The Nirvana Fallacy Revisited—Posner

I recall hearing when I first came to the University of Chicago in 1969 the expression “Nirvana Fallacy,” used to describe the belief then dominant in the economics profession that market failures could and should be rectified by government intervention, assumed to be apolitical and effectively costless. The belief was unsound; government failure is commonplace, partly because of politics, partly because of the intrinsic difficulty of many of the tasks that are given to government to perform. 

The opponents of the Nirvana Fallacy did not deny the existence of market failures; they just wanted the costs to be balanced against the cost of government intervention. But as the years went by there was a growing tendency among conservatives to regard markets as Nirvana—as self-regulating—and thus to deny the need for government regulation. Alan Greenspan, when he was chairman of the Federal Reserve Board, was a spokesman for this position. It became particularly influential during the administration of the second President Bush, with seriously adverse consequences. The deregulation of the banking industry, which had begun under President Carter and been completed during Clinton’s second term, coupled with extraordinarily lax regulation of the nonbank banks (such as Goldman Sachs, Merrill Lynch, and Lehman Brothers) by the Securities and Exchange Commission (which had the principal regulatory authority over the nonbank banks) under the last chairman appointed by Bush, lax regulation of insurance companies (such as AIG) by state insurance commissioners, lax regulation of Fannie Mae and Freddie Mac by the Federal Housing Finance Agency, and lax enforcement by the Federal Reserve Board and the other bank regulatory agencies of the remaining regulations of commercial banks, were major causes (along with the lax monetary policy of the Federal Reserve in the early 2000s and misleading statements by successive Fed chairmen) of the financial crisis of September 2008 and the ensuing economic downturn—the most serious since the Great Depression. 

Most economists did not understand the inherent instability of financial markets (which derives from the basic financial model of borrowing short term and lending long term, which can induce runs, especially when, as in the case of the nonbank banks, the short-term capital—often overnight—is not insured), the vulnerability of housing markets (in which the banking industry was heavily involved) to bubbles, or the potential macroeconomic consequences of a failure of those markets, which made deregulation a riskier policy than in industries such as air and surface transportation, electrical distribution, natural-gas production, oil pipelines, and communications. Because of the potential for catastrophic market failure, regulation should have been much tighter than it was. 

Of course more than mistakes by economists were involved; the pressure of the banking industry for deregulation and light enforcement of the remaining regulations was intense, because the bankers wanted to be allowed to take more risk so that the expected return would be greater. Whether there would have been more resistance if the economics profession had opposed the industry is an academic question. 

Regulation had got a worse name than it deserved because of a tendency to conflate it with other, more questionable government activities—the actual operation of economic enterprises (the Post Office, air traffic control, toll roads, TVA), all of which would be more efficiently operated as private firms, and a variety of unjustifiable subsidies, such as the provision of medical insurance to affluent old people, or the deductibility from federal income tax of interest on home mortgages. Government-run businesses and most government subsidies displace more efficient private activity, but regulation is essential and cannot be outsourced. Not that there isn’t excessive regulation; but some—notably of financial markets—is indispensable. 

Another potential confusion is between comprehensive economic regulation of specific industries and the regulation of safety and health and of workplace discrimination, cutting across industries. Public utility and common carrier regulation, illustrated by the regulation of telephone companies and railroads before the deregulation movement, was notably inefficient, tending to protect not consumers but instead sellers, by shoring up the sellers’ cartels or monopoly. Banking regulation was of that character before the deregulation movement—limitations on the grant of banking charters, on branch banking, and on the payment of interest on demand deposits were examples of regulatory policies that reduced competition in banking. This was not an entirely undesirable effect because the more competitive banking is, the riskier it is—and the risks are macroeconomic (in contrast, if the airline industry, say, went bankrupt, the consequences for the rest of the economy would be trivial).  But the traditional regulation of banking was too restrictive and was rightly dismantled—only the deregulation of banking (and related financial institutions) went too far. 

The deregulation movement that focused on comprehensive regulation of specific industries coincided with a movement in the opposite direction—toward greater regulation—with regard to safety, health, pollution, and discrimination. Many of these regulations have no economic justification; they are paternalistic, as in the case of seatbelt laws—or if justified, are justified only because of the existence of other unjustified government interventions, such as subsidies for the medical expenses of people injured because they don’t fasten their seatbelts. 

