Who's at Fault: Government or the Markets

The debate has been raging for a few years now. The stakes are enormous, so it will continue to rage.

Economists, in particular, and pundits, in general, have been debating whether the fault for our current financial difficulties lies with the markets or with the government.

The lessons we draw from the current crisis will be used to solve or to aggravate the next crisis.

Since Democrats, and many people who are not Democrats, believe that the New Deal solved the Great Depression, the current administration, along with an important segment of educated opinion, believes that government spending will get us out of our Great Recession.

If we as a nation conclude that government is the problem, not the solution, we will seek out  market-based solutions.

Looking to the markets means relying on individual initiative and enterprise.

This morning Nobel Prize winning economist Gary Becker makes the case for the markets. In his view government meddling in the markets produced and exacerbated the crisis. The fault lay in the unwillingness of government bureaucrats to trust the markets.

In Becker’s words:  “Although many banks did perform poorly, government behavior also contributed to and prolonged the crisis. The Federal Reserve kept interest rates artificially low in the years leading up to the crisis. Fannie Mae and Freddie Mac, two quasi-government institutions, used strong backing from influential members of Congress to encourage irresponsible mortgages that required little down payment, as well as low interest rates for households with poor credit and low and erratic incomes. Regulators who could have reined in banks instead became cheerleaders for the banks.”

And then, the government leaders “misdiagnosed” the problem and prescribed more, not less, government intervention.

Becker writes: “The misdiagnosis of widespread market failure led congressional leaders, after the 2008 election, to propose radical changes in financial institutions and, more generally, much wider regulation and government control of companies and consumer behavior. They proposed higher taxes on upper-income families and businesses, and extensive controls over executive pay, as they bashed ‘billionaire’ businessmen with private planes and expensive lifestyles. These political leaders wanted to reformulate antitrust policies away from efficiency, slow the movement by the U.S. toward freer trade, add many additional regulations in the medical-care sector, levy big taxes on energy emissions, and cut opportunities to drill for oil and other fossil fuels.”

And also: “Congress did manage to pass badly designed laws concerning financial markets, consumer protection and medical care. Although regulatory discretion failed leading up to the crisis, Congress nevertheless added to the number and diversity of federal regulations as well as to the discretion of regulators. These laws and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires.”

In another world, it would be called doubling down on failure.

David Brooks offers slightly different, and complementary, take on the problem. He argues, cogently and correctly, that the government regulation produces the problems that it is designed to control.

More regulation means more distrust, both of the markets and of individuals. And more regulation presupposes that without such regulations, evil human impulses would have free reign.  In truth, excessive regulation fosters the reign of evil impulses.

If government trusted people more, people would be more inclined to behave better.

Brooks says that the Republican, in particular, the Rick Perry message, of smaller government sees human beings as prone to commit virtue.

In his words: “America became great, they [Perry Republicans] explain, because its citizens possessed certain vigorous virtues: self-reliance, personal responsibility, industriousness and a passion for freedom.

“But, over the years, government has grown and undermined these virtues. Wall Street financiers no longer have to behave prudently because they know government will bail them out. Middle-class families no longer have to practice thrift because they know they can use government to force future generations to pay for their retirements. Dads no longer have to marry the women they impregnate because government will step in and provide support.

“Moreover, a growing government sucked resources away from the most productive parts of the economy — innovators, entrepreneurs and workers — and redirected it to the most politically connected parts. The byzantine tax code and regulatory state has clogged the arteries of American dynamism.”

To be brief, government is the problem that it is trying to solve. When government steps in, human beings feel relieved of the responsibility to act virtuously. If the government takes them for incipient criminals, they tend to fulfill the cultural expectations. They know that if they fail the government has their backs.

If government relieves people of their personal moral responsibility, and if it then uses the situation it has helped produce to enhance its own power, then it is engaged in a monumental failure to take responsibility.  

Where Becker wants the government to get out of the way, Brooks tempers his view—he’s writing in the New York Times—by calling for more big government. Specifically, he wants us to improve our educational system. Hopefully, he is not proposing that more government spending on education will produce better test scores. We should all know by now that the problem does not involve the amount of money, but the way teaching is conducted.

Worse yet, government maintains a near monopoly over teaching, one that immunizes it from being held to account for its failures.

Since students are going back to school and to college this week educators and pundits have been producing articles showing that we are not doing a very good job educating American children.

In particular,  American children cannot compete in mathematics. At a time when many American jobs are going unfilled because employers cannot find people with the required math and technical skills, it is worth taking a look at how we educate our children.

We should ask whether schools are preparing children to function in the marketplace, to compete for jobs and success, or to be community organizers, social workers, and bureaucrats?

Are schools more interested in teaching math and science or do they care more about being agents of therapeutic change, teaching self-esteem?

Given the current pedagogical ideology, one wonders how schools could possibly teach math. If it’s all about how you feel, if no one is better than anyone else, and if no one’s answers are better than anyone else’s you cannot teach math.

Mathematics has right and wrong answers; it does not care about whether or not your feelings get hurt by getting it wrong. Mathematics involves objective realities, and these cannot co-exist or even thrive in a world where teachers are like Nannies.

Mathematics requires strict discipline and a lot of hard work. It is not the place where you are going to get in touch with your feelings and develop your creativity.

Mathematics is also a field where you can build a real sense of achievement because you know that there are higher truths than your teacher’s trendy ideology. 

Eric Hanushek and Paul Peterson from Stanford University and the Hoover Institutions bring us the bad news: “So maybe it is more than a mere coincidence that 32 percent of U.S. public and private-school students in the class of 2011 are deemed proficient in mathematics, placing the United States 32nd among the 65 nations that participated in the latest international tests administered by the Organization for Economic Cooperation and Development (OECD). The United States ranks between Portugal and Italy and far behind South Korea, Finland, Canada, and the Netherlands, to say nothing of the city of Shanghai, with its 75 percent proficiency rate.”

Of course, the children who are out-competing our children did not merely suffer a rigorously disciplined classroom environment. They also had Tiger Moms.

They were taught discipline and hard work. They were not encouraged to be popular or to go out and learn the fine art of having fun. They were not encouraged to express themselves in their work. They knew that you will never learn algebra if you think that the classroom is a place where you can learn to express your personal feelings without being judged.

Walter Russell Mead wrote the follow admonition to college students last year. “Your competition isn’t sitting in the next library carrel.  Your competition is in China and India – and your competition isn’t hanging out at frat parties or sitting around watching sitcoms with dorm-mates.  It isn’t getting stoned and it isn’t putting its energy into chasing the opposite (or apposite) sex.  Your competition isn’t taking lots of courses on gender studies; it isn’t majoring in ethnic studies, or (unless it is planning to go into movie making) the history of film.”

Mead seems to feel that college students are suffering from their belief in credentialism. They imagine that once they get a degree from a prestigious institution, they will naturally become successful. Don’t degrees put you on the road to success?

Better yet, they do not have to work too hard to get the degree. It’s very difficult to flunk out of college. Grade inflation offers everyone a sterling transcript. They can sail through college without working too hard, developing good character, or acquiring marketable skills.

They are, Mead suggests, in for a very rude awakening.