Low Hanging Mirages

Consider what the effects of this kind of regulation are:

Antonios Avgerinos, 59, a retired army pharmacist, always wanted his own pharmacy here. And why not? Greek law ensures that pharmacists get a 35 percent profit on all drugs sold, even over-the-counter medications.

But Greek law also limits just about everything else about pharmacies. They must be at least 820 feet apart and have a likely market of no fewer than 1,500 residents. To break into the business, an aspiring pharmacist generally has to buy a license from a retiring one. That often costs upward of $400,000.

The goverment, through its extensive regulation of pharmacies, has created an asset that is traded between retiring pharmacists and aspiring ones. There is no good reason why this needs to be the case and this is a fantastic example of free lunch deregulation, right?

Well, as soon as you deregulate these pharmacies, you destroy $400,000 of paper wealth for every pharmacist in the country. The macroeconomics of that are probably tolerable, but the politics are absolutely toxic. No politician wants to tangle with a highly educated group of cornered wolverines fighting for their nest eggs.

Among other strategies, they can probably point to dozens of other equally ridiculous regulations that should be struck down first. Until they wise up and realize that by teaming up with these other interest groups they can create an invinciple coalition against reform.

And what if all of these incumbent interests borrowed money to pay for their licenses? That means that reform will also wipe out the debt they owe, which means the banks lose out. Those banks can hardly afford that, can they! Suddenly fixing a ridiculous regulation has morphed into economic self-annihilation.

Now consider how this story plays out in other countries. Here in the US a lot of wealth has been chenneled into rising house prices, probably for stagnationist reasons, and now you have a similar situation for housing reform. Can’t tell everyone you’re going to destroy 10-15% of their GROSS wealth, particularly if that equals 115% of their net wealth. And then there’s the banks.

I posted on the politics of the anti-loose-money coalition, basically saying that it’s not demographics because the policy responses to 2008 and 1931 were the same while the demographics were far far different.

Well, Steve Waldman was gracious enough to comment, mostly citing cultural and intellecutal advances since the 30s. I’m skeptical and responded by pointing out one huge similarity between the monetary mistakes of today and the 1930s: DEBT.

That graph isn’t an awesome one because in a big bad crisis both the numerator and denominator are changing in erratic ways, relative to history. And deflation really complicates the analysis. I’m not gonig to parse the data myself today, though, so I’ll go on and just make my point.

Which is that too much debt is toxic for lots of reasons, most particularly because it chains policymakers to the status quo. You can’t loosen up monetary policy because you destroy too much wealth and perhaps spur a banking crisis.

You can’t raise rates either: consider China, where interest rates are probably too low. Their growth model has been a debt-fueled investment boom (see Michael Pettis for more on this) which, Japan has taught us, usually ends with too much debt and too much useless crap. But if you have too much debt, raising interest rates is suicide at roll-over.

I’m trying to tie together a common story through all this, which is that there are often problems in an economy and sometimes these problems get really bad. Debt makes it really really difficult to get out of these problems and once the market realizes this, NGDP forecasts drop. Then you have a Krugman-Sumner recession, which I think of as simply an expression of our straightjacket.

If we had control of the economy, we’d get out, but if we had control we’d never have gotten in in the first place.

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