But the fact that there is a great deal of unsound or questionable regulation is not a good argument for leaving all economic activity to the Darwinian processes of the market. Competition forces businesses to ignore external costs and benefits (that is, costs and benefits not borne by the creator of them). If either sort of externality is great enough, there is a strong case for regulation, provided the benefits of regulation can be shown to be highly likely to exceed the costs.

Comments

[Steve]

>Hi, Philippa. I am sorry we didn't have time to connect at the paocrrmenfe on Saturday. (I did shout out a question to you from the darkness.) I loved the interpretation, the editing and even the additional speeches. My big, burning question is: Was the play within the play largely a creation of the director or did the actors contribute a lot of the business, e.g. the mechanical dog, the prompter on the skateboard, etc? And most of all, who came up with the idea of Bottom and Flute hooking up on the kiss through the wall's hole? Michael

[Shaik]

>Hello Lauren,I wouldn't be woerrid about the age appropriateness of this production. We are always very mindful, with the two Shakespeares at the beginning and end of the season,of our large student matinee audiences. It is an amazing show, full of magic (sometimes literally!) and wonder. I am so sure your 7th grader will love it that if not I will eat my mouse (the desktop one, not the live one).Philippa

[Baburam]

xylem369 Posted on Such a bullshit movie!! Apart frm songs and some bits n cnkuhs the whole movie is crap! subhash ghai tera sooraj isiliye doob gaya madarchod..tujhey movie ki gaand bhi nahin banani aati..bas paisa hai to showman bana firta hai thts y u will neer be able to come back nobody likes piece of crap ganga ki aaulad!! chutiya saala!!

[Dani]

vinaykumar626 Posted on another great work by Rajesh Khanna. why dont they make mveois like this now in bollywood ?? so emotional. all songs are just too amazing. Superb work R.d Burman, Kishore Da, Lata, Mukesh. Ever alive great people

[Uky]

koyaai Posted on That actually sonuds great Sandra. Yes, I do believe keeping your inner child in check is a requirement in having a healthy and happy life. I will take you idea on the New-Year-Meet-Everyday-With-Excitement-Enthusiasm-and-Awareness

[Vatana]

foredimples529 Posted on I don't usually leave cnmmeots but I had to for this video I haven't heard Kenny G at a Haitan wedding since the early 90 s and I've been to plenty of haitian weddings since than, so im shocked..It is what it is I guess

[Talentoss]

Saurabh Rajadhyax Posted on There are no easy answers / sonoituls to the issues raised by the incident As always tendency will be to argue whether this is an law & order issue or a societal issue etc etc. The obvious answer to this is that is it is a combination of multiple issues1) Law & Order Something is an deterrent if folks know that if you do the crime you do the time. In our justice system, unfortunately it takes a lot of time to decide whether someone has to do the time. More often than not guilty are acquitted while innocent languish in jail. Specific to this incident I am assuming on all available evidence, this will be an open and shut case. Hopefully the witness friend will stay strong (public awareness of the case will help here). Police also will do its job unless there is political intervention. Constant monitoring of such cases is the only way I see to maintain pressure and ensure that everyone concerned does what is right.2) Societal issues This is where the main issues come up. Someone will say, folks belonging to certain states, communities, class, literacy levels etc etc are prone to indulge in this kind of behavior. I am not sure if statistically or even anthropologically we can prove any of this. But let us not forget that many of us including the industry the author works in have in myriad of ways contributed to the situation.For example if we look logically, Vivek Oberoi did the right thing by calling that press conference and talking about Salman's physical abuse of Aishwariya. May be he did it for publicity, may be he thought that was a way to build relationship with Ms. Rai but heck he did what many of us we will do i.e. Raise voice against abuse/violence against women. Just look at the reactions within and outside the film industry to figure out how Vivek and Salman were perceived after that press conference.

