January 2013
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Lessons Not Learned – Housing, Education, and Hubris

Experts have a poor understanding of uncertainty. Usually, this manifests itself in the form of overconfidence: experts underestimate the likelihood that their predictions might be wrong.

Nate Silver – Herman Cain and the Hubris of Experts

Nate Silver is, first and foremost, a great statistician. I may not agree with his politics, but it’s hard to argue with his methods and his results. I chose this quote because I just finished reading Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned? by Steve Keen. I was most interested in his chapters about the housing debacle and the recession that followed it. While I think Keen has many valid points, I also have several issues with his critique of free-market economics.

My principal argument is this: While Keen (and other critics of Capitalism) blame the crisis on banking deregulation and unfettered Capitalism, and few (if any) mainstream economists predicted the depth of the recession, a number of free-market economists did predict it (such as Thomas Sowell and Walter Williams, among others). Keen lumps together characters like Bernanke and Samuelson and Greenspan and Volcker under the same general heading of mainstream economists – which Keen seems to see as a hybrid of Keynesian and Chicago schools of economic thought. I think that’s a stretch, to say the least. Samuelson is a Keynes apologist, through and through. Volcker was a monetarist, and none of them represent the Chicago School – especially Bernanke. It is difficult to imagine Milton Friedman supporting “quantitative easing” – a.k.a. printing money – as a solution to a recession.

There is no one single event that created the housing bust – but there is one central culprit – the Federal Government. While it is easy to make this broad assertion, it becomes rather more difficult to prove. Others have already done that (see Thomas Sowell – The Housing Boom and Bust).

What is amazing to me is that despite the colossal failure of federal housing policy – whether we are talking about the Boom and Bust, or Urban Renewal, or Freddie Mac and Fannie Mae – our political class has learned nothing from any of these disasters. And all of these disasters share a common theme – hubris: The propensity of politicians to believe they can determine better outcomes than the forces of the free market.

We are seeing it again in the education biz. American education policy is built around several goals:

  • We should do everything possible to reduce the rate of high school dropouts to zero. Anyone who has ever seen a bell curve knows that the only way to do that is to lower standards to the point where a high school diploma is pretty much meaningless.
  • Every student should attend college/university. Again – that pesky bell curve. Every year the percentage of college students requiring remedial coursework is increasing.
  • Government must make college affordable through generous grants and loans.

Let’s spend some time on that third point – especially in light of the housing debacle. Through a combination of easy credit and tax policy, the federal government was one of the prime movers in driving up the prices of single-family dwellings. (The other significant culprits were local and state laws making it difficult to increase the supply of housing). Increased demand because of easy credit and restricted supply means prices rise – pretty basic economics. We have an analogous situation in education. Easy credit and lowered standards lead to increasing demand for education. In light of this, colleges and universities keep raising tuition rates, creating a situation where many students graduate with worthless degrees and few prospects – while carrying student loan debts in the neighborhood of $100K or higher. This will inevitably lead to unsustainable default rates, which will, in turn, stick taxpayers with yet another bill for government hubris.

fiat lux!

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