by publius
So JP Morgan has agreed to buy Bear Stearns at $2 a share. As others have already pointed out, this is, from the point of view of the shareholders, just barely better than bankruptcy. Talk of a bailout of the bank is silly--this wasn't a bailout; it was an orderly winding-up of business.
Hmm, $30 billion credit lines by any other name smell just as bailout-ish to me. The rest of her post, however, is quite reasonable. Why not just call a spade a spade though? This was a bailout. McArdle thinks it led to a reasonably good outcome. Ergo, she thinks a government bailout worked (or at least provided a decent outcome among many potential bad ones -- for now).
UPDATE: There is a larger point here -- one unrelated to McArdle (again, I liked her post other than that one sentence). One of the more frustrating challenges the progressive movement faces is that the public is blind to the various and often invisible ways that government has improved people's lives. For instance, I doubt "small government" advocates spend much time thinking about why the public currently enjoys free schools, clean air, weekends, subsidized roads, Social Security, non-contaminated food, etc. All of these benefits, though, resulted from government action following intense political battles.
This is getting way beyond Bear Stearns, but the quickest way to shatter the current Reagan paradigm is to rehabilitate the idea of government in the public's mind. Indeed, one of the long-term costs of Bill Clinton's political strategy of the 1990s was that it implicitly discredited the benefits of government action. I don't blame him - he did what he had to do under rough circumstances. But to really shift the paradigm for good, progressives need to make the public understand that government can and has been a force for good (when it's done right, obviously).
Thus, if the government has acted to help the markets here, we should say so. Unapologetically.]
Wow, so Megan McArdle completely and totally rejects libertarianism, with the implicit caveat that it will be completely and totally unrejected the minute that the financial markets recover, or in the event that someone suggests giving a government dollar to a poor person rather than to a billionaire, whichever comes first.
Everything that is wrong with "capitalism" in one little fraudulent "born and raised on the Upper West Side of Manhattan" package.
"The credit markets are already badly malfunctioning", she bleats. Poor little malfunctioning markets. Sad face.
"[B]ankruptcy proceedings are time-consuming and uncertain". Shriek! Real markets have transactions costs! I have been reading the Economist for years, and this is the first I have heard of such a thing! Why was I not warned?
Allowing BS to fail, "would have been like throwing a hand grenade into a burning pool of gasoline", she predicts. "Well, I'm glad I'm not in the prediction business", she says. Good lord.
Color me impressed.
Posted by: now_what | March 17, 2008 at 02:42 AM
This is not a bail out of BS, BS is dead and given that this is a stock swap deal BS shareholders are dependent on JPM stock holding up during the transaction. I doubt it will.
The $30b is more likely a prop up of JPM and large investment banks, keeping it from marking to market the BS derivatives it acquires when there is no market. This can keep the big banks appearing solvent for a while. The market generally overshoots in the short term, so this may help minimize the damage, or it may just be trying to hold back the tide.
Posted by: JayS | March 17, 2008 at 02:54 AM
Just to be clear, the $2 a share price is an extreme discount but it means that JPM has to hold up until the deal is done for BS shareholders to get even that. You can argue they should have lost more, but they are losers on this deal and they are likely to get less than $2 a share IMO.
Posted by: JayS | March 17, 2008 at 03:30 AM
Regarding your larger point, Publius, that seems to be what Krugman is saying in his column today when he says a fed bailout is inevitable. He spends more time talking about how the fed bailout should be limited, and who should take it in the teeth, but the underlying argument is that it's the government that is going to have to step in and keep this whole thing from collapsing.
Posted by: Incertus (Brian) | March 17, 2008 at 04:09 AM
I doubt "small government" advocates spend much time thinking about why the public currently enjoys free schools, clean air, weekends, subsidized roads, Social Security, non-contaminated food, etc. All of these benefits, though, resulted from government action following intense political battles.
You're arguing against a very flimsy straw man here, publius. While all of these resulted from government action, not all are the result of bureaucracy, which is what small-government advocates tend to oppose. All creating a five day standard workweek required, for example, was writing and signing a law. The public schools are hardly free - in fact we pay taxes to fund them whether we use them or not - and we don't get much for the money, considering that we spend more per pupil than any other industrialized nation, and yet consistently rank near the bottom in test scores (except, interestingly, for those who attend non-government schools). While I don't know anyone other than doctrinaire anarchists who would claim that the government shouldn't be responsible for regulating and maintaining roads, it does tend to do a better job of both when the hairy details thereof are contracted out to competitive private entities. Clean air and non-contaminated food are great, and while government action provided a spur to the development of both, it was the private sector that produced catalytic converters, exhaust scrubbers, sterile packaging, etc. As for Social Security, I'm not all that keen on it as it's currently set up, considering it'll go insolvent just about when I'm ready to retire, and personally I'm banking my retirement on my private savings.
There are certainly good arguments to be made for government intervention a lot of times, including, sometimes, in the economy. But that's not equivalent to blanket proof that all government intervention is positive.
Posted by: Xeynon | March 17, 2008 at 04:46 AM
The credit lines don't bail out Bear Stearns, they bail out all the counterparties of Bear Stearns.
BS equity holders got somewhere around 2.5 cents on the dollar - closer to a fire sale than a bail out. And since BS had a strong employee ownership culture, a lot of that equity was held by the people working there.
Posted by: HC | March 17, 2008 at 04:48 AM
You're arguing against a very flimsy straw man here, publius. While all of these resulted from government action, not all are the result of bureaucracy, which is what small-government advocates tend to oppose.
Could you point to one single government program of serious importance that could be sustained in the absence of bureaucracy?
All creating a five day standard workweek required, for example, was writing and signing a law.
This is incorrect. Signing laws into being changes nothing unless you also have inspectors to check compliance, prosecutors to file suit, police officers to enforce the decisions of the court, and a staff of regulators to specify how to apply the law as the business environment changes. You know, bureaucracy.
...(except, interestingly, for those who attend non-government schools)
Cite please? I was under the impression that scientific studies that control for socioeconomic status show that students in non-government schools perform no better than government schooled students. Surely your claim relies on more than the idea that the richest private school students outperform the average student?
While I don't know anyone other than doctrinaire anarchists who would claim that the government shouldn't be responsible for regulating and maintaining roads, it does tend to do a better job of both when the hairy details thereof are contracted out to competitive private entities.
Cite please? This does not jive with my experience. Certainly, the horrific corruption associated with Bechtel's contracts for the Big Dig in Boston suggest otherwise.
Clean air and non-contaminated food are great, and while government action provided a spur to the development of both, it was the private sector that produced catalytic converters, exhaust scrubbers, sterile packaging, etc.
This is a strawman argument. No one is suggesting that the federal government is directly responsible for producing air pollution control equipment. However, it is a fact that absent the coercion of the clean air act, power plant owners were unwilling to pay for air pollution control technologies. Which means that regardless of who developed the technology, it did no one any good until the government forced polluters to deploy it. Do you dispute that? If not, what was the point of reminding us that the government does not invent all new technologies?
As for Social Security, I'm not all that keen on it as it's currently set up, considering it'll go insolvent just about when I'm ready to retire, and personally I'm banking my retirement on my private savings.
There is no reason to believe that SS will go insolvent. The model that indicates it will has consistently underperformed reality for the last 50 years; meanwhile the alternative model that has matched reality shows that SS will be solvent as far out as forecasting makes sense.
There are certainly good arguments to be made for government intervention a lot of times, including, sometimes, in the economy. But that's not equivalent to blanket proof that all government intervention is positive.
Can you please point me to where Publius, or anyone else at OW, argued that "all government intervention is positive"? If you can't do that, will you concede that this was a straw man?
Posted by: Turbulence | March 17, 2008 at 05:09 AM
Thank goodness we have Social Security! I mean, in the absence of government action, we might have to do without that pyramid scheme.
Posted by: Vernunft | March 17, 2008 at 05:22 AM
Thank goodness we have Social Security! I mean, in the absence of government action, we might have to do without that pyramid scheme.
if it's a pyramid scheme, there should be a group of individuals near the top, who are making the majority the money, while the vast majority of us never see a dime. by definition of "pyramid scheme". yet, that's not what happens.
Posted by: cleek | March 17, 2008 at 06:57 AM
As I read Publius' post, I thought, "On the contrary, Publius, a great many 'small government' advocates have given it all a great deal of thought and prepared a wide variety of logically fallacious and factually incorrect denials of the obvious truth." And lo, it is so.
Posted by: Bruce Baugh | March 17, 2008 at 07:22 AM
While all of these resulted from government action, not all are the result of bureaucracy, which is what small-government advocates tend to oppose.
Nonsense.
Small-government advocates often oppose government interventions that just require "writing and signing a law." You will find lots of them who dislike, for example, the Fair Labor Standards Act, and admire the Lochner decision throwing out a NY state law limiting bakers' work hours.
In fact, there is almost no labor regulation that some small-govt people don't hate. Minimum wage, OSHA, ADA, EEO - you name it.
While I don't know anyone other than doctrinaire anarchists who would claim that the government shouldn't be responsible for regulating and maintaining roads, it does tend to do a better job of both when the hairy details thereof are contracted out to competitive private entities.
