Richard Posner, one of most cited legal scholars alive, has a new post on the blog he co-writes with Nobel laureate Gary Becker . It's his take on the silver lining of economic downturns.

On the surface, it reads a bit like an ode to Phil Gramm and his ilk who scoff at our nation of whiners. It's actually more of a plain-old market defense of why it's better to go through the pain now rather than delay it for an inevitable future. He does, however, support a tax increase right now.

Take a look and let us know what you think.

Here's a brief excerpt:

A depression increases the efficiency with which both labor and capital inputs are used by business, because it creates an occasion for reducing slack.One might think that a firm that has slack in good times will have as much incentive to reduce it as it would in bad times; slack (failing to maximize profits) is an opportunity cost, which in economics has the same motivational effect as an out-of-pocket expense. But firms are organizations, and organizations experience agency costs, which are more difficult to control in good times than in bad. If a firm's profits are growing, it is easier for the firm's executives to skim some of the profits, pocketing them in the form of excessive compensation or perquisites, than when the firm is shrinking. In the former case, stockholders will be doing well, so the pressure they exert through the board of directors to minimize the extraction of rents by executives and other employees will be less intense than when the firm is at risk of collapse. When the depression ends, the firm will have lower average costs, though they will drift upwards as the firm re-grows.

categories: Understanding The Crisis

4:17 - November 11, 2008

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