Arnold Kling  

What is Fiscal Profligacy?

Who Said It?... My Thoughts on Monetary Policy...

Tyler Cowen writes,

In bad times, and when accounting gimmicks are rampant, a government's fiscal policy is best understood as a portfolio of options positions, not in terms of a static balance sheet.

Read the whole post. There is much, much to think about here.

For example, one argument for government intervention in many areas is that government can provide insurance where markets cannot do so. That is because government has so many more ways to spread risk across people and across time.

But one way to read Tyler's point is that the government still manages to write more insurance policies that it can really cover. Some of the risks are correlated, and they become more correlated in bad times. When the government insurance company goes bankrupt, things get ugly.

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COMMENTS (2 to date)
joecushing writes:

The problem with this idea is that govenments don't just spread risk, they transfer it. This leads to transfer payments and moral hazard. The classic example are homes built in hazardous areas are "insured" by the govenment because there is no market for private insurance of these homes. People pay far less for this government "insurance" than they would for real insuance. Homes get built that otherwise wouldn't have. The need for government "insurance" grows. Those of us who don't own these hazard homes pay for those who do.

Sonic Charmer writes:

To put it another another way, the government is essentially the world's biggest CDPC, the super-senior protection seller of last resort. AIGFP had nothing on USG.

But seriously, I often hear the suggestion bandied about that if they want to help the economy, the government should just literally sell super-senior protection in size. It's the fact that in a sense it's already doing that in various, less transparent ways that gives me pause and makes me think the idea might not be entirely insane.

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