Yeah. Bechtel did a marvelous job on the Big Dig.
it was the private sector that produced catalytic converters, exhaust scrubbers, sterile packaging, etc.
For none of which there would have been any demand without govt regulations requiring their use. To give the private sector credit for pollution reduction is ludicrous.
Posted by: Bernard Yomtov | March 17, 2008 at 09:18 AM
We need to capture the essense of the issue, in a short, pithy phrase: Nanny State.
The 'risk takers and entrepenuers', as Dubya chants, keep the profits; the public, the 'little guy' eats the losses.
The 'haves' and the 'have mores', like the camel train, move on.
Don't let folks preempt the issue by bleating the 'nanny state' mantra over things like trans fats, minimum wages, universal health care, and social security, without pointing out how the other end of the market spectrum is considerably advantaged by this system
Posted by: Porcupine_Pal | March 17, 2008 at 09:33 AM
This is incorrect. Signing laws into being changes nothing unless you also have inspectors to check compliance, prosecutors to file suit, police officers to enforce the decisions of the court, and a staff of regulators to specify how to apply the law as the business environment changes. You know, bureaucracy.
Nobody's arguing that we don't need courts and police officers. Nobody but the anarchist lunatic fringe would argue that those aren't perfectly valid government organs. Inspectors and regulators? For some things they're necessary, but for many others they're redundant and get in the way.
To take the example of a five day workweek - you don't think if a company was forcing its workers to work Saturdays and Sundays in contravention of the law, word wouldn't get out? I don't see why it's necessary for OSHA and the like to go around checking. Particularly in the information age, when it's a LOT harder to keep workplace problems secret.
I was under the impression that scientific studies that control for socioeconomic status show that students in non-government schools perform no better than gnment schooled students.
The data is mixed, but looked at from the broadest perspective, yes, the public schools are reasonably competitive when you adjust for socioeconomic status, if your metric is standardized test scores (private schools do better by other measures, such as percentage of graduates who continue on to college, although that doesn't necessarily mean they're superior either). The best argument for school choice is not that the government is uniformly incompetent at providing education, however - I don't believe that's so, and since I'm a public school graduate myself, I certainly hope it's not. Rather, it's that our current set-up restricts individuals' choices in situations where public school might not be the best option, and hence that the government is incompetent in with respect to educating certain individual students.
For any given student, the "mean public school" is irrelevant. What matters is the public school in that student's neighborhood. Students of high socioeconomic status generally have the option of attending excellent public schools, because public schools in well-to-do areas generally have fewer behavior problems, fewer students who come into school facing serious educational deficits, etc. and as such are less difficult places to learn in addition to being better able to attract qualified teachers. Even if the public schools aren't good, though, the parents of these kids can afford to send their kids to private schools. Poor students have no such options, and high achieving students in areas with bad public schools are stuck in them, at least until they get to the higher grades and magnet schools, if there are any around, become an option. In the meantime, though, their progress has been retarded by their having attended poor quality primary schools. Giving low-income parents the option of sending bright kids to schools other than the local PS via voucher programs or the like would give these kids an opportunity to learn in a better environment from a young age. Yes, it's true that this would deprive the worst schools of their best and brightest students (which may not mean "best and brightest" per se, but rather "best able to learn via the pedagogical approach typically used in public schools", but that's for the best, certainly for those students, and, in my opinion, for the schools as well. I work as an educator, and I've taught at both public and private schools. One of the biggest problems in the former is that a typical grade school class unavoidably has students distributed all across the bell curve in terms of both innate intelligence and learning style, but that public school bureaucracies inevitably favor a "one size fits all" pedagogical approach. The teacher ends up 1.)teaching to the middle, which benefits neither the brightest kids (who get bored because they're not sufficiently challenged) nor the slowest (who don't understand everything and get frustrated), and 2.)using the presentation methods best suited to the largest number of students (which, as any experienced teacher will tell you, does not mean nearly every student). Private schools have more freedom to explore alternative educational philosophies, which may be better fits for some students. Unfortunately under the current educational regime, these are generally inaccessible to all but well-off parents. Opening up parents' options would allow talented and motivated students without the financial means to pay to do so on their own to attend better schools from a younger age, as well as giving students who may not cotton to public school educational methodology the chance to find a private school that was a better fit. The free market can find these efficiencies in a way that no amount of bureaucratic tinkering by the Dept. of Education can, and five small high schools with 200 students apiece, each using a different approach and attracting students who best like that approach, will generally do a better job educating them than one massive public high school that takes all 1,000 and shoehorns them.
You do, of course, end up with some schools full of straight-up educational rejects who didn't succeed anywhere, but - those kids exist and always will. Contra stereotypes, there are even plenty of them here in Asia. It's better to place them in a school of their own that focuses on providing them some kind of life skills rather than sticking them in with more academically oriented kids with whom they can't keep up and letting them drag everybody else down. American society should, in my opinion, give up the idea that every kid can grow up to be a doctor or a lawyer.
The countries with the best educational systems in the world (Germany, Japan, New Zealand, the Scandinavian countries) all incorporate market-based approaches in their educational policies to some degree. There's no reason we shouldn't as well.
Certainly, the horrific corruption associated with Bechtel's contracts for the Big Dig in Boston suggest otherwise.
The problem with the Big Dig was precisely that there wasn't enough market competition involved - Bechtel got the contracts, and that was it. I'm not saying that private enterprise is always saintly - of course it's not. But when they'll lose business if they don't, private companies tend to behave themselves. If Bechtel had been at risk of losing the contract, they would have shaped up. The government awards far too many of these sorts of thing on a noncompetitive basis.
However, it is a fact that absent the coercion of the clean air act, power plant owners were unwilling to pay for air pollution control technologies. Which means that regardless of who developed the technology, it did no one any good until the government forced polluters to deploy it. Do you dispute that? If not, what was the point of reminding us that the government does not invent all new technologies?
I don't dispute that, and personally I have zero problem with the Clean Air Act - this is one area where government intervention was a net positive. My point was that the best thing for the government to do to achieve a goal is to manipulate incentives so that the market will produce the desired outcome - not to make specific stipulations about how things are done. Coal power is a good example - according to my father, who's an engineer specializing in power plant construction, government restrictions on building new coal plants (which use technology that is relatively clean) are so strict that it is cheaper for power producers to keep old plants which use inferior technology online than build new ones. This seems counterproductive, to say the least.
There is no reason to believe that SS will go insolvent. The model that indicates it will has consistently underperformed reality for the last 50 years; meanwhile the alternative model that has matched reality shows that SS will be solvent as far out as forecasting makes sense.
Only if you consider the money owed the SS Trust Fund by the Federal government a valid asset. Since the government pays the fund in federal bonds, it's essentially borrowing that money from itself and will need to raise it somehow if it's to redeem that debt, so that seems silly to me. Add in inflation, the demographic timebomb of the graying boomers, and the very real possibility that advances in medicine will further extend economically nonproductive lifespan, and there's no way that the system can go on the way it is now without some major adjustments. I'm prepared to accept that I will never receive as much from SS as I pay into it.
Can you please point me to where Publius, or anyone else at OW, argued that "all government intervention is positive"? If you can't do that, will you concede that this was a straw man?
He didn't argue that, but his brushstroke dismissal of "limited government" was equally careless - that was my point.
Posted by: Xeynon | March 17, 2008 at 09:48 AM
I don't see why it's necessary for OSHA and the like to go around checking.
Sorry to cherry pick out of such a long comment, but this was too outrageous to let pass. If you don't see why it's necessary for OSHA and the like to go around checking, then you've never been a person who would be adversely affected by an OSHA-free environment. When I worked in a grocery warehouse, my life would have been in danger without the threat of OSHA inspectors.
Posted by: Incertus (Brian) | March 17, 2008 at 10:03 AM
The problem with the Big Dig was precisely that there wasn't enough market competition involved - Bechtel got the contracts, and that was it. I'm not saying that private enterprise is always saintly - of course it's not. But when they'll lose business if they don't, private companies tend to behave themselves. If Bechtel had been at risk of losing the contract, they would have shaped up.
No. In the first place, it's very difficult to change contractors in the middle of a huge project. More important, while Bechtel may have had this particular contract locked up, it's performance surely affects its ability to get other large-scale contracts. That should be plenty of incentive - indeed, the whole "businesses never misbehave because it would damage their reputations" argument is a (foolish) staple of market-worshippers.
I don't dispute that, and personally I have zero problem with the Clean Air Act - this is one area where government intervention was a net positive.
Backtracking a bit here, I think. Your previous claim was that improvements in air quality were the consequence of private invention. Whatever your individual opinions though, small-govt types do in fact tend to oppose the imposition of these types of controls. They fought mandatory catalytic converters tooth and nail, for example.
Posted by: Bernard Yomtov | March 17, 2008 at 10:51 AM
If you don't see why it's necessary for OSHA and the like to go around checking, then you've never been a person who would be adversely affected by an OSHA-free environment. When I worked in a grocery warehouse, my life would have been in danger without the threat of OSHA inspectors.
