Thursday, December 18, 2008

Our Flawed Debate Over Education

As usual, Freddie DeBoer has a worthwhile post up today. Discussing the now-dormant but neverending debate over education policy, he writes:

As someone who is an ardent supporter of public education, and a committed opponent of vouchers, one of the most frustrating aspects of the conversation is
the amount of work done by completely unfounded and unsupported notions about
widespread public school failure. Simply put, a huge difficulty in our discussion on education is really paralyzing lack of reliable data on which schools are succeeding and which are failing. We just don't know, really, how many school districts are reliably good, how many reliably bad, and we really don't know about individual school quality within those districts. But when I argue education policy, again and again I find foes of public education allowing the assumption that any given public school has to be shitty to carry their water for them. This is made especially frustrating by the fact that these are often people who are usually very circumspect in the way that they construct data, and would never countenance an opposing argument that relied on so much assuming and anecdotal evidence. But when it comes to public school, where it benefits them, they can just talk as if it's safe to assume that any given public school is probably no good, and certainly worse than a private alternative. It's a failure of elementary good faith argument and analysis.

I think this identifies a very real problem in the debate over vouchers, although I think he underestimates the extent to which it exists on both sides (like Freddie, I am a product of the public schools).

One of the biggest problems with the debate over vouchers/school choice is that it does tend to get bogged down in the question "public schools: good or bad?" This is a problem, for both sides, because it is inherently a normative question, but is couched as if it can be scientifically proven - of course, depending on your side of the debate, that science just happens to agree with you.

The real question, in my mind, is how much control individual parents should have over their child's education? This is still a normative question, but it at least does not hide its subjectivity, allowing us to debate on more or less common ground.

For many - maybe most - parents, the local public school does an adequate, even more than adequate, job meeting expectations in terms of quality, safety, and, yes, values. The trouble is, for some unknown but still significant number of parents, a local private school or homeschooling would be a much better fit. Maintaining a system that only incentivizes those parents keeping their children in the public schools is rife with problems.

For instance, if those parents become a powerful political force within their school system, you will wind up with huge battles over curricula (see Kansas, State of). Even if those battles are settled relatively peacefully, they often result in significantly watered-down curricula that wind up leaving out or whitewashing critical issues so as to avoid controversy. Worse, in some cases these local compromises can wind up having fallout on education throughout the country (take a look at how right wing political correctness in Texas and left wing political correctness in California affect textbook content nationwide).

There are a whole bunch of other issues that you can pretty easily think of that wind up undermining the ability of some individual parents to get their children anything resembling the type of education they would like, solely because of the district in which they live, and where preferences are particularly subjective. Some other examples: vending machines - ban or keep?; do metal detectors deter violence more than they make schools feel like prisons?; Does a teacher's advocacy of a political position indoctrinate students more than it encourages critical thinking? And so forth.

Importantly, changing the debate to focus on the question of "how much control do we give individual parents over their child's education" avoids the moral absolutism and elitism that comes with the existing debate, which makes it difficult to discuss on terms that all sides understand. Instead, changing the debate puts us all on something of a sliding scale in which individuals are forced to recognize the complexity of the issue. To be sure, there is a temptation to simply answer the question as if parents should have total control - but there are few who actually believe that, at least when push comes to shove. It is, after all, close to universally accepted that a parent has no right to prevent their child from receiving an education or has a right to abuse their child in the name of that child's "education." Similarly, I know of no one this side of Pol Pot who would argue that parents should be left out of the education process entirely. Simply put, thinking of the debate on these terms throws almost all of us into that "mushy middle" where we are forced to actually engage in a real discussion rather than simply throw ideological grenades.

"Can You Change My Grade?"

Thoreau complains about needing a personal secretary to handle all the complaints he gets from students about their grades.

But sometimes, students have legitimate gripes. For instance, this DC Councilmember was, long ago, my Constitutional Law professor. The exam, IIRC, included a multiple choice section (based, of course, on the professor's interpretation of ConLaw). Is it possible I can have that exam retroactively regraded?

