Richard Posner's Animal Spirits


Richard Posner, the one-man content robot who has been writing of late on "The Failure of Capitalism," makes the Market Psyche 101 case in favor of the auto bailouts:

The bailout worked. At a relatively modest, though by ordinary standards very large ($17 billion), cost to the government, the auto companies were kept out of bankruptcy until the acute psychological phase of the economic crisis had passed. Last December, and indeed until sometime in March, government officials, the media, and the public were understandably fearful that the economy was in free fall and might land somewhere near where the economy had landed in March 1933 (25 percent unemployment, output 34 percent below the GDP trend line, 18 percent deflation). Such a fear can constitute a self-fulfilling prophecy, because by causing consumers and producers to hoard cash rather than to spend, it can push the economy into a very deep downward spiral. That fear has now abated. Moreover, General Motors and Chrysler (and Ford as well) have in fact partially liquidated since December, closing many plants and laying off (for good, probably) many hourly and salaried employees, and terminating many dealerships. As a result of these drastic measures (but spread out over months, which reduced their psychological impact), the incremental shock effect of the auto companies' declaring bankruptcy has diminished greatly. And government promises to back any bankrupt automaker's warranties have begun to sink in and reassure consumers. Chrysler has just declared bankruptcy and GM may follow suit in a matter of weeks, yet the perturbation caused by the bankruptcy of the one company and the prospect of the bankruptcy of the other has been slight.

It's an interesting argument, perhaps even a correct one, and certainly something I've heard from more than one self-described libertarian over the past half-year. But I'm not convinced. Partly out of a suspicion for what Reason contributor Will Wilkinson has called "macroeconomics as mind control" (see more of Wilkinson's argument on same here, here, and here). In other words, that there is something quite a bit less than scientific and quite a bit more than mildly propagandistic about basing public policy on acute psychological phases, self-fulfilling prophecies, mass perturbations, and the like. What's more the argument ignores or glosses over the not-insubstantial role that the past two presidents of the United States have played in fomenting that fear to begin with, particularly whenever their latest piece of legislation is up for a vote (when, that is, they even bother with such separation-of-powers niceties). The self-fulfilling prophecy has much more to do with presidents warning hyperbolically of a new Great Depression, and changing the rules and conditions of the finance market almost daily, than it does with the market sentiment of car buyers.

When you start down that rabbit hole of managing public fear and reassurance, you quickly end up in that bad place, as Henry Farrell did in a debate with me, in which it's OK for a president to lie as long as it's in the service of making us all calm down. Put another way, just because Detroit bankruptcy was off Obama's table in November, yet administration policy by April, doesn't mean us proles should be expected to alter own views accordingly. In order for Posner to be right, I think, it has to be true that bankruptcy proceedings launched late last year would have created substantial spillover effects into the economy, enough to prevent anything like normal bankruptcy events (such as renegotiations with creditors, or the sale of some divisions to competitors) from taking place. That, and not the animal spirits of psychology, is the argument that needs to be won before I'm willing to even consider having the president suspend the rules of capitalism and law. Your mileage may vary.