Chasing the Rabbit: Official Blog by Author Steven Spear

In a previous post, I suggested public sentiment that government does too much but not enough is not contradictory.  It reflects a recognition that government does too little of what it should do, too much of what it shouldn’t.  Today’s news that retails sales were dragged down by a drop in auto purchases, a deflation after the ‘cash for clunkers’ program ended supports that point (”Retail Sales Drop on Fall in Autos” Wall Street Journal, Jeff Bater, October 14, 2009).

There is a wealth of evidence and theory that markets work best in directing resources to their most productive use.  The general consensus is that government’s role is appropriate to counteract market failure–unavailability of reliable  information for markets to work, absence of decision rights to act on information even if it were reliable, or decisions that have consequences external to the decision maker.

Our financial market meltdown was triggered particularly by the first and third forms of market failure: Regulators allowed less and less transparency about transactions and credit risk and people were able to make transactions where they enjoyed the upside but dumped catastrophic costs on the rest of us.

The right response then is to fix the markets.

Pretty well accepted is that government is lousy, absolutely lousy at intervening in markets to pick winners and losers.  If government does so, it is a likely as as not to pick wrong, diverting resources from better to worse purposes.

The cash for clunkers was a case study in such wrong headed policy.  It pulled forward purchases that would have been made anyway, so net sales were likely flat, were an exceptionally expensive way to protect a relatively few number of jobs (albeit in politically influential districts), and probably was bad for the environment in the end, given the enormous energy required to make a new car relative to the energy required to propel an existing one

Related posts:

1. Rage at Government for Doing Too Much and Not Enough
2. Economic Recovery Package–A systems perspective (Part I)
3. Federal Policy–Does the treatment fit the cause?