Actually, if the proposal were a lot more narrowly tailored, I don't think it would be that problematic from a purely Constitutional standpoint. For instance, the Council could create a regime of probationary registration wherein training needed to be completed within a certain period of time. Under this proposal, training would only be required for the applicant's first registration, with exemptions for those who could present evidence of prior training. A basic gun safety course only takes an hour or two, and there is probably a "compelling" or at least "important" government interest in preventing accidental discharges, especially in an urban environment.

Wednesday, December 17, 2008

Getting a Seat at the Table

It's been an extremely busy day here at Publius Endures, to say the least. Anyways, I now have a follow-up to my Culture11 piece posted at Donklephant (and cross-posted in pertinent part below), where I will now be contributing from time-to-time.

My most recent piece at Publius Endures dealt with a piece of legislation that largely fell under the radar: the Consumer Product Safety Improvement Act of 2008, which I argued needs significant revisions regardless of your political viewpoint. I have a much better piece (read: actual journalism!) up as of this afternoon at the excellent conservative site Culture11. The act, passed with almost no opposition, appears to represent the confluence of good intentions gone wrong, poor legislative incentives, and bad economics, with the added bonus of being particularly devastating to small and medium-sized domestic businesses. In other words, as enacted, the legislation should offend the sensibilities of almost any ideology.

The basic facts of the legislation appear, at first glance, to be quite reasonable. In essence (and although it also addresses several other subjects), the legislation is a response to the imported toy scandals of 2007, in which several mass-produced toys had to be recalled for containing levels of lead far in excess of the legal limits. As a result, near-unanimous passage of the legislation was almost guaranteed from the start - after all, who wants to be FOR lead in childrens’ toys in an election year?

The problems arise in the actual details of the legislation, which are voluminous and, worse, vague. As I write in the Culture11 piece (please do go read the whole thing!):

The biggest problem, perhaps, is that the law implements a new third party testing requirement on every SKU number of every children’s product (including individual titles of children’s books), testing that can run anywhere from a few hundred dollars to tens of thousands of dollars, depending on the type of product. It is unclear how often this testing will be required; however, the wording of the legislation suggests that it could be as often as every outgoing shipment. What is clear, however, is that large imported shipments will only need to be tested upon their arrival in the U.S.

The new law also requires a new type of labeling on all children’s products, in which these products must be stamped with various information for tracking the product, including the date of production. While seemingly easy to comply with, this will actually require expensive retooling for manufacturing machines. The law further mandates that suppliers provide their distributors with certifications for each shipment of each product, a bureaucratic nightmare that many businesses will likely violate occasionally due to simple human error.

Yet punishments for violations of the law are draconian — $100,000 minimum fines
for each violation up to $15 million, plus possible criminal sanctions. In addition, it is still possible that the law will be implemented in such a way as to turn some pre-existing inventory into contraband when the law takes effect on February 10, 2009 (unless this changes, existing inventory would have to be discarded, immediately driving many businesses to close and/or default on loans).

The piece goes on to discuss the way in which this legislation was passed, and how free market advocates can prevent legislation such as this in an era where “deregulation” is a four-letter word.

For those answers you’ll have to read the whole thing, but I did want to discuss something here that was not relevant to my point in that piece.

One of the most amazing things that came out during the course of my research was just how little this law is going to do to improve toy safety - indeed, it will most likely make children’s products more dangerous by causing the CPSC to focus on catching paperwork errors instead of finding dangerous products. This is true even though the bill significantly increases the agency’s budget.

Even more amazing was just how easily Congress could have passed legislation that actually would have improved safety. The people I interviewed for the article agreed that one of the best things that could have been done in the wake of the toy scandal was to force the CPSC to better prioritize its enforcement responsibilities. In essence, one of the reasons so many lead-laden toys got through last year was that the agency treats most enforcement issues as being created equal (unless, of course, there’s a death involved). This encourages a focus on finding problems that are easily found, but are usually relatively harmless - things like paperwork errors, for instance. It’s the same type of problem Megan McArdle says faced the SEC with respect to the Madoff case. Instead of fixing this problem, the legislation actively makes it worse by giving CPSC more technicalities to enforce.

