La Société Malade*

*The three years of French fully depreciated long ago, this translation due to Google.

This piece gives a variety of examples of things gone awry.  Is this our destiny henceforth across all endeavors?  Each example has a toe in a current news item, but also a glimpse into the past.

The operative underlying question is which of the following alternatives best applies?
   (a) This is an innovation, meaning there is an immediate benefit and a benefit that extends into the future.
   (b) This is a disruptive innovation, meaning there very well may be an immediate cost but there is a benefit that extends into the future.
   (c) This is a short run gain but a long term pain.
   (d) This is sheer destruction, with costs now and deleterious impact into the future.

The related questions are:
   (e) in prospect is it possible to tell which of (a) - (d) is going on?
   (f) in retrospect is it possible to tell which of (a) - (d) is going on?

* * * * *

Let's start with this rather gently written piece by Robert Schiller on the now virtue of renting.  Schiller's main points are that:  (1) The American Dream as signified by homeownership was an invention of the 1920s and didn't exist before that, (2) people of modest means owning a home means most of their savings are tied into that and hence they are not well diversified, and (3) if in the wake of the subprime crisis we move away from subsidizing home ownership (in effect this is what both Freddie Mac and Fannie Mae did and then, of course, there is the mortgage deduction on the income tax) then we need to find another way to encourage ordinary citizens to save. 

I concur with Schiller's points.  But what I want to note is that this wasn't always the conventional wisdom.  Indeed, it wasn't the conventional wisdom right up to the time that the subprime crisis hit.  Until then the view was that people should own their homes, even if they were of modest income, because of the pride of ownership factor, first and foremost, signified in the movie It's A Wonderful Life, and even if they were expected to turn over the property fairly quickly, say in the event they would move to a new job in a different location, because Adjustable Rate Mortgages came along and with the low initial rates that encouraged home purchase. 

It's sensible to ask why the conventional wisdom changed.  No doubt the subprime crisis is responsible.  But then you want to ask what caused the subprime crisis. Here you can list a bunch of factors off the top of your head: unscrupulous lending practices, cheap credit supplied by the Chinese and enforced by the Fed, people having earlier learned to live in a highly leveraged manner because of the run up of the stock market, flat wage earnings but rising consumption aspirations helping to reenforce the leveraged approach.

I want to look at a different factor that started much earlier.  It may have been benign when it started.  And it may have created much benefit in the near future after it came into being by making the cost of capital much lower.  I'm talking about mortgage securitization, the brainchild of Lewis Ranieri, and popularized in the book Liar's Poker.  It all started in the late 1970s.

Capital flow was slower then and innovation in capital markets didn't diffuse as rapidly.  When I started at Illinois in 1980 I rented, just like my fellow Assistant Professors.  After six years, I bought my first place, a condo.  I believe the mortgage on that place was locally held, not sliced and diced as mortgages now are.  The maximum loan possible was 80%, or if mortgage insurance was  purchased then 90%, and there was quite a lot of scrutiny done by the bank originating the loan in order to get the mortgage.  Among the things that happened to me at the time, I'm not sure they were absolutely necessary but certainly they greased the skids, I moved my financial assets from Fidelity which was definitely more modern and had a "money management account" to the local bank, and I ended up playing a round of golf at Lincolnshire Fields with my bankers, something I've never done since. They wanted to know I was an ok guy.

If you take mortgage securitization but keep all the old mortgage origination practices, that may have been win-win.  But, of course, the old practices went by the wayside.  And here what is cause and what is effect is difficult to decipher.  As John Cassidy tells us in How Markets Fail, there is a Prisoner's Dilemma aspect in markets under a bubble, where normally prudent lenders are forced by the market to offer higher rates to investors to attract their capital and, in turn, they are equally forced to invest in highly risky assets, since those have higher yields and are the only way to cover what they are paying to investors.  So while there may be truly bad guys in this story, even the good guys became bad guys as a means of (near term) survival.  In this world, mortgage securitization looks like pouring fuel on the fire.