I was talking about OSHA enforcing 40 hour work weeks in a white collar environment. I agree that workplace safety inspection is a much bigger deal in manual labor environments.
No. In the first place, it's very difficult to change contractors in the middle of a huge project. More important, while Bechtel may have had this particular contract locked up, it's performance surely affects its ability to get other large-scale contracts. That should be plenty of incentive - indeed, the whole "businesses never misbehave because it would damage their reputations" argument is a (foolish) staple of market-worshippers.
It's obviously going too far to say businesses never misbehave. That kind of overgeneralization is always foolish. In situations where there's no downside and/or people don't think they'll get caught - like the Big Dig - they obviously do sometimes. That said, potential damage to reputation is a real - and powerful - incentive not to misbehave in many situations. A scandal can ruin a company's business. See, for example, what happened to Ford's business after the Pinto. Or Jack-n-the-Box after the E. Coli scare. Or Merrill Lynch after their accounting scandal. Given that over-regulation imposes
burdens even on all businesses, not just the misbehaving ones, and often fails to stop abuses from happening anyway, I'm not convinced it's the better course.
Backtracking a bit here, I think. Your previous claim was that improvements in air quality were the consequence of private invention. Whatever your individual opinions though, small-govt types do in fact tend to oppose the imposition of these types of controls. They fought mandatory catalytic converters tooth and nail, for example.
You're over-generalizing. It's no more fair to say that "small-government types" hold monolithic positions on these issues than it is for me to say that "liberals" all think that 9/11 was primarily America's fault. Libertarianism is, like liberalism, a movement which stretches across a continuum of opinion.
Posted by: Xeynon | March 17, 2008 at 11:13 AM
As others have noted, the right question is "a bailout of *what*". Bear Stearns shareholders and employees are taking a bigger hit this way then they would in bankruptcy--the big question in the markets today is "Will they take the deal?"
This is an attempt at--not a bailout, exactly (it's too small to call it that, since the Fed isn't going to eat anything like that $30 billion, and may end up making money), but a shoring up of the whole banking system. I support this not because I want to protect Wall Street--I accumulated no love for financiers during my brief sojourn there, and as far as I'm concerned many of them would do society more good learning to operate a fry-o-lator. Unfortunately it is very difficult to bail *us* out without making some of their lives better as well. Credit collapses can be very, very ugly for the entire economy: witness the great depression.
Posted by: Megan McArdle | March 17, 2008 at 11:37 AM
In situations where there's no downside and/or people don't think they'll get caught - like the Big Dig - they obviously do sometimes. That said, potential damage to reputation is a real - and powerful - incentive not to misbehave in many situations. A scandal can ruin a company's business. See, for example, what happened to Ford's business after the Pinto. Or Jack-n-the-Box after the E. Coli scare. Or Merrill Lynch after their accounting scandal. Given that over-regulation imposes
burdens even on all businesses, not just the misbehaving ones, and often fails to stop abuses from happening anyway, I'm not convinced it's the better course.
The problem is that we already know what a lack of workplace regulation creates: it creates a system with bad actors free to act with impunity.
We all know how shitty it is to work at Wal-Mart, for example, as compared to Costco. The former's labour abuses are large, varied, and well-catalogued; the latter's good labour practices are routinely trumpeted by those wanting to demonstrate that it's possible for a retailer to turn a decent profit without treating its employees like shit.
But Wal-Mart doesn't change its practices particularly, despite all the bad press it gets. Partly this is because a pro-business culture has sprung up to defend bad actors like Wal-Mart in the name of freedom and capitalism and the bottom line. But partly it's also because Wal-Mart simply doesn't need to - wage stagnation over the past three decades has created a living standard where the classes that form Wal-Mart's worker base all live month-to-month and don't have the luxury of being able to think "gosh, this job sucks; I should quit and go find a new one."
Now compare that to, say, the situation at slaughterhouses, which typically hire recent immigrants or old-fashioned illegals to do dangerous work precisely because that sector of society is more vulnerable and less aware of their rights as labourers, and explain to me again how the free market can take care of this in a way that isn't unintentionally hilarious.
Posted by: mightygodking | March 17, 2008 at 11:45 AM
It isn't a bailout because Bear Stearns is (properly) going down. Which by the way is an operation of the market doing its job. As far as I can tell, the people who made the stupid decisions and those who invested in the stupid decisions are going to lose a lot of money.
The government market intervention by the government is on behalf of the counterparties to the bank to keep the sale of assets from all happening right at this very second (when things are already not selling and when trying to sell would cause even more serious marking down of the assets than is probably necessary). The assets will still be marked down, and will still be sold. It just all won't happen right this very second because the government doesn't would prefer to spread the pain out over time so as not to spark any further pain.
Think of it as taking ibuprofen to stop an inappropriate inflammatory sequence. It isn't wise to take an anti-inflammatory all the time (and might cause a chance of heart problems), but when your (normally quite useful) immune system is overreacting you want to tone it down temporarily. That isn't to say that it would be wise to replace your immune system with anti-inflammatory drugs. Nor does it say that it would be wise to take such drugs all the time.
The strawman libertarian argument would be that the government can't take any action at any time.
The real argument is that the intervention should be rare and temporary. The libertarian critique of modern progressives is that they tend to want the interventions to be constant and permanent.
Posted by: Sebastian | March 17, 2008 at 11:45 AM
Xeynon: Only if you consider the money owed the SS Trust Fund by the Federal government a valid asset.
That money owed to the trust fund is in the form of Treasury Bonds. If you don't consider Treasury Bonds to be "valid assets", then you might want to explain that to the government banks of China, Japan, and many other countries, which have been buying Treasury Bonds and paying for the Bush tax cuts.
That kind of statement is so utterly foolish it's amazing. The credit crisis we're in now would look like NOTHING compared to if the US government decided to default on the bonds it owes. That would probably cause wars.
The real problem isn't Social Security, it's all the debt we've been building up. The Bush tax cuts didn't cut taxes, they just moved them into the future, with interest. Not to mention the trillions of dollars we've spent invading Iraq to protect us from Saddam's WMDs.
Posted by: Nate | March 17, 2008 at 12:14 PM
The problem is that we already know what a lack of workplace regulation creates: it creates a system with bad actors free to act with impunity.
We know this based on what? The Gilded Age? We live in a far different world today. Blue collar workers, for the most part, have the right to unionize (as they should). Part of the purpose of labor unions is to ensure the safety of their members. In many situations, this creates unnecessary overlap with federal regulatory bodies like OSHA. Furthermore it's a lot easy to take a negligent employer to court than it was in Upton Sinclair's day. Every manual labor job I ever worked (and I worked more than a few on my way through college) was EXTREMELY strict about workplace safety - in one case, to the point of making me fill out an accident report and go to the hospital because I'd gotten a small cut from hitting my head against an open fold-out window. This was not because OSHA inspectors were a regular presence at that place of work - they weren't.
Re: Wal-Mart - their labor practices are pretty unsavory by American standards, yes, but still far better than 99% of those ever worked by people in human history, and far better than those in the majority of the world today. Employees don't have to work there, though - any town large enough to support a Wal-Mart, even if it's not yuppie-ish enough for CostCo, generally has a lot of other retail businesses as well, which would require the same skills of workers, and many of which presumably offer better workplace conditions, granting that Wal-Mart truly is the bottom of the barrel. I worked at K-Mart full time for two summers in college, and it was not at all a bad place to work. Not high paying, no. But safe and extremely attendant to labor law, yes.
Now compare that to, say, the situation at slaughterhouses, which typically hire recent immigrants or old-fashioned illegals to do dangerous work precisely because that sector of society is more vulnerable and less aware of their rights as labourers, and explain to me again how the free market can take care of this in a way that isn't unintentionally hilarious.
I already acknowledged that in particularly dangerous sorts of workplaces, mandatory safety inspection is a good thing. That said, in addition to labor unions, we've also got much more active and informed workers and immigrants' rights groups these days than we ever did before. Why should we assume that immigrant workers don't know their rights? In my experience, they do. The fact that they're entitled to minimum wage, overtime if they work beyond 40 hrs. a week, etc. is, in the case of most of the immigrant workers I've encountered, a major reason they came to the U.S. to work in the first place.
Regardless, OSHA doesn't need to concern itself with overseeing whether the copy paper at the local law office poses a potentially excessive risk of paper cuts.
Posted by: Xeynon | March 17, 2008 at 12:25 PM
Yes, this is creating moral hazard that we'll have to deal with, probably unpleasantly, down the road
McArdle misjudges the moral hazard in this case.
The moral hazard here is not government stepping in to prevent financial speculators from taking the entire economy down with them. The moral hazard is allowing Wall Street smartasses to play around with other people's money without being on a very tight leash.
In the little over two hundred years that this nation has had a market economy, unrestrained speculation has, like clockwork, periodically driven it over a cliff. This became less true after the regulatory framework that was established early in the last century was put in place, but the financial industry still manages to blow itself up now and then.
Of the various times that has happened in my lifetime, I can't think of a single case where it was caused by unnecessary government oversight. Can you?
