Sunday, October 27, 2013

Of Standoffs and Redistribution

Frank Pasquale

Izabella Kaminska is one of the most insightful writers at the Financial Times. In a recent post, she helps us understand the paradoxical relationship between legal regularity and economic growth. She first quotes from a recent work by Katharina Pistor, entitled "A Legal Theory of Finance," which crystallizes the tensions at play:
Law lends credibility to financial instruments by casting the benevolent glow of coercive enforceability over them. But the actual enforcement of all legal commitments made in the past irrespective of changes in circumstances would inevitably bring down the financial system. If, however, the full force of law is relaxed or suspended to take account of such change, the credibility law lends to finance in the first place is undermined.
Kaminska applies this logic to explain why the shutdown threat eventually dissipated:
[In the] Tea Party shutdown standoff . . . . [i]t soon became clear that while upholding the debt ceiling and risking system collapse may have made a lot of sense to those without savings, lots of gold and many guns (i.e. those the Tea Party was representing) it did not serve the interests of the Tea Party’s wealthy benefactors who had a vested interest in seeing the system survive.

[For the middle class Tea Partiers,] the law, by yielding on bailouts and debt ceilings, is already failing them, so the step to outright lawlessness is hardly a step away. All they need is enough smarts (gold!), muscle (guns!) and divine favour (the constitution!) to survive the apocalypse, and re-establish the law on their terms. And this is how the apocalypse mindset arguably comes into play. Luckily for the markets, those in the apex of power are more likely to be aware that their wealth is symbiotically dependent on a functional and cohesive system anyway and that no man is an island.
I have to wonder, though, if the benefits of disorder are not greater for some very powerful players near the top of the system. Isn't a classic recipe for financial success buying assets "on the cheap" in the midst of crisis? Moreover, finance leaders like to pick winners early on, and shutdown leader Ted Cruz sure looks like one. He returned to Texas as a hero. He's enjoyed standing ovations of 8 and 14 minutes and chants of "2016! 2016!" Moreover, many of his strongest supporters see his rise as a mandate of heaven:
In a sermon last year at an Irving, Texas, megachurch that helped elect Ted Cruz to the United States Senate, Cruz's father Rafael Cruz indicated that his son was among the evangelical Christians who are anointed as "kings" to take control of all sectors of society, an agenda commonly referred to as the "Seven Mountains" mandate, and "bring the spoils of war to the priests", thus helping to bring about a prophesied "great transfer of wealth", from the "wicked" to [the] righteous. . . .
Admittedly, the present predilections of policy technocrats are not exactly a template of social justice. But commentators like Kaminska should not underestimate the role of extra-economic motives among very powerful political actors. One poll showed Cruz as a 2016 presidential frontrunner. If we heed Professor Somin's work on political ignorance, we may well conclude that general voter tendencies to "vote the bums out" may lead to mass support for a candidate among those with less than complete knowledge of his or her policy positions, or their consequences.

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