[Ivaneide]

You do realize that would be a felnoy ( which the bank can't help you with ) .Are you previously experienced with jails ?Can you survive in there ?There are some very mean old ladies in there and unless you are about 250 lbs tough ,I would Not risk it .>

[Carllo]

Annoyed Posted on Whatever you mean by being western ? I am a girl, who was raiesd in Bombay (More specifically, Amboli, so I grew up with Reuben and Keenan). I now reside in a Western Country . Let me tell you one thing, the amount of times I was groped, teased, touched inappropriately, had lewd remarks passed at me (all because I was dressed in Jeans and so in your opinion western ) did not seem fair. And, even though I did manage to slap some of these jerks, it did not stop others from doing the same thing. Now living in a Western country, I have never had that happen to me even once. It made me wonder how I could provoke' that response in one country and not another. I now believe, its not what we girls wear or do or say. Its the way some Indian men are raiesd (I repeat some, because Reuben and Keenan were not those men)that allow them to believe that all women are nothing but objects . So, I'd suggest, get out of this delusional world of yours which offers you a false sense of security. And please stop blaming the victims.

[Gabriel]

Varsha Posted on I was working in Mumbai for 5yrs & have some of my best memieors there! I took pride in midnight walks on Carter Road without a worry Sadly it shattered when I read this! The Mumbai I knew stood up to wrong, believed that there was no place for cowards, was united in grief, made women feel safe (even though there were stray incidents on the train even then) & more importantly respected women! What bothers me is that the DNA of most metros is changing & suddenly taking a cab after 9pm makes me anxious! and reading about incidents like these does nothing to my morale!I watched Keenan's dad & Rueben's brother on the Times Now debate last night they were so dignified & calm! There pain is beyond what we can imagine & yet they are being so brave. I wish from that horrible night, atleast some people have the balls to come forward & be witnesses. Its Keenan & Rueben today, tomorrow it will be YOU!

[Angel]

Vikram Posted on This is tragic. I am so sorry for your loss. How can we even be close to be caleld a responsible society when incidents like this exist. We boast about our culture when we don't even understand the basics of human behavior. I have been living in Australia for the last four years, and haven't even come close to witnessing an incident where a girl has been harassed by someone, forget the latter of bringing swords and killing somebody. This is not a law and order problem. It's education. It might take a generation to fix, but hopefully people are working towards it. Having a mob to defend self hurt, or to prove self pride should be shunned. I hope this incident incites some change. I hope Ruben died for a reason. God bless his soul.

[Sireesha]

Mridula Singh Posted on Ashwin, thank you for throwing light on this indceint. Well I was neither watching F1 nor metallica performance nor Ra-One ..Being a gurl, I dun think I will be wrong to say, it's we gurls who somewhere, somehow provoke all this if we get courage to wear fancy westerns, n dance in pub n drink n smoke all western styles why dun we buckle up to slap n stand such cheapsters ..wen westernity is really needed we just back-off ..for example, if I say nething in public to a guy or slap him for some wrong doing our parents dun go wid us, dey say u r gurl n nt suppose to do it, fct is we being a gurl we can do lot many things to put things on d correct path, hope I could have been some help to Reuben n Keenan

[Nikiwe]

rsakid Posted on @yourjunk420 Your an Atheist I assume. So what you beivele is nothing? And that everything happened by chance and science? Or at least that is what I have herd it is about. Don't you think there is something more out there? How can the universe just happen by chance ? And that's what I hate about the word Christian , it comes with SO many labels and so many people taint it and give it a bad name. Being a True Christ follower is All about LOVE!

[Kabeer]

Vishal Posted on Rana and gang should not only be buohgrt to justice but they should be tortured to death and it should be visible to each and every citizen of INDIA so that next time no fucking bastard can even think about teasing a girl nor kill anyone punishment should be cruel! Cut their balls and throw it away..may be next time a girl walks in the midnite no one would ever dare to misbehave!I give a salute to both keenan and reuben.!May ur soul rest in peace ur fight will never go vain.! Please don't mind about the abusive words..rana and gang do not deserve any kind of respect..

[Ariya]

splittersora Posted on Ok I am sick of all these Atheist and anti Christian rants. If u have a problem with it, don't watch it don't say anthniyg to hurt others for what they believe in. It's REALLY annoying. Good video by the way.

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