Some people are greedy, reckless, and irresponsible. The financial industry tends to attract them, because that's where the money is. If nobody prevents them from doing so, they will happily take insane risks with other people's money if it means they, themselves, might get rich in the process.
Of course, the market will eventually scrub them out of the industry, but not until after they've pissed away thousands of other folks' money. I don't see that as an adequate remedy.
It's hard for me to think of free-market libertarians as anything other than an economic version of the flat earth society. Lots of clever and interesting ideas, but no real relation to the real world.
We no longer live in an 18th century economy dominated by agriculture and artisanal crafts industries. There are almost no significant industries left whose normal operations satisfy the prerequisites for a free market.
I encourage anyone who's remotely curious to go look up what those prerequisites are, and then explain to me how they apply to the economy we actually live and work in, today.
Maybe there are truly free markets for things like roofing nails, or lipstick, or shoelaces. Peanut butter. Bottlecaps, maybe.
For pretty much anything else, the free market is a fiction.
I hate to break it to you, but Adam Smith is dead.
Somewhere, a modern economy operates in a truly unrestrained fashion, achieves perfect Pareto efficiency, and all is well. And in that place, it's brillig, and the slithy toves do gyre and gimble in the wabe.
I don't live there, and nobody I know does, either.
I'm sick of hearing about the wonderful free market, and how all we need to do is get out its way. It's an academic chimera, an intellectual toy.
Most of us have to live in the real world. We don't have time for that crap.
Thanks -
Posted by: russell | March 17, 2008 at 12:26 PM
"not all are the result of bureaucracy, which is what small-government advocates tend to oppose"
Thank you. It was very profitable. Lack of government bureaucracy in Iraq after invasion meant massive, unchecked war profiteering for us. Rah rah small government! More money for us, less to do for it, no pressure to get it right!
Posted by: Halliburton et al | March 17, 2008 at 12:28 PM
That money owed to the trust fund is in the form of Treasury Bonds. If you don't consider Treasury Bonds to be "valid assets", then you might want to explain that to the government banks of China, Japan, and many other countries, which have been buying Treasury Bonds and paying for the Bush tax cuts.
Nate, as I already said, Treasury Bonds are a promise on the part of the government to pay back debts that it owes itself. If I take a $10,000 advance on my credit card tomorrow and loan the cash to myself, the me lending the money still has to pay back the credit card company. How is the government going to redeem those bonds without additional sources of future revenue, when social security outlays inevitably grow to the point that the trust fund has to start collecting on debts?
As for China and Japan, they have good reason for bankrolling us, but it's not because they expect us to pay them back - it's because we buy a lot of their stuff and their own economic health is dependent on American consumption. They're not gonna pay for our public retirement funds, though - they've already got enough trouble with their own.
The real problem isn't Social Security, it's all the debt we've been building up. The Bush tax cuts didn't cut taxes, they just moved them into the future, with interest. Not to mention the trillions of dollars we've spent invading Iraq to protect us from Saddam's WMDs.
Note that my position on SS is not mutually exclusive with me agreeing completely with you here - I opposed both the Bush tax cuts and the Iraq War, largely on fiscal conservative grounds. Believe me, I'm well aware that Bush is foisting a huge tax burden on my kids, and I'll be distrustful of the Republicans for the forseeable future because of it.
Posted by: Xeynon | March 17, 2008 at 12:42 PM
Russell-
Clever wordplay is not a substitute for substantive argument.
Posted by: Xeynon | March 17, 2008 at 12:46 PM
I don't dispute that, and personally I have zero problem with the Clean Air Act - this is one area where government intervention was a net positive. My point was that the best thing for the government to do to achieve a goal is to manipulate incentives so that the market will produce the desired outcome - not to make specific stipulations about how things are done. Coal power is a good example - according to my father, who's an engineer specializing in power plant construction, government restrictions on building new coal plants (which use technology that is relatively clean) are so strict that it is cheaper for power producers to keep old plants which use inferior technology online than build new ones. This seems counterproductive, to say the least.
As an aside, where does your father work? My father is an engineer who designs air pollution control equipment for power plants at WGI.
I'm going to disagree with your father. First off, coal plants are only clean IF you add the necessary remediation technology, some of which is not required by the CAA, and even then, the soot and ash are considerable; I really don't know how anyone can talk about coal being "clean" compared to any real alternatives. Secondly, there are lots of reasons why power companies choose to expand and retrofit existing plants as opposed to building new ones. In fact, if you compare how often such expansions happen for natural gas or other power plant types, I think you'll see this issue has little to do with coal. Retrofitting existing plants often brings a higher return on investment than building from scratch.
Also, there are relatively few places where you can just buy a vast chunk of land sufficient for a power plant that also happen to be adjacent to power transmission lines and supply lines for getting your fuel along with the necessary water and byproduct disposal. If you need to move hundreds of tons of coal a day, you're going to need serious access to heavy rail or ship transport. Even worse, most potential locations are surrounded by neighbors that would NOT take kindly to siting a large power plant in their back yard; that sort of thing is bad for property values.
Posted by: Turbulence | March 17, 2008 at 12:50 PM
Bonds backed by the full faith and credit of the US government are pretty reliable investment vehicles. As others have said, they had better be.
I don't see why people who worry about this stuff -- as opposed to worrying about our general levels of debt -- aren't driven completely round the bend by the totally unfunded rest of the government. I mean, if you look at the dedicated funding streams for the DoD, say, there isn't any!!!! So it's going to go bankrupt as soon as already appropriated funds run out!!!!!! OMG: all that stands between us and hordes of invaders is the promise of future taxation!
Posted by: hilzoy | March 17, 2008 at 12:52 PM
How is the government going to redeem those bonds without additional sources of future revenue, when social security outlays inevitably grow to the point that the trust fund has to start collecting on debts?
The government is going to have to raise taxes. Soon. To pay back the general fund deficit, and the ginormous debt we've built up. But it won't be because of Social Security, it will be because of things like tax "cuts" and the Iraq war, and giant bailouts of financial companies that led us to this mess. (Why don't we seize some of the hundreds of millions the owners and CEOs of the companies made at our expense, or make them pay for the bailouts?)
As for China and Japan, they have good reason for bankrolling us, but it's not because they expect us to pay them back - it's because we buy a lot of their stuff and their own economic health is dependent on American consumption.
While true, they're not expecting to be paid back YET, and are buying the bonds for short term reasons, do you really think the Chinese government, or the financial markets that have for years recommended the US Treasury Bond as the safest investment in the world, would react very kindly if we suddenly announced "Yeah, so these are all really fiction, so we're not going to pay them back?" Do you think they'll react as quietly as all of the investors who've watched Wall Street shenanigans destroy their retirement funds, their savings, their home values? I don't think so. We'd be talking worldwide financial crisis at best, wars at worst. If the US government defaults on treasury bonds, we'll have FAR bigger problems than paying for Social Security.
The Social Security Fund has Treasury Bonds enough to cover its bills for years, which it may not even need depending on the projections. The "OMG SOCIAL SECURITY IS FALLING!" claims are based on the lowest projections, which have never been right.
Really what's going on here is the Bush administration and congressional Republicans and the people who benefited from Bush and Reagan's tax cuts are trying to convince people that Social Security is doomed, DOOMED! to cover for the billions and trillions of taxpayer dollars they've spent or given away or outright stolen. If the Social Security fund is empty, it's because Republicans have been looting it for years. Since the 80s when the rates were raised to ensure Social Security's solvency for years, and the Republicans have run on their tax "cut" and spend platform and spent our money.
Posted by: Nate | March 17, 2008 at 12:55 PM
Note that my position on SS is not mutually exclusive with me agreeing completely with you here
Then you ought to recognize that the "SS problem" is really a fiscal problem - no more an SS problem than a defense problem or an [anything the govt spends on] problem. To single out obligations Social Security as the source of that problem is just inaccurate. The program by itself is sound. It is fiscal irresponsibility that threatens it, not some inherent flaw in the program itself.
Bear Stearns shareholders and employees are taking a bigger hit this way then they would in bankruptcy--the big question in the markets today is "Will they take the deal?"
How do you know this? I thought a big part of the problem was that the assets are difficult to value, so there is no way to support this claim. As for whether they'll take the deal, well, there was one angry guy on a conference call. I don't blame him for being angry, but I don't think there's much doubt they'll take the deal, and that it's better than bankruptcy.
Posted by: Bernard Yomtov | March 17, 2008 at 12:56 PM
Clever wordplay is not a substitute for substantive argument.
I wasn't actually responding to you. I was responding to McArdle's comment about "moral hazards".
There's actually a fair amount of substance in my post.
If you're interested in a point by point discussion of the specific examples you name, I'll see if I can squeeze it in later today.
If I can't, so be it.
Thanks -
Posted by: russell | March 17, 2008 at 01:04 PM
Megan:
the Fed isn't going to eat anything like that $30 billion, and may end up making money...
Could you provide any thing to back up this? Especially the part about making money?
My (highly imperfect) understanding of the deal is that the Fed has taken over a lot of paper that no one can really value properly at face value of $30 billion. Currently it is worth much, much less than $30 billion. In the future it may be worth more than its value today but I can find no one predicting that it will be worth more than face value ever because Bear was loaded up with very high risk paper backed by mortgages on properties that are losing value rapidly.
