If you are an avid watcher of the History Channel’s series The Universe (as I am), you may have seen the episode that discusses an interesting paradox: While Einstein’s theories pointed to an expanding universe, Einstein himself believed that the universe was in a “steady state” – that there was no Big Bang, and thus the universe had always been – and always would be – the same size. Einstein refused to believe the facts which his own work put in front of his eyes.
I thought about that again this week when I read Paul Krugman’s opinion piece complaining about profitable Wall Street companies – not because they are profitable, but because their profits are drawn from what he calls socially destructive behaviors. As an example, he points out that Goldman-Sachs engages in high-speed trading that uses technology available to large brokerage firms that small brokerage firms may not have access to. Krugman likens it to insider trading because these firms take advantage of a faster flow of information and analysis of trends; it’s a risky move, he says, and it sucks money out of the economy that could go to more responsible players.
Risky behaviors lead to higher profits, but government backstops take away the risk without limiting the reward. In another recent column, Krugman grouses about Wall Street profiting from bailouts – yet, in the same column, argues that banking rescues are necessary. When children reach out to touch a hot stove, they get burned and are more cautious in the future; Krugman seems to be the type of parent who would keep a toddler out of the kitchen altogether but then wonder the child is so fearless and reckless around a neighbor’s range.
Krugman is obviously smart – they don’t publish “Winning a Nobel Prize for Dummies” – but he’s a smart columnist, not an economic policymaker.
(By the way, before you correct me on the title, go back and watch Kingpin again…)