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Fiat Shuffle: Bailout Edition

August 25th, 2009 · 8 Comments

Megan McArdle approvingly quotes Tyler Cowen on the bailouts:

Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see.  Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period. [...]

If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931?  If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts.  Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat?  Or is it that natural market forces would have somehow avoided a wrenching surprise deflation?  Or do you think the authorities for some reason would have not nationalized the major banks?  Please let us know.

I’m not inclined to debate economic policy with Tyler and Megan, so I won’t presume to take a position on the ultimate wisdom of the approach that was taken, but this sounds an awful lot like the old debate trick I’ve previously referred to as the fiat shuffle. Just to refresh: The way the trick works is that, for the purposes of arguing the merits of a given policy, you assume away various real-world political barriers to the policy’s being enacted—in debate lingo, you get to “fiat” the policy and restrict the argument to whether this would be a good thing without fussing over whether you could get the votes in the House (or whatever) to do it. The shuffle comes when you assume the same political constraints back in again as part of an argument that the proposed policy would create pressure for other salutary reforms, or to dismiss alternatives as infeasible.

Now, this isn’t a clear case of fiat shuffle, because it’s easy to imagine that we might have had the political will to resist the bailouts, but that this would not have been sufficient to forestall still more aggressive intervention later assuming things would have gotten far worse. Still, despite a an initial defeat in the house, the bailout ultimately passed by a 3-to-2 margin there, and by an even more lopsided 3-to-1 vote in the Senate. Which is to say, the world in which we didn’t do the bailout is clearly a world with a pretty radically different political culture, presumably populated by legislators with a very different average worldview. When would the inhabitants of that world have given up their resistance to intervention, and how much more dramatic would the intervention have been when they did? Damned if I know, but projections based on the current composition and views of Congress probably don’t apply.

Update: I didn’t think this post made the claim that “if legislators had had the guts to stop the first bailout, they would also have had the backbone to stop a second one,” but I suppose I should train myself to start talking that way in case I ever need to do cable news.

Tags: Horse Race Politics · Libertarian Theory · Markets


       

 

8 responses so far ↓

  • 1 Ex-debater, but high-school LD. // Aug 25, 2009 at 9:24 pm

    It’s like a reverse anthropic principle. Probabilities make the discussion much more complicated, so set them aside for the moment. Known fact F makes event E impossible, but if the impossible E actually happened, and the universe remained otherwise identical (including F!), then a lot of other things would have to change to accommodate E’s having happened. That’s crazy! Not least because F and ~E bear a relationship of material implication. Assuming E generates a contradiction by modus tollens, which allows you to argue for literally anything, including things that hypothetically flow from F in the impossible universe. (“We accept our opponents’ fiat. But we offer the counterplan of giving everyone infinite wealth, profound wisdom, and supermodel hotness. Also, invisible, odorless pink unicorns!”) This isn’t really like a reverse anthropic principle — although it is kind of like saying, “if electrons had a greater charge, and the universe remained otherwise the same, we could totally generate more electricity!” — because the natural laws governing social institutions are inevitably psychological, and therefore trade in probabilities. But it’s logically similar, and in dire need of a better name than “fiat shuffle.” (Apologies to colleagues from the other side(s) of the debate world, but using “fiat” as you do is, and always was, silly.)

  • 2 It Was One Year Ago Today, Milton Friedman Taught The Band To Play « Around The Sphere // Aug 26, 2009 at 1:27 pm

    [...] Julian Sanchez: I’m not inclined to debate economic policy with Tyler and Megan, so I won’t presume to take a [...]

  • 3 Zach // Aug 27, 2009 at 2:39 pm

    Hi Julian,
    This is obviously less problematic for the merely libertarian-inclined but isn’t ideological, big L Libertarianism a sort of Fiat Shuffle? Advocating a minimal state would seem to ignore the very nature and history of the state mechanism. In what world would abolishing the Department of Education, eliminating the income tax, restoring the gold standard, etc. occur and then remain steadfastly in place?

  • 4 Julian Sanchez // Aug 27, 2009 at 3:17 pm

    Well, I think Big L libertarians really are imagining some kind of big structural and cultural transformation that would make it stable. Though plenty are just pessimistic—they think the scenario they believe would be optimal is, for many of the same reasons, basically impossible.

  • 5 Brian Moore // Aug 27, 2009 at 4:05 pm

    I found this line from the article you link the update head-smackingly painful:

    “So I put the question to you, readers: Would a second Great Depression have been worth it if it resulted in real health care reform and the redistribution of wealth, somewhere down the line?”

    Wow. Certainly I don’t like those 2 things either, but if there’s anyone out there who thinks that’s even remotely a fair trade, even for the most optimistic results for healthcare reform/redistribution, they need to do a little more Depression-era research.

  • 6 Max // Aug 28, 2009 at 10:32 am

    News flash. McCardle has no economic degree and doesn’t know what she’s talking about.

  • 7 rj45 stecker // Sep 5, 2009 at 2:18 am

    According to me advocating a minimal state would seem to ignore the very nature and history of the state mechanism. In what world would abolishing the Department of Education, eliminating the income tax, restoring the gold standard, etc.

  • 8 translation services // Sep 3, 2010 at 10:26 am

    Its like a man opposite principle. Probability that the debate is more complicated, set aside for the moment. F is known event E makes impossible, but if I can not really happened, and the universe remains otherwise identical.

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