Sherman Dorn

An historian reads the business section (with apologies to John Allen Paulos)

I do not generally comment on economic matters, but I think historians of education can say something productive about the current myths plodding around the internet about the stimulus and the non-bank sector of the banking industry. First, some of the current discourse:

• Sean Snaith, an economist at the University of Central Florida, is unimpressed with stimulus dollars being spent in Florida, arguing that to do much good, the money should have come in and been spent much faster.
• John Quiggen is upset over at Crooked Timber over Goldman Sachs's profiting from risky ventures, or maybe upset that they're getting significant leverage over financial firms that have taken federal recapitalization and sat on the money, or repaid it to avoid additional regulation. I am not exactly sure how close Quiggen is to Krugman's being upset that we're not moving fast enough to regulate the unregulated (non-bank) part of banking.

These appear to be fairly standard concerns with economists. And I sort of understand that, except for a few perspectives from the history of stodgy institutions (schools):

• Sometimes moving slowly is what's needed for longer-term needs. As other economists have pointed out, White House economist-in-chief Christine Romer's broader concern has consistently been with the general output gap over several years. In contrast with a mild recession where the output gap really is short-term, we're going to have problems with output for more than 8-12 months. So spending over more than 8-12 months is not a bad idea. This is about saving the entire country's economy, not just Florida or any single state.
• Lots of institutionalized changes are hidden, and that's as true for the stimulus as it often is with education. For political purposes, the White House is now starting to highlight the jobs created and to a lesser extent the jobs saved by the stimulus. To my mind, it's the thousands of public-service jobs saved that are evidence of effective policy, but that's hidden because people have kept jobs (and it's hard to see non-change as a success). Similarly, part of the stimulus is the reduction in federal income-tax withholding. If I understand things correctly, that's more effective than a tax rebate precisely because it's not that visible, and people of low and moderate means are likely to take that extra money every paycheck and spend it on things they desperately need to pay for... and that keeps demand up. (Giving people a tax rebate may be perfectly justifiable public policy for other purposes, but I'm not convinced that it's effective for stimulus.)
• Instead of hoping that we can fix those buggers so they can't game the system anymore (a common dream in accountability policy), maybe we should assume that the attempt to game the system is as much of a permanent feature of financial institutions as it is in schools. And maybe we should take a long-term perspective that we always assume there will be attempts to game the system and a need to adjust public policy on a cyclical basis to respond to such gaming. As many have pointed out, even if the bank-in-name side of banking has recovered and started to lend again (and I think it has), there is a huge hole where the non-banking side used to leverage itself out the wazoo to give out subprime loans, liars' loans, and the like. Yes, there needs to be better regulation of the finance industry, but we should assume it is always incomplete and never done. An example of where the evolution of financial regulation worked is in so-called peer-to-peer lending, where propser.com and lendingclub.com popped up in the wake of Kiva's charity microlending on a social platform. The difference between charity social-networked lending and social-network lending with interest is disclosure and risk. In Kiva, you're not expecting interest, and you know that your money loses value every day it's out there in a loan. But that's not a problem since your goal isn't making money. In 2008, the Securities and Exchange Commission ruled (properly, I think) that the Prosper and LendingClub operations were essentially securities and needed to be run as such. And both sites have now been approved and reopened as SEC-approved securities operations. This is where regulation works well to keep things transparent. This doesn't mean that P2P lending serves the functional role of putting money to its most productive uses, but I don't think subprime lending did, either, and at least the risks exist and are stated up front, while individuals have the power to make both wise and foolish investment decisions. 

And now, I'll crawl back into my HistoryCave, waiting for the next Little Red Schoolhouse silhouette to show up on the underside of my metropolis's clouds to signal another emergency requiring an Historian of Education.

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Posted in History on October 17, 2009 7:35 PM |