There's one other point to make here.  In our lifetimes we saw it all before, in the Savings and Loan crisis of the 1980s.  It was not as calamitous as the subprime crisis, but it was plenty bad.  So we were forewarned.  Brakes might have been applied but weren't.  Thinking this way, who is to blame, Clinton or Bush II?  If we know in advance that Republican administrations will regulate less than their Democratic counterparts, should Clinton have allowed Robert Rubin and the Larry Summers to liberalize on this front?  The Fed, of course, also failed its due diligence.  Alan Greenspan was the genius of the capital markets, right up until he wasn't.  His career has an eerie parallel to that of Lance Armstrong.  I certainly don't want to let Bush II off the hook.  The tax cuts were ill considered and getting involved in Iraq was horrible.  As they say, there is plenty of blame to go around.  My point is that on this one we might have known, but we sure didn't act that way. 

* * * * *

Let me turn to politics.  Yesterday there was a piece by Frank Bruni about the dysfunctional U.S. Senate.  It is not just that it is incredibly difficult to get any legislation through nowadays.  It is also that moderate incumbents and potential candidates are being driven away.  One can't in good conscience serve in an organization, any organization, when one holds substantial contempt for many of the would be "colleagues."  This point is not new to Bruni's column.  We saw it not that long ago in a piece by Evan Bayh, as he was about to leave the Senate. 

In today's paper there is an equally discouraging piece by Thomas Friedman about the House.  The issue there isn't gridlock, like it is in the Senate.  It is insanity.  (Or, if you want it to put it more politely, it is that that narrowness of view blocks enlightened self-interest.)  The body now has a destructive, Far Right agenda.

This new norm, a polarized view of Congress, wasn't what I was taught as an undergraduate.  I took a course then on economic models of politics.  Among our readings was An Economic Theory of Democracy by Anthony Downs.  This is essentially the model of spatial competition by Harold Hotelling, but applied to politics.  The result was what is called, "the median voter model."  The distribution of population preferences determines the positions of the candidates, who run to the middle.  The winner is the one who best finds where the median is located.  That was the old conventional wisdom.

What happened to change it?  Downs' model abstracts entirely from the inner compass of the candidates.  It makes the candidates complete chameleons.  A more realistic picture would allow both factors to influence the positions a candidate takes.

Then there is the emergence of cynicism of the Federal government among the electorate, first as a consequence of the Vietnam War and then amplified greatly by Watergate. 

But probably the most significant change was the realignment of the parties after the various pieces of Civil Rights Legislation in the Great Society, with Southern Democrats switching party lines in great numbers and Reagan Democrats voting for the Republican candidate while maintaining their party affiliation.  The Democratic party had been a left-right party while the Republican party had been a right-center party.  There was overlap between the two parties and that enabled compromise and government function.  What we have now is the Democrats as a left-middle party and the Republicans as a right-far right party.  There is no overlap.  Some have argued that it is better this way, since now the parties are purer.  I think they are completely wrong.

Since race and racism are at the heart of this realignment and since so much attention has been given to the recent George Zimmerman verdict, with the  conclusion that young black men are still subject to massive racial stereotyping, it is worth asking why that is.  Between the Great Society and Rodney King, there was 25 years.  The polarization of the parties was still just getting started.  In The Conscience of a Liberal Paul Krugman argues, over and over again, that Reagan played the race card to lure the Reagan Democrats, who voted against their own economic interests.

It's been another 20 plus years between Rodney King and Trayvon Martin.  Growing up we were taught that time heals all wounds.  In college I learned a more sophisticated version.  Racism would end as the old guard passed away and the next generation took over.  This more sophisticated version seems to hold sway with gay rights and particularly with the overturning of DOMA, even if that decision was 5-4.  It is a different story on race, with the recent decision on the Voting Rights Act recreating a House Divided.  Krugman's argument about Reagan may be even more apropos now about the entire Republican Party.   It is a White party that must appeal to middle and working class voters in order to have success at the ballot box.  It's sad but true that the politics of resentment mobilizes people.

