Government as Administrative Assistant

Noah Smith offers a practical critique of privatization of government services:

irreducible transaction costs are a fly in the libertarian soup. Completing an economic transaction, however quick and easy, involves some psychological cost; you have to consider whether the transaction is worth it (optimization costs), and you have to suffer the small psychological annoyance that all humans feel each time money leaves their bank account (the same phenomenon contributes to loss aversion and money illusion). Past a certain point, the gains to privatization are outweighed by the sheer weight of transaction cost externalities.

For certain things, government provision relieves individuals of the mental burden of engaging in numerous small transactions while imposing only relatively minor costs.  Noah argues that such a society “feels freer”.  This is an interesting argument for government intervention, and Noah makes a convincing case.  The anarcho-capitalist utopia does seem like a huge hassle doesn’t it?

How would a libertarian reply?  Perhaps by suggesting that institutions would emerge to relieve the individual of many of the expected burdens.  For instance, one might be able to join a group that allows access to a network of parks, benches, and roads for a periodic fee, thus eliminating the need to initiate a separate paying transaction every time one wants to sit on a bench.  One might also add that we have no idea what would happen, but if these hassles were a big problem for people, the market would probably find a way to fix them.

That said, unless you are writing your libertarian manifesto, it’s hard to disagree with Noah.  Arguing for real-world action on the finer points of libertarianism can get you into trouble.  Do you really want to lead the fight against government-provided parks?  You might even be right, but who cares.  There are more important things.

PS: The comments on Noah’s post are worth reading.

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Fed Statements, and The Timing of Market Movements

Loyal reader Adam offers:

the question [of why long-term rates Treasury dropped] regards the timing of the fall in long-term yields – was it before or after the Fed announcement?

Scott Sumner has two recent posts on this issue.  In this piece, Scott shows that first (i) equity prices and treasury yields both plummeted immediately after the Fed statement, and then (ii) equity prices subsequently surged while yields stayed low.  He argues that the immediate reaction in (i) reflected the market’s disappointment that the Fed did not explicitly announce QE3, while (ii) reflects “second thoughts”or perhaps a closer reading of the Fed’s statement.

I’m not exactly sure what those [second thoughts] were, but I’ve seen two possibilities discussed.  John McDermott suggested that there was wording similar to the Fed statement that preceded QE2.  Others pointed to the three dissents, suggesting that Bernanke is preparing to move ahead more boldly, and is willing to tolerate a higher number of dissents.

In this subsequent post, Scott reminds us never to reason from a price change, and explains that a drop in long-term Treasury yields could be either

seen as an expansionary move, reflecting greater than anticipated monetary stimulus, or a contractionary move—the Fed throwing in the towel and adopting the Japanese monetary model of ultra-slow NGDP growth.

So in answer to Adam’s question, the fall in long-term yields came after the Fed announcement.  But we still don’t know what that means.  And equity markets aren’t really helping us find the answer.