Another possible solution that was mentioned to me was the idea of “component testing.” Under component testing (which the CPSC actually is, apparently, considering in some form), you require testing only of individual components instead of the final product. This is less costly on a per-test basis and allows manufacturers to make multiple products using the same components. So, for instance, a small children’s book publisher would only need to test its ink, paper, and coverboard rather than having to test every single title.

Yet neither of these easy solutions was even considered by Congress. Instead, one of my sources told me that Congress’ response to just about any proposed changes or objections was, effectively, “the National Association of Manufacturers is on board, as are Hasbro and Mattel, so we don’t really care what you think.”

This presents a major problem for small business (unless one of the major parties adopts something akin to the position I advocated in my Culture11 piece), to wit: How do small businesses defend themselves against onerous laws and regs when they can’t get a seat at the table?

One obvious answer is to organize into a more focused advocacy group, but even this doesn’t always get you a seat at the table. For instance, so far as I can tell (though I’m not 100% certain), the Apparel and Footwear Association (which, unlike other advocacy groups, is not dominated by its biggest members) did spend a substantial amount of effort pushing for changes to the legislation. Yet none of those changes made it through, suggesting they received essentially the same response.

And, finally, some breaking news. I just now found out that the National Association of Manufacturers (which supported the legislation) is petitioning the CPSC to implement regs that would eliminate a lot of the hardship to be caused by this law. I have to think about what this means…but I don’t think it’s inconsistent with the explanation I gave in my C11 piece.

More on "National Bankruptcy Day" OR "The Elmo Who Stole Christmas"

I am honored to announce that I was invited to do a bit of actual journalism at the fantastic conservative site Culture11 about the little bit of fallout from the Great Lou Dobbs Toy Scare of 2007 known as the "Consumer Products Safety Improvement Act of 2008," which I initially wrote about last week as a wonderful project for non-partisan blogger activism.

The first half of my C11 piece goes into much more detail about the effects that this legislation is going to have on small and medium size businesses. The second half takes an interesting turn:

Although this law presents a case study in self-defeating legislation, it also poses an important dilemma: how do you successfully fight bad legislation and regulation when doing so puts you on the side of something that virtually anyone would agree is an evil, like lead-laced toys? The background of this legislation may actually provide the answer.

For both the background and the answer, you'll have to read the whole thing. (Hint: certain friends of this site will probably be pleased with the answer).

Politicians as Moral Defectives - The Herr Blagojevich Third World Thugocracy Edition

A good friend and fellow libertarian blogger partially inspired the title. I lived in Chicago for several years so I am fully aware of the sorts of scumbags, lowlifes and other esteemed members of society that gravitate towards the Chicago political machine or Illinois politics in general. I vividly remember the car accident that claimed the lives of six children that ultimately uncovered a license-for-bribes scandal that, among other things, put former Governor George Ryan in jail for a 6 1/2-year term. Ryan's arrogance through the whole episode was sickening.

I never paid much attention to Blagojevich nor was I living in Illinois when he was elected governor. Nonetheless, even by politician standards, the man is a disgrace. His little payola scam for the Illinois Senate seat notwithstanding, a recent column by Joe Queenan in the Washington Post describes one of Blagojevich's finer moments (via Cato-at-Liberty):

What’s far more worrisome is Blagojevich’s bizarre confrontation with the Bank of America. The day before he was arrested on charges of massive corruption, Blagojevich visited a group of striking workers at a North Chicago firm called Republic Windows & Doors. After being laid off the week before, the employees had begun a sit-in, demanding benefits they were still owed by their employer, which said it could not meet their demands because the Bank of America had cut off its financing. At this point, Blagojevich informed bank officials that unless they restored the shuttered window-and-door company’s line of credit, the state of Illinois would suspend all further business with Bank of America. A few days later, the bank caved in and ponied up a $1.35 million loan.

