Plus ca change, plus c'est la meme chose

I just re-skimmed the 2002 paper of mine on flexible capital that I posted yesterday.  I can't help but quote myself talking about media coverage of the negative economic effects of the 9/11 attacks and point out how the same things are happening in the current crisis:

It would seem that when firms are making profits they are the victimizers but when they are making losses they are the victimized. This suggests that firms are active agents when they are making profits, but are passive recipients of the economic "deal of the cards" when they are making losses. From a Kirznerian perspective, this asymmetry in treatment makes no sense. Both profits and losses emerge from the active choices that firms make. If losses are signals that profits are available elsewhere, the choice to have pursued the path that generated losses, and not to switch paths in the face of such losses, are no less active choices than the one that would have produced positive profits in the first place.

Then there's this little bit of analysis that was somewhat prescient, even if the current negative evens are more endogenous than exogenous:

It is worth noting in this context the role played by the US government's subsidies to the airlines in the wake of September 11. Not only did such monies reduce the immediate incentive to make the necessary adjustments to the new underlying variables, but it sets a dangerous precedent for parallel situations in the future. If airlines, or any firm for that matter, expect to get a cash infusion in the face of events that cause a widespread and significant loss of their business, they are that much less likely to create the sorts of capital structures that would enable them to react appropriately to such losses. Absent capital structures of greater flexibility, the losses from similar events in the future might well be greater than they would have been had the subsidy not taken place the first time around. Given that less flexible structures may be more efficient at any point in time, firms might well accept the risk of a lack of flexibility if they expect to be bailed out if their gamble backfires on them. In a classic example of moral hazard, the subsidy creates an incentive to do precisely the wrong things that would be necessary to avoid the argument for such subsidies in the future.

The losses generated by a pervasive and negative exogenous change such as the one under discussion are a signaling process that should not be short-circuited. Although it is certainly unfortunate that so many have been so adversely affected by the attacks-induced changes, those changes are necessary and appropriate given the events. The destruction of physical capital will always bring economic contraction in its wake, and the shifts in public preferences that have followed (e.g., from leisure travel to staying home, or from business travel to teleconferencing) will have major transitional consequences. Those adverse effects reflect real events. The losses that firms suffer in the transition are no less real, or no less reflective of "victimhood," than are the profits they reaped clue to economy-wide increases in productivity clue to technological advances of the last decade.

Comments

[Greg Ransom]

You nailed it.

The airline bailout was my real big head up that the George W. Bush presidency was going to be a massive economic disaster.

Maybe I was behind the curve on that, but that was the big message in the sky for me.

Bush is the contemporary Hoover & LBJ all rolled into one.

[David Andersson]

I agree completely with the substance of this post. Thinking about 9/11, however, I wonder whether the hysterical response of the Bush administration is an illustration of a "Kopplian" Big Player, making expectations more important (in this case concerning a vaguely defined but never-ending war on terror). It seems that the relative economic restructuring (travel vs. teleconferencing etc.) has been all but non-existent in European nations with a history of lethal terrorism, and that the Big Player response has been more measured (for example, Spain, although Blairite Britain seems to have been a partial exception).