Saturday, February 7, 2009

In a Fix, Indeed...

David Leonhardt's article in the New York Times Magazine this week is well worth the long read. In it, he takes a stab at defining the key areas that can produce sustained growth in our economy, and what he thinks that the government should do in order to address them. In short order, how President Obama can use this perceived time of crisis to remake the economy.

I'm glad to see writers taking the time to dig deeply into the real issues facing the economy, even if I have my misgivings about their analysis. In short, I'd love to spend an hour over drinks with Mr. Leonhardt, and argue about this article.

I'll skip the first section in which Leonhardt is pimping for Keynes. I think you all know where I stand on much of that, and moreover, it's not the main push of his article anyway. He wants to get past reviving the economy, and dig into how to reform it for the long haul.

First, Leonhardt cites the problem of why we don't address the areas we should, and I can't disagree with a word of it:

In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would.
[...]
In these cases, and in others, interest groups successfully lobbied for actions that benefited them and hurt the larger economy.


Isn't the best way to avoid this from happening simply reducing the amount of money and influence that Washington can throw around?

His first target, I think is well wide of the real target:

Home builders and real estate agents pushed for housing subsidies, which made many of them rich but made the real estate bubble possible.


Or was it the well-intentioned aim of helping the less affluent (read: "minority") Americans get loans that they couldn't necessarily afford to pay back? Both Bush and Clinton threw minorities in at the deep end of the pool to show off the increasing numbers in minority home-ownership like a badge of honor. What they were really increasing was crushing debt on a poorer demographic that was little prepared to shoulder the burden. The lending policies of Fannie and Freddie, combined with the effects of the Community Reinvestment Act on private lending, encouraged shaky loans, and then Wall Street (ever complicit, always reacting to the playing field set by government) built a ponzi scheme out of that debt to hide how risky it really was from their own investors (Credit Default Swaps, Mortgage Backed Securities). In a real free market, the government wouldn't have provided the incentive to make risky loans just to feel better about itself and look good for the voters. Wall Street wouldn't have been able to hide its activities from the investors who support them. Transparency and individual free choice could have prevented this. Well-intentioned but foolish government regulation in the left hand, and government protectionism of big business in the right hand, enabled it.

Leonhardt goes on to say,
Surely no interest group fits Olson’s thesis as well as Wall Street. It used an enormous amount of leverage — debt — to grow to unprecedented size.


My point exactly.

He uses Great Britain in the late 1970's, and the "Winter of Discontent", as an historical example of how politicians can use crises to make sweeping changes that an otherwise stable system will not allow:

The resulting furor helped elect Margaret Thatcher as prime minister and allowed her to sweep away some of the old economic order. Her laissez-faire reforms were flawed in some important ways — taken to an extreme, they helped create the current financial crisis


Can statements like this continue to go unassailed? If laissez-faire reforms really were taken to the extreme, then we wouldn't have had government intervention acting as a stimulus for bad lending. What really helped create the current financial crisis, Mr. Leonhardt?

Moving from housing debt and Wall Street, to education as a source of growth:

Goldin’s and Katz’s thesis is that the 20th century was the American century in large part because this country led the world in education. The last 30 years, when educational gains slowed markedly, have been years of slower growth and rising inequality.


Or have slower growth and rising inequality slowed educational gains?

I am tempted to argue that the 20th century was the American Century because we controlled the only means of production that was undamaged by WWII. As the third world caught up, and Europe rebuilt and reentered the market after WWII, our relative monopoly on production started to subside. I'm not sure we could have had a middle class, the engine of our economy, if we hadn't enjoyed that privileged spot in the years that immediately followed the war.

As for education, I could argue, with somewhat more confidence, that the inflated price of higher education to the middle class (those too poor to afford college on their own, or too wealthy to be granted that education by government grant) priced the middle class out of a degree. Education prices rise at many times the rate of inflation, at the same time that middle-class blue-collar pay is stagnating due to the rest of the world catching up and supplanting the source of the creation of the middle-class in America: manufacturing.

I'll go along, for the moment, with Mr. Leonhardt's theory that education automatically produces growth in an economy, as he provides himself with enough caveats for cover. He writes:

Kane is one of the researchers whose work shows that teachers may matter more than anything else. Good teachers tend to receive high marks from parents, colleagues and principals, and they tend to teach their students much more than average teachers. Bad teachers tend to do poorly on all these metrics. The differences are usually apparent after just a couple of years on the job. Yet in a typical school system, both groups receive tenure.


"The differences are usually apparent after just a couple of years on the job" -- Apparent to whom? If this data were apparent to a parent (sorry, I couldn't resist), and that parent had the choice of what schools to send their child to, we'd see this practice of granting tenure carte blanche disappear fairly quickly, as schools clamored to draw students towards them. Mr Leonhardt seems to agree:

Paul Tough has described some of the most successful schools for poor and minority students. These schools tend to set rigorous standards, keep the students in school longer and create a disciplined, can-do culture. Many of the schools, like several middle schools run by an organization called KIPP, have had terrific results. Students enter with test scores below the national average. They leave on a path to college.


Mr. Leonhardt fails to mention that KIPP schools (65 out of 66 of them, nationwide) are charter schools with open enrollment. That's right. Public schools, with parental choice. I wonder why he would leave that point out? Perhaps it is a hindrance to the way in which Mr. Leonhardt wishes to remake our new economy. After all, a freer market is what led us into this mess in the first place, isn't it?

Similar to so many other problems, it seems to me that the real solution is individual knowledge and individual choice. According to the KIPP website, "As primarily public charter schools, KIPP schools typically receive 60 to 90 percent of the operational revenue and none of the capital expenditure revenue of district schools". Giving parents choice of where to send their children brings down cost, and improves performance. Market forces at work.

Having government simply spend more on primary education isn't solving the problem, and historical data supports that.




Surely, I am a product of the public school system, and I believe that, in a democracy, our public education is a key part of our shared infrastructure. I want the resources to be there to educate our populace, but the resources, without the incentives provided by individual choice, are wasted in magnificent fashion.

Leonhardt goes on to say "States, for their part, will be cutting education spending to balance their budgets". But isn't the example of excellence he cites in KIPP schools a way to both cut education spending at the same time as increasing it's effectiveness?

As a whole, Leonhardt's article is looking at all the right problems (how to sustain and increase growth of the economy, provided that it can be resuscitated by "stimulus"), but the solutions hinted at are largely ineffective:

* Improving health care by mandating, across the nation, which procedures and care will be funded by medicare (removing choice from doctors and patients).

* Blaming Wall Street (rightfully), but exonerating the Government in the current economic downturn.

* Relying on the somewhat dubious assertion that education can be "reformed" with government mandated efficiencies.

All of these prescriptions remove the freedom of the individual, and hide the knowledge that the individual needs to make informed choices. An economy of this size cannot be directed. It's like trying to control the weather. No set of minds, however brilliant, can command the trillions of individual decisions that make our economy run. By limiting the individual's choices, you can seem to make the problem simpler, but you're no longer dealing with reality. You're dealing with some simplified simulation that can't be mapped to the real world, where unintended consequences are conveniently ignored in the mathematical model, but won't fail to show up in real life.

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