Further, the Fed has given JP Morgan the right to acquire any of this paper at face value in the future. A great opportunity to cherry pick the value out of it.
So where is the opportunity to make money?
Posted by: Yukoner | March 17, 2008 at 01:07 PM
McArdle post:
So JP Morgan has agreed to buy Bear Stearns at $2 a share. As others have already pointed out, this is, from the point of view of the shareholders, just barely better than bankruptcy.
McArdle comment:
Bear Stearns shareholders and employees are taking a bigger hit this way then they would in bankruptcy
Posted by: Bernard Yomtov | March 17, 2008 at 01:09 PM
Turbulence - actually, my dad works for WGI too. Coincidence, huh?
Re: coal plants - I never said they were clean in an absolute sense, just that newer ones are relatively cleaner than old ones. That's true of oil and natural gas plants as well, of course, but those fuels are inherently cleaner, so the difference is smaller. You're correct about retrofitting not being unique to coal - but the habit creates the biggest pollution headaches with coal for the same reason. It'd be nice if we could stop burning coal altogether, but since that's not likely to happen anytime soon, we might as well burn it in clean, new, state-of-the-art units.
I don't see why people who worry about this stuff -- as opposed to worrying about our general levels of debt -- aren't driven completely round the bend by the totally unfunded rest of the government.
Don't get me wrong. I don't want the DoD spending tax money on dozens of unnecessary new B-29's or $600 toilet seats either. I'm an equal opportunity spending hawk. The DoD isn't due for a massive increase in spending coupled with a massive decrease in cash inflow the way retirement entitlements are, though.
But it won't be because of Social Security, it will be because of things like tax "cuts" and the Iraq war, and giant bailouts of financial companies that led us to this mess.
It'll be because of a variety of things. Large and growing entitlement liabilities (Medicare is actually a bigger concern than SS, but both contribute) aren't going to help, though.
If the US government defaults on treasury bonds, we'll have FAR bigger problems than paying for Social Security.
Yes. I never said we're going to default. I think rather that what's likely is that we'll keep pushing off our obligations to repay (including to repay the SS Trust fund) further and further into the future. Since we're gonna need that money to pay for peoples' pensions at some point, we can't necessarily count on cashing them.
It might be fun for you to pillory the Republicans for looting the trust fund, but that's a bipartisan bad habit.
The program by itself is sound. It is fiscal irresponsibility that threatens it, not some inherent flaw in the program itself.
It's sound for now - but to assume it will remain that way, or that if does become unsound we can just deal with it at that point in time, isn't smart IMO. The baby boomer retirement wave is going to take the biggest, highest-earning cohort out of the economy while simultaneously massively increasing the pool of beneficiaries. That's going to cause some tremors. I'm not saying we should abolish the program, but reform is almost certainly going to be necessary, and the fact that the Democrats demagogue any suggestion at showing some foresight about this problem as kicking grandma out on the curb to eat moldy potato peelings is not helping.
Posted by: Xeynon | March 17, 2008 at 01:17 PM
Hi Russell-
I know you were responding to Megan. And I was perhaps a bit uncharitable as the first half of your post is, as you say, quite substantive. I just thought it devolved into snark by the end, though.
I'm too tired to get involved in any further debates tonight. :) Especially not in place of someone who knows a lot more about economics than I do, as Megan McArdle does.
Posted by: Xeynon | March 17, 2008 at 01:23 PM
and the fact that the Democrats demagogue any suggestion at showing some foresight about this problem as kicking grandma out on the curb to eat moldy potato peelings is not helping.
What suggestion? Bush never offered any sort of concrete plan. He just made vague noises. The fact is that major reforms are not necessary, though some tweaks could be useful, and I don't think the Democrats would demagogue those. Some liberal groups and economists have in fact proposed such tweaks.
Indeed, I think Republicans would be more likely to demagogue them, because too many of them hate the program. It was Bush, after all, who referred to the SS bonds derogatorily, as a bunch of IOU's in a file drawer.
Posted by: Bernard Yomtov | March 17, 2008 at 01:29 PM
Sebastian:
"The real argument is that the intervention should be rare and temporary. The libertarian critique of modern progressives is that they tend to want the intervention to be constant and permanent."
Well, if we are talking about Fed and Treasury intervention in the markets, the real argument is that some modern financial innovation has led increasingly to the use highly complex, interlocking, and opaque financial instruments which, when combined with leverage and a fragmented international financial regulatory system, have more frequent and disproportionate effects on underlying markets.
In the current crisis, no one, even the folks who came up with the mathematical models, knows who owns what and the market cannot find a clearing price.
Posted by: John Thullen | March 17, 2008 at 01:44 PM
The DoD isn't due for a massive increase in spending coupled with a massive decrease in cash inflow . . .
Ha ha! Thanks for the laugh.
Posted by: Phil | March 17, 2008 at 01:48 PM
Re: Wal-Mart - their labor practices are pretty unsavory by American standards, yes, but still far better than 99% of those ever worked by people in human history, and far better than those in the majority of the world today.
"Because American workers do better than slave labor in China" is not a valid reason for arguing against regulatory oversight.
Employees don't have to work there, though - any town large enough to support a Wal-Mart, even if it's not yuppie-ish enough for CostCo, generally has a lot of other retail businesses as well, which would require the same skills of workers, and many of which presumably offer better workplace conditions, granting that Wal-Mart truly is the bottom of the barrel.
Xeynon, you're completely missing the point. The average lower-class breadwinner cannot afford to leave Wal-Mart, regardless of how shit their salary might be; we're talking about the extremely common situation of somebody living paycheck-to-paycheck, the sort of person who can't afford to take unpaid sick days, much less time off to go interview with another employer.
(To say nothing of the potential risk to their current employment status should their manager discover they're shopping themselves around. Yes, this should not in fact happen. Yes, it really, really does.)
Posted by: mightygodking | March 17, 2008 at 02:00 PM
The countries with the best educational systems in the world (Germany, Japan, New Zealand, the Scandinavian countries) all incorporate market-based approaches in their educational policies to some degree. There's no reason we shouldn't as well.
Oh do they now?
See I'm from New Zealand and that's absolutely untrue, we do partially fund private schools as long as they comply with certain acts of parliament but that's it.
What we do do is fund in an almost exact reversal of the US system, schools who have students in the lowest socio-economic group get the most funding. We also don't focus excessively on standardised testing.
All this is not to say that our system is perfect, there's about 25% of student who are getting well and truly "left behind" and I believe that a newly mooted curriculum is going to focus on them.
Posted by: Annamal | March 17, 2008 at 02:21 PM
"In the current crisis, no one, even the folks who came up with the mathematical models, knows who owns what and the market cannot find a clearing price."
Which has always been the case when illiquid assets such as real estate go into one of their regular down cycles.
The problem is that people who should have known better believed they had magically turned illiquid assets into liquid assets. What they had really done was generate assets which represented a more average pricing of the underlying asset than holding any one piece of property could do.
In a market which is moving up, those assets are essentially insurance against unforeseen problems in any given piece of property. You say: while one building might have termites that I didn’t find, and another might have water damage that I didn’t find, on average I’ll be fine. In that case, the price of the average is likely to do better than most individual purchases
In a down market, it makes more sense to rely more heavily on your particularized knowledge of the building because the average is moving down. So in a down market the average is likely to do worse than individual purchases.
The problem here is that too many people either didn’t understand it, or didn’t step effectively from the up market to the down market. A wise government intervention won’t try to prevent the down market. A wise government intervention would temporarily help transition. (What form that would take is well beyond my expertise). This is analogous to the free trade issue. A wise government intervention would not be to try to ‘save’ Detroit jobs. It would be to acknowledge that those jobs are going and temporarily help the worker transition to other jobs. Unfortunately, in both the banking and the jobs issue, government interventions tend to be permanent. (See temporary WWII rent stabilization in New York, or farm subsidies from the same time period). Which is why many libertarians are more likely to oppose government intervention completely—they know that many progressives and big government conservatives have trouble with the idea of a temporary intervention and we end up with things that have outlived their usefulness for generations. But they shouldn't do that. They should push hard for credible commitments to keeping it temporary (automatic sunsetting is a good start).
Posted by: Sebastian | March 17, 2008 at 02:28 PM
Xeymon -
A handful of comments on some of your points upthread. Others have addressed some of these already.
Workplace safety regulations would be meaningless without an enforcement bureaucracy. Yes, if some companies broke the rules, word would get out. The folks that could afford to leave, and had some other opportunity to do so, would. The rest would be stuck. In the real world, as opposed to the theoretical world, it happens every damned day.
You're quite right that roads should be built by professional road builders, and that the state should just hire one of them when it builds a road. The hiring process should be open to all, or at least a reasonable number of, qualified bidders. Cost should be a factor in contractor selection. All good.
To go from there to this:
The problem with the Big Dig was precisely that there wasn't enough market competition involved
is, if you'll forgive me, kind of goofy.
