). Why should I be bailing out retards who signed a mortgage they shouldn't have? The government would be better off giving money to responsible renters instead of retarded home buyers.On Fannie and Freddie, you need to get your facts right:http://archives.chicagotribune.com/2008/aug/03/…Fannie and Freddie were some of the bigger instigators of the problem and other banks jumped on board once they saw what they were doing.

  20. Are you really that blind? Don't you realize that often what forces a company out of business is competition? A competitor offers a better product, a cheaper price, better customer service, etc.Somehow you think a big, inefficient government is good for liberty? No offense, but you and your ilk reaching into my pants to grab my wallet is an impingement on my liberty.

  21. Pingback: Populism. And local newspapers. « Local Democracy

  22. Well, the banks got the general relaxation of regulations by the Bush administration, the lifting of leverage limits to 30 to 1 or some such nonsense, the prohibition of regulation of derivatives, the bankruptcy requirement that derivatives were first in line to be paid, just to name a few. And probably more.Where you been, brother?

  23. A business have always a problem.. Competition is always there.. And now..we are suffering from recession.. So its not surprising that their are many business that fails..

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