Tyler Cowen linked to a couple stories yesterday that touched on a similar theme, I think.
First, was this NY Times Upshot story about school principals' estimation of school poverty. According to the study, principals in the U.S. greatly overestimate levels of poverty among their students.
If I understand the variable on the x-axis properly, this is the percentage of principals who believe that more than 30% of their students come from disadvantaged homes. If the problem in the US was related to socioeconomic segregation, then this number would be low, since most principals would have only a few disadvantaged students and a few principals would have many disadvantaged students. If these principals have a reasonable perception, then this would imply that there is massive poverty in the US that is evenly distributed among schools. As the article points out, widely distributed poverty among a 30%+ portion of the population doesn't seem objectively reasonable.
There are a number of subtle and complicated issues here that I won't begin to understand. But, this fits with a set of cultural peculiarities that seem to be in place right now in the US. First is the apparent socioeconomic factor in school performance. US students who are poor seem to do especially poorly in school. And, many educators and public education advocates appear to put a lot of weight on this idea - both in terms of advocating that public schools in poor neighborhoods need more public support and in terms of assigning responsibility of poorly performing schools and students to their poverty instead of to the educational institutions and their faculty and staff.
In short, we have school districts that are compulsory institutions, school leaders who attribute student failures to poverty, and school leaders who overstate the level of poverty in their schools. Is there a bit of constructed fatalism here? It seems to me that if we arranged a stronger right of exit and choice in primary education, we wouldn't even need to answer that question. Dismayingly, one reason that public school advocates give for opposing the right to exit is that many poor children will be failed by a system that requires their parents to shop for the best school. No doubt, there will be many failures of this kind, and it would be a tragedy that requires some sort of safety net for the children who fall through the cracks. But, especially in light of evidence such as that from the Upshot article, the layers of fatalism in defense of coercion are a potential red flag. If the attitude of many families to their local schools and the attitude of the schools to those families are both fatalistic - and clearly they are, in both directions - then how does this become anything but a vicious cycle? Is there really more than one reasonable answer to inner city families in places like DC and LA who take to the streets demanding choice?
The other piece was an excellent piece by Robert J. Samuelson in the Washington Post about Dodd-Frank. He discusses the fact that Dodd-Frank might undermine the Federal Reserve's role as lender of last resort. In a system with banking capital and reserve regulations and a public monopoly on currency creation, this might be the Fed's most important tool for crisis prevention. Yet, this role has been categorized as a "bailout" in the accepted narrative of the recent crisis where private banks and financiers recklessly drove us over a financial cliff, only to be rewarded with "bailouts".
This is a right-of-exit issue again. Because, what if that narrative is wrong? What if the crisis was a product of a mishandling of currency production by the Fed, and playing the lender of last resort was one of the important tools the Fed used to save us from their errors?
As with the school issue above, this is an empirical question, but because of the complex nature of the subject, the interpreted facts become a product of the narrative itself, and so the narrative exists above and before the empirics. The narrative is predicated on an assumption that markets consisting of thousands or millions of professionals devoting their professional lives to safely interpreting a complex ecosystem of human interaction are so uniformly driven mad by greed that they predictably join in consensus behavior that self-destructs. Only a committee of high priests, chosen by the President and approved by the Senate, can stand above the fray and save us from these savage lemmings.
In a sane world, the transcripts of the FOMC meeting from September 2008 would have discredited this point of view. (Talk about too big to fail.). The Fed was forced over and over again to substitute emergency liquidity for the sane, conventional liquidity that they refused to supply, and almost everyone seems to agree that the emergency liquidity is the one thing we definitely want to avoid repeating the next time this happens.
Then there are people like Ron Paul, who appear to be radicals, and who call for the abolition of the Fed. But they are in complete agreement on this matter. They also think it was the liquidity that was the problem. Paul is supposedly the free market extremist, but he also thinks his view of the marketplace should be trusted over the millions of professionals who actually spend their working time trying to allocate capital. He thinks they are savage lemmings, too, stupidly rushing off the cliff together and taking the economy with them, apparently because they can't forecast monetary policy as well as Mr. Paul can! How is he any different than Barney Frank?
This is just textbook dogmatism (with a bigoted mindset) at work. There is a widespread set of beliefs about the finance sector that is predicated on ungenerous, illogical, morally loaded presuppositions about how the financial world works. The financial industry is a target you can safely treat with reflexive cynicism and receive social approval for it, among practically any political or social faction. Is it that crazy to imagine that this leads to constructed narratives that - shock! - use finance as the antagonist? I don't say this to paint financiers as victims. That's not my point. My point is that cheap cynicism and bigotry makes people stupid. And stupid people have stupid opinions and support stupid policies. The danger for me here is to use this as an excuse to dismiss all opinions that differ from my own. But, so much of what I hear with the banks as the heavy and the Fed as the hero just appears to use convenient preconceptions, with no connection to facts. In hindsight, nobody would have wanted to own banks over the past decade compared to other equities. I know, Goldman Sachs owns the Treasury Department, and CEO's walked away with millions of dollars while firms failed, etc. etc. These things, and many more, are true. But, show me a bigot that doesn't have a briefcase full of incontrovertible facts in their defense. I know this is a very convenient point for me that makes my argument non-falsifiable. But, it happens to be true. There are a lot of problems out there. But, please. Assuming that an entire industry, including financial representatives as well as high wealth individuals with their own capital on the line, will behave destructively pro-cyclically, but that a committee of political appointees won't, is madness. It's believable if you're reflexively cynical about it, though.
The Fed transcripts from 2008 are damning in this matter, but you can't reason someone out of something they weren't reasoned into. This intellectual framing is made possible, as with the school issue above, because there is no right to exit. We are captives of our monetary and banking regulation framework. I can buy or sell assets if I disagree with the marginal investor. If I'm right, the marginal investor pays, and if I'm wrong, I pay. Tread very carefully if you disagree with the marginal investor, by the way. But, if I disagree with Chris Dodd, Barney Frank, or Ron Paul, I'm screwed either way. If Ron Paul wants to give me the right of exit from a monopoly liquidity provider, more power to him. But, if he wants to saddle me with some monetary policy based on what he thinks the S&P 500 should be going for, then he should go buy some puts and leave the rest of us alone. At least he gets it half right, which is better than Dodd, Frank, and the rest of the folks writing the legislation that Mr. Samuelson is reviewing.