I’m all for the idea, recently touted by Ben Bernanke, that there should have been tighter underwriting standards during the housing bubble. But I wonder what it is people think would have happened had their not been a speculative boom in house prices? Would tighter underwriting standards really have eliminated the human penchant for herd thinking, speculative excess, and irrational exuberance? I doubt it. The indebted US consumer, and the fiscally irresponsible Bush administration, the global savings glue, etc. would all still have been around. And one way or another the emergence of some kind of speculative bubble at some point was pretty much inevitable.

The striking thing about the current recession, at the end of the day, isn’t that there was an asset bubble and then it popped. Things like that happen now and again. The striking thing is that the policy response to the decline in housing prices was so poor that we wound up mired with 10 percent unemployment.

I expect to disagree with Cato Institute personnel about matters related to taxes and environmental regulation, but it’s really remarkable that a libertarian organization’s Vice President for Legal Affairs and director of its Center for Constitutional Studies has such a cavalier attitude toward civil liberties:

So how did Obama treat the Christmas Day bomber al-Qaeda sent us? The way his mentor, Franklin Roosevelt, treated the German saboteurs who landed on our shores? No — Abdulmutallab was “lawyered up,” read his Miranda rights, and encouraged to talk through his lawyer, like any common criminal. Some say that approach — like calling him “the underwear bomber” — reduces a terrorist’s stature. That’s fine for the playground (as if the terrorists were seeking simply to join the community of nations). This is the real world.

I suppose this is better than the suggestion than the view that we should be emulating Roosevelt’s treatment of Americans of Japanese ancestry but it certainly doesn’t sound like “Individual Liberty, Free Markets, and Peace” to me.

Last week, James Hamilton posted the following chart of cyclically adjusted P/E over the last century. The blue line is the ratio of real value (in 2009 dollars) of S&P composite index to the arithmetic average value of real earnings over the previous decade and the red line is the historical average:

One way to interpret this is that stocks are overvalued and we’re primed for an aftershock crash. Another way of looking at it is that markets are anticipating some rapid earnings growth as the economy recovers. Both hypotheses are consistent with the basic idea that someone who buys stock today is likely to see a below-average return. But they have different implications for the overall economic outlook. I’m a sunny guy, so I suppose I lean toward the latter. But what’s important isn’t so much whether one wants to be an optimist or a pessimist, but where one sees the balance of policy risks. Like Paul Krugman I worry that political actors will find themselves motivated to take the earliest signs of growth as a reason to cancel growth-boosting policies. In particular, the whole debate about a jobs bill can easily be rendered moot if the Fed decides it’s time to tighten.

This is all a bit nuts. As long as the level of economic activity remains so clearly depressed—people unemployed, office space unrented, factories not working—then policy needs to remain oriented on spurring the renewed utilization of the people and facilities currently sitting idle. You sometimes face tradeoffs between short-term and long-term issues, but there’s nothing to be gained over the long-term from having people, space, and equipment sit around going unused for lack of appropriate public policy. The time for demand-boosting policy will end when there’s a decent argument to make that we don’t have an unusual amount of idleness.

Jonathan Zittrain has concerns about a trend toward online contract work:

What’s to worry about? For one thing, online contracting circumvents a range of labor laws and practices, found in most developed countries, that govern worker protections, minimum wage, health and retirement benefits, child labor, and so forth. Any jurisdiction that imposes restrictions on how crowdsourcing services operate might find itself bypassed—a firm like LiveOps could simply disconnect all its contractors in, say, New York, and make more work for people in Arizona. Workers may have to accept near-constant monitoring of every mouse click and conversation. Many of these services ask workers not to disclose even that they’ve worked for a firm. Your reputation is just another trade secret.

Reihan Salam sees personal empowerment in this brave new world. I’d just say we should ask what the policy response ought to be.

The ability of firms to circumvent regulation by going elsewhere, at the end of the day, isn’t a new one. Child labor continues to exist in the world, but there’s very little evidence that globalization somehow makes laws against it non-viable. I’d say something similar for the minimum wage—the most salient thing about it is that the minimum wage is really low. Low enough that it’s not a major factor determining where companies locate their businesses. And realistically everyone more-or-less acknowledges that there’s only so high a minimum wage can go before it becomes counterproductive.

The real issue here concerns health and retirement benefits. In the postwar era, the United States established a kind of informal employer-based welfare state. Public policy encouraged the creation and consolidation of this welfare state through subsidies (mostly hidden in the tax code) and also through an informal labor-management understanding that maintaining this kind of welfare state would forestall political pressure for a more formal public policy solution. But this solution only works if you can assume long tenure at jobs, at least as an ideal or a social norm. The move to more flexible workplaces and career paths has made it less-and-less viable and this kind of labor model will make it even less viable. The good news is that a more flexible economy should be more efficient and create more overall wealth and income. So the solution is to take advantage of that flexibility to have higher taxes to finance generous health security and retirement benefits.