Institutions Matter

UPDATE: Congratulations, Paul Krugman, winner of 2008 Nobel Prize in Economics (okay, The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel).

Paul Krugman lauds Gordon Brown's weekend efforts: "you don’t expect to see Britain playing a leadership role. But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own."

Fair enough; yet Krugman offers little explanation for this puzzle beyond his distaste for the Bush administration--"I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense." Yet, just a few column inches above, Krugman notes how Bernanke favored the capital injection approach--surely Ben mentioned this to Paulson?

Perhaps institutions account for the difference. Gordon Brown did not need to testify before the legislative branch, nor did he need to build a majority in the upper and lower houses. Instead, parliamentary government and strong party discipline enabled Gordon Brown to formulate a concise plan and "act quickly on its conclusions." Not so in the U.S., where Paulson must plead for the necessary authority and resources and required two votes in the House to pass a much altered version of the plan he proposed. I am not sure how that institutional process promotes clarity of thought or rapidity of response.

Indeed, Paulson's initial proposal might be seen in this light: more about gaining broad authority to do what was necessary and less about the specific details. Sell the request for authority based on vague details that would sell; once you have the authority use it to do what is needed to stabilize the system (including recapitalization, now in vogue). Hence, the plan was short on details about how to solve the crisis, and explicit about Treasury authority. Yet, Krugman was no big fan of that plan, in part because it gave Treasury so much unchecked authority.

Maybe we can't have our cake and eat it too? If we want clear thought and quick action, we need unfettered executive power. If we want to constrain executive power, we must accept policymaking through a slow process in which outcomes often fail to embody clarity of thought.