Words of wisdom
The question here is what would Adam Posen have done if he had Tim
Geithner’s job? And based on Posen’s analysis, I think the only
conclusion you can reach is that he’d have done more-or-less the same
thing. Talking about a different issue last week, I heard Tyler Cowen
forcefully make the point that you have to think of the political
constraints as a real policy consideration. Suppose Geithner had asked Congress to appropriate $1 trillion to implement a program of bank
nationalization, asset writedowns, and loan guarantees–what would that
have accomplished? It certainly wouldn’t have gotten Congress to
appropriate $1 trillion to implement a program of bank nationalization,
asset writedowns, and loan guarantees. It might have derailed the
budget and thrown the political momentum on the Hill to proponents of a
neo-Hooverite spending freeze program. It might have caused panic. And
it certainly would have undermined the credibility of the inevitable
effort by Geithner to do the most he can with the authority he already
has.
One thing I like about Bryan Caplan's book is an interpretation which he will probably hate. The truly decisive actors are people directly in the political process. Maybe the "libertarians" who are or have been in politics are not just "sell outs." Rather they are implementing the net-liberty-enhancing policies that a real libertarian would favor if he or she were truly a decisive agent.