The number of companies who are even capable of running a project on the order of the Big Dig is pretty small. The Big Dig was plagued with a number of problems that had little to do with Bechtel. It is, in a nutshell, damned hard to put a major interstate highway underground in the middle of a compact, densely settled, historically sensitive major city. The soil conditions weren't always what were expected. The I-90 connector and airport tunnel was a plain old hairy piece of engineering. Shit happens, and it's hard to get it all right on paper before you wade in.
And, there were also problems with Bechtel. Unfortunately, on a project of that scope, once you're underway changing horses in midstream is usually more expensive than just soldiering on. That's life.
The free market has little to do with the problems there, or with their solutions.
I have little to quibble with in your description of the problems with public school education. In most cases, schools have to pitch their programs to the median kid. In poor areas, they have to do so with less money, and in communities that are already underserved.
I'm sure there are contexts in which voucher programs etc would be a big help for a lot of the kids. That's because the existing situation sucks. Vouchers are, in that context, essentially a tourniquet to stop the bleeding. That's not the same as a real solution.
The solution to this, in either a public or private context, is small class sizes and good teachers. And, the focus needs to be on developing the kids, rather than just warehousing them while Mom and Dad work. There's no magic there.
Private solutions make things better for some. That's about it. It's not nothing, but it's not exactly a real fix. And yes, as you note, public vs private outcomes are mixed.
The other question here is whether we should even have publicly funded education. McArdle has asked that question before in her blog. I won't really get into that other than to note that if we give up public education we'll be living in a much, much different society than the one we live in now.
The countries with the best educational systems in the world (Germany, Japan, New Zealand, the Scandinavian countries) all incorporate market-based approaches in their educational policies to some degree.
To be honest, I think you're talking out of your hat on that one, but I don't have the facts at my fingertips, so I'll let it pass.
Clean air and non-contaminated food are great, and while government action provided a spur to the development of both, it was the private sector that produced catalytic converters, exhaust scrubbers, sterile packaging, etc.
That sounds like a pretty optimal relationship between public and private effort to me. I'm not sure I see a problem there. Did I miss your point?
See, for example, what happened to Ford's business after the Pinto. Or Jack-n-the-Box after the E. Coli scare. Or Merrill Lynch after their accounting scandal.
Yeah, some cars blew up and some folks got killed. I'm not familiar with the Jack in the Box case, but if E. Coli was involved some folks probably got sick and maybe died. And, some other folks lost their money.
I'm not sure embarrasment and possible financial loss to those three companies is really an adequate remedy. Plus, they're all still here, aren't they?
My build is done so I'll stop there.
What I am not really taking away from any of your points here is what any of this has to do with the current collapse of the credit market.
A bunch of smart guys figured out a clever way to turn mortgage loans into a tradable commodity. In the process, whether by intent or not, they obscured the actual risk profile of the underlying asset. Although, clearly, quite a bit of malfeasance was involved.
Bake at 350 for one hour, and we're all screwed.
People shouldn't be allowed to take large risks with other people's money without making the risk explicit. Lots of them won't do that unless someone makes them do so, because by the time the market reveals their bad deeds, they'll already have their piece of the pie, and that's all they really care about. The best available disinterested actor capable of making them toe the line is the government.
What about this is controversial?
Thanks -
Posted by: russell | March 17, 2008 at 03:37 PM
Blue collar workers, for the most part, have the right to unionize (as they should).
They have lost, and are losing, that right more and more every year (with Wal-Marts et al providing the most jobs). Not to mention that 22 states have "right-to-work" (ie. anti-union) laws. Blue collar workers, and their unions, have done great in keeping their jobs from going overseas, haven't they? (Not to mention how the powerful Coal Miner's Union has done so well in protecting their members.)
White collar workers, by and large, have no unions at all.
Furthermore it's a lot easy to take a negligent employer to court than it was in Upton Sinclair's day.
Again, this is something that's gotten much worse, as "whistleblower" laws get scrapped or made ineffective.
Posted by: Jeff | March 17, 2008 at 04:56 PM
Sebastian,
I don't think the problem here is analogous to the auto industry. This is not just a transition to some new, lower, level of activity.
A big problem, it seems to me, is the existence of financial institutions that operate similarly to banks (as Roubini points out in a post publius links to) without the controls that banks are under. Further, these institutions "deposits" are de facto more or less government insured. I don't think that a brief transitional scheme is going to do the job of minimizing the damage that can occur.
Posted by: Bernard Yomtov | March 17, 2008 at 06:18 PM
Bernard: I changed my mind
As to how the paper could make the Fed money, my understanding is that it's taking it on at face. Some of that paper will undoubtedly default, but not nearly as much as the writedowns imply. The rest of the paper will continue to pay handsome premiums. On average, it will probably net either a small profit or a small loss over the long run--it's just that Bear doesn't have a long run, and JP Morgan, which marks to market, understandably doesn't want to take the huge writedown.
Posted by: Megan McArdle | March 17, 2008 at 09:02 PM
it's a lot easy to take a negligent employer to court than it was in Upton Sinclair's day.
It most certainly is not--take it from someone who has spent a good portion of the last 20 years or so litigating these issues.
Take a look at my win for the employer in Travis v Dreis & Krump Mfg Co, 453 Mich 149; 551 NW2d 132 (1996).
Posted by: rea | March 17, 2008 at 09:06 PM
Bush never offered any sort of concrete plan. He just made vague noises. The fact is that major reforms are not necessary,
They're not necessary... yet. But enacting them now will be less painful than waiting until the problem is more acute, which is what the Democrats propose when they even acknowledge the possibility that there might be future problems at all.
don't think the Democrats would demagogue those.
Oh really? Hillary Clinton angrily declaring that even Obama's very sensible proposals for minor tweaks to the system are "off the table" for her (I forget the verbatim quote, but it was something to that effect) isn't demagoguing?
It was Bush, after all, who referred to the SS bonds derogatorily, as a bunch of IOU's in a file drawer.
That would be demagoguery, except that it's, you know, true. Just because Bush said it doesn't make it incorrect. Even a stopped clock and all that..
Ha ha! Thanks for the laugh.
Bush's tax cuts and massive defense spending increases were fiscally incoherent and incredibly irresponsible, but they were not part-and-parcel of the same government program the way systematic increases in benefits coupled with decreases in revenue for SS are.
"Because American workers do better than slave labor in China" is not a valid reason for arguing against regulatory oversight.
True, but "Wal-Mart doesn't let their employees unionize and is stingy with salary and benefits" isn't a valid reason for arguing for them. Rather, it's an argument for better collective bargaining laws which, incidentally, I generally support.
The average lower-class breadwinner cannot afford to leave Wal-Mart, regardless of how shit their salary might be; we're talking about the extremely common situation of somebody living paycheck-to-paycheck, the sort of person who can't afford to take unpaid sick days, much less time off to go interview with another employer.
Please. WalMart might be a lousy place to work, but they're not working their employees in the coal mines from dusk to dawn seven days a week. Retail businesses aren't like law firms or banks. In general, they're open evenings and weekends, and it's perfectly possible to interview at one without taking leave from one's regular job. Obviously, workers in this situation generally have other time commitments, but - so does everybody else. I've known a lot of low-wage single mothers who were nevertheless able to find new jobs when they decided they hated their current ones enough. If you could point me to data that suggest this is not the case for a large number of people, rather than just asserting that it's "all-too-common", I'd find your argument more persuasive.
See I'm from New Zealand and that's absolutely untrue, we do partially fund private schools as long as they comply with certain acts of parliament but that's it.
Subsidizing private schools doesn't count as "incorporating market-based educational policies to some degree"? If not, how about charter schools and vouchers. "Market-based" doesn't necessarily mean "completely privatized", contra the strawman that opponents usually attack.
Workplace safety regulations would be meaningless without an enforcement bureaucracy. Yes, if some companies broke the rules, word would get out. The folks that could afford to leave, and had some other opportunity to do so, would. The rest would be stuck. In the real world, as opposed to the theoretical world, it happens every damned day.
Or, the folks who didn't care enough to leave, wouldn't. In any case, the fact remains that the bureaucracies are often redundant, and that unions (which are a form of private alternative) can often do just as good a job of enforcing workplace safety rules.
The number of companies who are even capable of running a project on the order of the Big Dig is pretty small. The Big Dig was plagued with a number of problems that had little to do with Bechtel.
You're right. It's quite possible that the Big Dig was just a hare-brained idea from the start, for all the reasons you cite, and it's likely any contractor would have run into unforeseen problems. Some inefficiency was inevitable. But corruption? Perhaps with the Big Dig it was inevitable due to the scale of the project and the difficulty of changing horses midstream. But with most public projects, it's not. And certainly, Bechtel's problem with that project hasn't exactly left government organs lining up at their door to sign them up for new public works undertakings, has it?
I'm sure there are contexts in which voucher programs etc would be a big help for a lot of the kids. That's because the existing situation sucks. Vouchers are, in that context, essentially a tourniquet to stop the bleeding. That's not the same as a real solution.
I'm not arguing that they're a total solution. Rather, that they might very well be part of a more comprehensive program of reform. Unfortunately, the NEA, educational bureaucracy, etc. tend to oppose them full-stop.
