Sentences of Enduring Value

Two for the price of one:

A key point that I have not seen made elsewhere: since the whole point of financial regulation is to counteract market failures in financial markets, it makes no sense to base regulation on the prices that those same markets generate (as is done when we use mark-to-market accounting or rely on market prices of risk in risk models).

Dani Rodrik

Mr Bivens seems to see growing inequality as the trouble with trade; I see it as a failure of American economic mobility. Given that trade does produce net benefits for the nation, it seems to proper course of action is to liberalise trade and focus on fixing immobility produced by slowing educational attainment.

The Economist

Should policy address rigidities or should it take them as constraints? ((See the footnote on this post. Yes, this is a footnote referencing a footnote. My progress in the dark arts of academia is proceeding apace.)) Neither type of policy gets us to the first-best world, but both can improve efficiency. In other words, taking the Rodrik line about this being a second-best world doesn’t imply we should take rigidities as constraints. A second-best world doesn’t require second-best policy.

This issue can be addressed with the usual marginal analysis. How much does each type of policy cost and what would be the benefits. The optimal type of policy would be that which provides the most efficiency gains for the least cost. Maybe reducing labor market frictions is more expensive than just increasing trade restrictions. This seems plausible in the static case, but the dynamic case?

Does one type of policy have more severe unintended consequences than the other?

But there may be a moral case to focus policy on removing rigidities rather than working around those rigidities. In the trade/education example, the moral case is obvious. Improving labor markets, increasing educational opportunities, increases freedom while closing borders reduces it. Can a general case be made against Rodrik-style policy?