* * * * *

In the last few days there have been a couple of pieces about the abuse of the patent system.  Joseph Stiglitz had a piece lauding the Supreme Court decision that genes could not be patented, but then decrying how many companies pursue a monopolization strategy that is socially deleterious, blocking both current competition and future innovation.  In Stiglitz' view of the world we have gone from an approach to make the pie bigger, and thus everyone gains, to getting as big a slice as possible and to hell with what happens with the pie overall.

Then, yesterday, there was a piece about the FTC turning up the heat on patent trolls, where perhaps the worst possible abuses will be curtailed, though it may be far less than what is needed for firms to return to a growth agenda through new products and services.

There is a thought about economic growth and economic malaise that some of it is simply a sign of the times, a consequence of whether there is an underlying engine or not.  During the Reagan years that engine was the PC revolution.  During Clinton's time in office it was the Internet Revolution.  The argument goes that there is nothing comparable now.

Potential candidate engines of growth have been discussed.  The cracking of the human genome was supposed to usher in a new age of economic growth based an increasing demand for genetically engineered products.  Ditto for the discovery of natural gas reserves and the potential for cheap clean energy.  It may still happen.  But so far it's not.

Yet CEO pay has continued its inexorable rise.  Perhaps the most charitable explanation for this is that CEO pay is more tied to growth in the Dow than growth in GDP and the former has grown a lot faster than the latter, thanks in no small part to Quantitative Easing.  The outrage in CEO pay appears to be gone.  We've become numb to it.  Yet isn't it as sickening as the patent trolls? 

Robert Gordon, whom I had as a teacher when a graduate student at Northwestern, has gotten a lot of mileage from this paper about the end of economic growth.  I don't know if he is right or not.  Only time will tell.  But if he is right we're essentially in a zero-sum game.  There are some folks who know how to play that game for their own advantage very well, while the rest of us take it in the shorts.

* * * * *

My focus for the last fifteen years or more has been on Higher Ed, not economics or politics.  It's what I thought about first when conceiving this piece.  I'm writing about it last only because I think what is happening there is a microcosm of like changes in the economics and politics.

What set me off was a Special Report in the Chronicle on Monday about The Gates Foundation.  I wonder how many readers of my piece have read The Death and Life of the Great American School System, by Diane Ravitch.  I wrote about it a while back, where I agreed with her argument but felt like I was getting beaten up while reading the book.  The same point was made over and over again, with one example after another of failed Charter Schools and school systems seemingly indifferent or worse to their low income students.  So my first thought seeing the Chronicle piece was, "Look what Gates has done for K-12.  Now his Foundation is doing an encore for Higher Ed."

Gates is unlike a Tea Party politician in that his motives seem spurred from good intentions we can all endorse.  But he shares with the Tea Party politician a characteristic found in Willam Faulkner characters - total certitude with regard to approach and an unshakable persistence to achieve that end.

Gates would benefit from reading Thinking Fast and Slow and learning about WYSIATI.  He wants to apply essentially the same approach as he is using to good effect for the eradication of disease to addressing how to give an effective education to a large under served population.  Both are driven by data centric approaches.  The data about disease that are collected are informed by epidemiological models that have worked well in curtailing other diseases.  What models inform the collection of data about learning?  How well have those models performed previously? (Ravitch would say in the case of K-12, not very well at all.) 

On a listserv I'm on the very recent discussion has turned to Badges.  Ten years ago the rage was ePortfolios.  Digital certification of learning has been with us for some time.  Yet there is surprisingly little innovation on the learning itself, to my everlasting regret.

I fear we have only a limited amount of mental bandwidth to devote to Higher Ed and the Gates Foundation is claiming well more than its fair share of it.  I'd love to be wrong.  But I'd bet otherwise.

* * * * *

Some of my friends can seemingly maintain their personal equilibrium by expressions of outrage.  Get it out of their system and they can keep on keeping on.  I can't do that.  I have an ill feeling inside.  We seem to be moving from a substandard status quo to an unstable and horrifying abyss.  I can't make the ill feeling go away because I don't know how to get us to reverse course.  The world seems one big Prisoner's Dilemma and we're all trapped playing the game.