The solution to this, in either a public or private context, is small class sizes and good teachers. And, the focus needs to be on developing the kids, rather than just warehousing them while Mom and Dad work. There's no magic there.
That would be ideal, yes. But if we're stuck with large class sizes and so-so teachers, as we are in some situation because of simple economic realities, the kids might as well be better grouped by ability and learning style, and studying under a teacher whose pedagogical approach suits them. As for teaching rather than warehousing kids, well, I think competition is good for motivating that sort of improved behavior.
The other question here is whether we should even have publicly funded education. McArdle has asked that question before in her blog.
I get off the libertarian train well before it gets to that stop. Publicly funded education is, IMO, a worthwhile investment, and I tend to agree that imagining our society working well without it is a free marketist's fantasy.
To be honest, I think you're talking out of your hat on that one, but I don't have the facts at my fingertips, so I'll let it pass.
I've already given you the cite for New Zealand. Here's one for Sweden, which includes additional links for the rest of Scandinavia as well as other European countries. Japan finances their system differently, as parents are required to pay for children to attend school directly regardless of whether the school is public or private. However, since public schools are open to competition, it's essentially a market system. Germany has a very limited voucher system, and the government subsidizes private schools and provides tax credits for tuition costs, which is essentially an indirect way of achieving the same thing as vouchers do.
That sounds like a pretty optimal relationship between public and private effort to me. I'm not sure I see a problem there. Did I miss your point?
Nope. I've maintained all along that the Clean Air and PFD Acts were fine pieces of legislation. My point is, it's better for the government to say "you need to achieve these standards one way or another, or else we're going to tax you more heavily", etc. rather than mandating specific approaches to problem solving (e.g. you must install equipment X).
Yeah, some cars blew up and some folks got killed. I'm not familiar with the Jack in the Box case, but if E. Coli was involved some folks probably got sick and maybe died. And, some other folks lost their money.
It's a harsh truth, but when new products are produced, they will sometimes turn out to be unsafe, sometimes for completely unforseeable reasons. Government regulation generally can't solve this problem - see, for example, the case of drugs which pass FDA muster and then turn out to have dangerous side effects afterward (e.g. fen-Phen).
I'm not sure embarrasment and possible financial loss to those three companies is really an adequate remedy. Plus, they're all still here, aren't they?
They're there, but their business suffered, and they've been forced to develop better, cleaner, safer, more reliable products.
Blue collar workers, and their unions, have done great in keeping their jobs from going overseas, haven't they? (Not to mention how the powerful Coal Miner's Union has done so well in protecting their members.)
Nobody said unions would be able to immunize their workers from the pangs of globalization. Fact is, rust belt manufacturing and coal mining are moribund industries, and have been for a while now. Neither unions nor any government regulation short of economic isolationism were going to save them.
Posted by: Xeynon | March 17, 2008 at 09:23 PM
To clarify: I've questioned whether the government should run the schools, not whether it should ensure that every child is educated. I am firmly behind universal education (and universal health care) for children under eighteen; I just don't see why that necessarily implies state run schools.
Posted by: Megan McArdle | March 17, 2008 at 09:30 PM
A wise government intervention won’t try to prevent the down market.
A wise government intervention is done when markets are irrationally optimistic.
We haven't had anyone wise running the Fed for quite a while. When people were irrationally optimistic, everyone at the Fed insisted there was no way to know when we are in an irrational bubble. Those same retards insist they know with certainty when we are in an irrational sell-off.
If you are not going to regulate on the way up, the moral hazard of intervening on the way down is serious enough to outweigh the benefits of doing so.
Some of that paper will undoubtedly default, but not nearly as much as the writedowns imply. The rest of the paper will continue to pay handsome premiums. On average, it will probably net either a small profit or a small loss over the long run
So you sometimes know better than the markets what the true value of a collection of securities is (even without being privileged to the exact details of those securities, quite a feat). What action would you advise government to take when you know that a collection of securities is currently overvalued by the financial markets, rather than undervalued?
Posted by: now_what | March 17, 2008 at 09:36 PM
"Allowing BS to fail"
I wish BS was allowed to fail five years ago. Unfortunately it was pretty clear that in that instance of BS failure wasn't gonna be an option.
Posted by: Dan S. | March 17, 2008 at 09:38 PM
Or, the folks who didn't care enough to leave, wouldn't.
That should be "and", not "or". But we're not talking about the people who don't care enough. At least I'm not.
In any case, the fact remains that the bureaucracies are often redundant
There is, quite often, some level of redundancy in any bureaucracy. Worse, sometimes overlapping bureaucratic actors operate at cross purposes.
It ain't a perfect world.
and that unions (which are a form of private alternative) can often do just as good a job of enforcing workplace safety rules.
Again, I'm not sure this is an either/or situation. Some states don't have strong union representation. Some industries aren't unionized, and don't want or need to be unionized.
Whatever works.
I think if you look at the history you'll find that the government has not spent its time chomping at the bit to introduce new regulatory schemes into industry. The normal case is that it's forced into doing so by political pressure created when industries flagrantly fail to police themselves. The history is there to read if you're interested.
And, as an aside, I don't know if it's occurred to you, but unions wouldn't exist in this country were it not for federal intervention. Labor organizers used to be shot on a fairly routine basis.
Perhaps with the Big Dig it was inevitable due to the scale of the project and the difficulty of changing horses midstream.
Actually, it was probably because it was in Boston. Boston and maybe Chicago seem to be the incorrigible last hurrahs of insider, scratch my back and I'll scratch yours governance.
I've already given you the cite for New Zealand
Thanks for the links, I'll check them out.
It's a harsh truth, but when new products are produced, they will sometimes turn out to be unsafe, sometimes for completely unforseeable reasons.
Sorry, not a convincing response.
IIRC in the case of the Pinto, the problem was known when the car was put on the market. The hygenic steps necessary to prevent e.coli are pretty well known. Likewise the fiduciary and legal requirements for investment firms.
If I knowingly let someone operate deficient equipment and it led to their death, or if I served someone food that poisoned them, or if I engaged in financial malfeasance, I would not be embarrassed and have to pay a fine. I'd go to jail.
Government regulation generally can't solve this problem
I think we're in "says you" territory here. All I'll say is that it comes a damned sight closer than no regulation.
To clarify: I've questioned whether the government should run the schools, not whether it should ensure that every child is educated.
Thanks for the clarification, I appreciate it.
Thanks -
Posted by: russell | March 17, 2008 at 10:56 PM
In many cases, this is a feature, not a bug.
What those cases are...and what cases where it IS a bug, I leave as an exercise to the student. What you stated is a nice operational guide---but it doesn't apply to all cases.
Posted by: gwangung | March 17, 2008 at 11:04 PM
russel: IRC in the case of the Pinto, the problem was known when the car was put on the market.
As I recall it there was a damning memo from a Ford executive giving a cost analysis that included an allocation based on the burn deaths of prospective accident victims. The WikiPedia, of course, has details and pointers.
Megan McArdle: To clarify: I've questioned whether the government should run the schools, not whether it should ensure that every child is educated.
That is an interesting topic, one we could discuss at length. My personal experience is as a founding parent and member of the Governance Council of a charter school in California. I can attest to the frustration in dealing with an education bureaucracy, even a friendly one, but I strongly doubt that a "free market" solution would be an improvement.
This is somewhat off-topic, so I'll leave it at that.
Posted by: ral | March 17, 2008 at 11:22 PM
Megan:
As to how the paper could make the Fed money, my understanding is that it's taking it on at face. Some of that paper will undoubtedly default, but not nearly as much as the writedowns imply. The rest of the paper will continue to pay handsome premiums. On average, it will probably net either a small profit or a small loss over the long run--it's just that Bear doesn't have a long run, and JP Morgan, which marks to market, understandably doesn't want to take the huge writedown.
But Megan, I think you are overlooking the crucial point that JP Morgan has the option to buy some, all or none of that paper from the Fed at any time. As (or if) it becomes clear that some of it is paying hansome premiums as you say I think you would agree that the bank will snap those portions up at face value leaving the Fed and I assume, the US taxpayer, holding all of the worthless crap.
I guess no one should be too surprised.
Posted by: Yukoner | March 18, 2008 at 12:07 AM
The countries with the best educational systems in the world (Germany, Japan, New Zealand, the Scandinavian countries) all incorporate market-based approaches in their educational policies to some degree.
You haven't heard of the PISA
study by any chance?
Posted by: novakant | March 18, 2008 at 02:58 AM
Subsidizing private schools doesn't count as "incorporating market-based educational policies to some degree"?
Not really, it's not designed to introduce competition, if anything it's used as a carrot to ensure that private schools meet ERO standards.
If not, how about charter schools and vouchers. "Market-based" doesn't necessarily mean "completely privatized", contra the strawman that opponents usually attack.
Oh you mean the destructive reforms of the 80's and 90's that were rolled back and were part of putting the left wing in power for the last nine years? Notice how nothing in your report comes after 1999?
Posted by: Annamal | March 18, 2008 at 03:57 AM
Oh you mean the destructive reforms of the 80's and 90's that were rolled back and were part of putting the left wing in power for the last nine years? Notice how nothing in your report comes after 1999?
Annamal, just read up a bit more specifically on New Zealand's case, and I'll grant you that it does illustrate very clearly that vouchers aren't a panacea and can exacerbate problems in some situations. What to do about the worst students in the worst schools is an issue that needs to be considered as part of any comprehensive approach to educational reform. It seems from what I've read, though, that the reason the program ultimately became unpopular was the government's refusal to acknowledge or deal with its shortcomings on ideological grounds, not systematic failure (indeed the report I read said that the program benefited many poorer, and specifically Maori and Pacific Islander, students).
As a non free-market ideologue, I'm not committed to defending those grounds. I think it's possible to come up with a system that provides opportunities to poor kids stuck in crappy educational environments while making the best of the delinquent problem as well.
Posted by: Xeynon | March 18, 2008 at 04:29 AM
OK, I'll repeat:
Germany does not rank among the countries with the best educational systems in the world.
The Scandinavian countries do not rank among the countries with the best educational systems in the world - only Finland does.
Furthermore, the German educational system is terribly complex, since it is implemented differently by each of the 16 German states and secondary education in Germany is largely divided among 3 different types of schools, each leading to a different type of qualification.
Because of all this, Germany is a bad candidate for comparison with the US.
Posted by: novakant | March 18, 2008 at 05:38 AM
The German system is so different from those in English-speaking countries that even many terms to describe it have no equivalent in English. There are even mixed-up versions of the 3 basic school types. I would still consider it less deplorable in reality than the US system. It could be better but also much, much worse (we are working on that, please call back in a decade or so because the speed of change over here makes glaciers look like race cars).
Posted by: Hartmut | March 18, 2008 at 06:29 AM
Given that Canada is in the top three for "best educational systems in the world" - why not look at Canada to see what they're doing right? Would probably be easier to match like with like between Canada and the US than between the US and South Korea or Finland.
Posted by: Jesurgislac | March 18, 2008 at 06:35 AM
Btw, most "private" schools in Germany are for the most part state-financed and have very moderate tuition fees (with exemptions for people that cannot afford it). The curriculum has to be state-approved. Most of them are related to one of the major churches (Roman Catholic or EKD [mainline Protestant]) and the main difference from "state" schools is religious education as part of the regular curriculum and a tendency towards classical education (Latin, Greek). There is by no means that big a gap between crappy "public" schools and elitist "private" schools as I hear is the case in the US (and we fortunately still lack prominent wingnut academies).
Posted by: Hartmut | March 18, 2008 at 06:45 AM
Would probably be easier to match like with like between Canada and the US than between the US and South Korea or Finland.
Yes, probably. I'll admit that I haven't studied Canada's case.
A major reason Finland and South Korea rank so high is that the phonetic systems of their languages are regular and thus they are exceptionally easy to learn to read. This not only improves reading scores (obviously) but also the amount of time that can be spent on instruction in science and math. Given the complexity of their written languages, it's amazing that Japan and Hong Kong rank as high as they do.
Posted by: Xeynon | March 18, 2008 at 07:46 AM
Would probably be easier to match like with like between Canada and the US than between the US and South Korea or Finland.
Yes, probably. I'll admit that I haven't studied Canada's case.
A major reason Finland and South Korea rank so high is that the phonetic systems of their languages are regular and thus they are exceptionally easy to learn to read. This not only improves reading scores (obviously) but also the amount of time that can be spent on instruction in science and math. Given the complexity of their written languages, it's amazing that Japan and Hong Kong rank as high as they do.
Posted by: Xeynon | March 18, 2008 at 07:47 AM
Xeynon, while there is some evidence that teaching kids to learn a visually complex written language improves their intelligence, there is no evidence that "easy read" languages increase literacy.
My own country had universal literacy two centuries earlier than the country immediately to the south. It wasn't because the Scots are smarter than the English*, and it wasn't because Inglis was easier to learn to read than English: it was because the Parliament in 1633 passed the first of several Education Acts, mandating tax-funded schools in every parish so that every child in Scotland would learn to read.
Scots were better educated than the English because the Scottish government was willing to raise taxes to pay for Scottish children to be better educated than English children. That's in general how improvements in education get started: it's not a complicated mysterious thing.
*No, really. Even though I may have my haggis-hunting license taken away for admitting this.
Posted by: Jesurgislac | March 18, 2008 at 08:08 AM
There's a counterexample for phonetic regularity, Spanish has a very regular phonetic system, but I don't see it contributing in the same way you suggest Korean and Finnish does.
There's another factor that I think figures into Japanese (and perhaps Asian) achievement in math. Here, there's very little grade inflation as such, so a passing score is a 60, and many students are happy to get that. What this means is that the pace of the math classes go quite fast, with students being exposed to a lot of concepts that US students are only expected to get if they take an advanced math class, so students get much further, which, when international comparisons take place, places Japanese students further ahead. Unfortunately, this "60% is adequate to move ahead" notion is not at all conducive to language learning, so students often are spending time on language structures and points far beyond their actual ability. Because advanced mathematic notions are more logically linked to basic math notions in a way that the relationship between advanced grammatical notions and basic ones are not, the effect is to create the kind of achievement you see. That's not the whole story (societal pressure and cultural factors also play a role), but I believe that the grading system, which then transmits certain expectations about how the subject is to be learned and what counts as being adequate, also plays a role. Part of that is the higher status accorded to teachers in Asian societies, which is not just Confucianism, but also the way education has come to be structured in Asian countries.
Posted by: liberal japonicus | March 18, 2008 at 08:22 AM
Given that Canada is in the top three for "best educational systems in the world" - why not look at Canada to see what they're doing right?
Damn, we're doing things right? Education is one of the most deplored things in our society. Canadians bitch about our schools nearly as much as we bitch about our health care. But, then again, the health care is reasonably good, so I dunno.
Anyway. We have a public system, from two levels of kindergarten to grade 12 (we used to have grade 13, but that was steadily abolished through the provinces during the 1990s). No vouchers (governments have tried). Just about all universities are publicly funded (there are a couple of privately funded religious universities but they're small and exceptions to the rule). We have serious school crowding issues and the system is chronically underfunded. We don't have a "sports first" funding culture like certain areas of the United States do, but that's not really a policy you can adopt so much as it is a reflection of different societal priorities.
We do have parallel religious systems for religious minorities in certain provinces (Catholic schools in Ontario, for example), which are enshrined in our constitution, but a recent attempt by the Ontario provincial Tories to extend the school rights Catholics enjoy to other religions was met with severe public derision and a humiliating electoral defeat - the general sentiment as regards Catholic schools is that we'd rather just have more public schools, but it's a huge pain in the ass to set up a Constitutional referendum so until such time as it really becomes a major problem we'll just kind of quietly ignore the obvious unfairness of letting Catholics have their own publicly funded schools.
So that's our school system in a nutshell. I was honestly surprised to hear the third-place-in-the-world statistic.
Posted by: mightygodking | March 18, 2008 at 10:22 AM
Annamal, just read up a bit more specifically on New Zealand's case, and I'll grant you that it does illustrate very clearly that vouchers aren't a panacea and can exacerbate problems in some situations. What to do about the worst students in the worst schools is an issue that needs to be considered as part of any comprehensive approach to educational reform. It seems from what I've read, though, that the reason the program ultimately became unpopular was the government's refusal to acknowledge or deal with its shortcomings on ideological grounds, not systematic failure (indeed the report I read said that the program benefited many poorer, and specifically Maori and Pacific Islander, students).
As a non free-market ideologue, I'm not committed to defending those grounds. I think it's possible to come up with a system that provides opportunities to poor kids stuck in crappy educational environments while making the best of the delinquent problem as well.
I can think of a few reasons for Maori kids doing better during this period but the most noticeable one is that there was a huge Maori language push that began in the 80's and led to a lot of kohanga reo (Maori language kindergartens) and now a lot of kura kaupapa (Maori language schools)during the 90s. This Maori language push has continued for most of this decade as well(Maori tv has been far more successful than anyone predicted).
I remember the period of school competition because I was a high-school student during it, what I mainly remember is the perverse incentives. Schools (including mine) shelled out huge quantities for advertising to try and attract students and they prevented students from taking Bursary/School C exams if they thought the students would do badly and affect the almighty statistics and those are just the effects observed at my decile 10 high-school.
I also remember my intermediate expanding to take kids through to the 4th form and that my high school threatened not to take these kids if they did continue, threatening kids' futures to reduce competition..
Gaming statistics is what you get as soon as you put schools in competition with each other for funding(I suspect that in the States no child left behind has promoted a similar gaming).
Posted by: Annamal | March 18, 2008 at 02:18 PM
It was Bush, after all, who referred to the SS bonds derogatorily, as a bunch of IOU's in a file drawer.
That would be demagoguery, except that it's, you know, true. Just because Bush said it doesn't make it incorrect.
IOU's from the US Treasury are rather different than IOU's from your roommate. If you really endorse Bush's moronic view of this then continuing the conversation is useless.
Posted by: Bernard Yomtov | March 18, 2008 at 08:45 PM