The idea that the governor of a state as prosperous and important and sophisticated and upscale as Illinois would make this kind of threat is terrifying. Even more terrifying is that Bank of America saw no alternative but to give in. Yet even more terrifying is that nobody outside Chicago seems to have gotten terribly worked up about the situation, riveted as they are on the governor’s more theatrical transgressions. But peddling a Senate seat or using scare tactics to shake down a newspaper are nowhere near so serious a menace to society as letting the government arbitrarily intervene in financial transactions between banks and creditors. A crooked governor we can all handle. But a governor who capriciously decides which commercial enterprises a bank must finance and which it can ignore is a scary proposition indeed.

Rome wasn’t built in a day. But get the wrong politician in office, and you can burn it in a day. What the grandstanding Blagojevich reportedly attempted to do in the Republic Windows vs. Bank of America set-to is precisely the sort of thing that happens in China, where the government routinely orders up bank loans to politically connected firms. Whether a failing company actually deserves financing becomes irrelevant to the conversation; the government doesn’t want a company to fail, so it decides that it must not go under, even if it’s run by clowns, stooges, gangsters or in-laws. (emphasis added)

Not to give New York State politicians a pat on the back (unless it's hard enough to cause, ahem, discomfort), at least when they attempt to shake the citizenry down, they make a half-hearted (if not transparent) attempt under the guise of taxation, "user fees" or something that gives the aura of legitimacy like a state budget (i.e taxing digital downloads). Blagojevich's act is nothing more than a direct shakedown. This is the act of a low-level criminal thug. Politicians interfering with financial transactions is nothing new but to see the governor of a state behave in this manner in the brazen manner that he has sets a new low. I'm speechless.

Not the media's fault on this one...

My friend Henry posted a link to a press release that suggests that 77% of people surveyed believed:

the US media is making the economic situation worse by projecting fear into people's minds. The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse.

Before I comment further, I urge readers to consider the following passage from a contribution from a Cato Unbound reader to this month's discussion about the financial crisis (footnotes excluded):

As the subprime crisis developed and appeared to recede — after the implosion of Countrywide, which had spun off IndyMac, which was seized by the Feds last summer — and after Bear fell into the trap — pundits began to argue what market would go next.

In this context, it seems important to note that IndyMac is said to have gone down in a classic bank run, albeit they held plenty of Alt-A mortgages, and that SEC chief Christopher Cox claimed a run on the hedge funds was what ultimately brought Bear down.

Many market watchers have claimed or have been given credit for “calling” the present crisis sometime this summer, but a creeping trust problem seems to have been corroding the undersides of market structures since Autumn 2007, permabears aside.

In retrospect this seems about the time loss of confidence began to spread from one market to another. For example, popular pundit Jim Jubak of MSN Money argued on January 18th that subprime would be dwarfed by issues with CDS. The recent Nobel Prize winner Paul Krugman likewise predicted that credit crunch difficulties in “obscure” markets would spill over to normal people in the regular economy in a comment about student loans on February 13th.

The specific implications of this for Wall Street investment banks’ MBS issues seemed to emerge last Spring. One example is an April 10th Financial Times blog posting in which commenters roast Goldman, predicting not just more write-downs, but suggesting insolvency — and wider troubles that would “eradicate book value across the financial system.” The Wall Street Journal also ran an article at the time.

The late, widely admired banking expert Tanta blogged a May 22nd Reuters report on CalculatedRisk, noting that defaults on certain vintages of subprime reached 37 percent, or “4 percentage points higher than previous estimates, S&P said.” She noted other figures showing prime defaults were also rising above expectations.

Recall that S&P had been rating these kinds of deals. It seems safe to assume that the extra 4 percent S&P hadn’t expected certainly wasn’t accounted for in the models made years ago, when its employees were already squirming as they force-rated deals.

In short, everyone called this crisis. It loomed openly over the public’s head like Hiroshige’s wave all summer as the MSM studied its navel to find yet more things to say about the psychological aspects of the Clinton-Obama relationship.

Business reporters and bloggers were sounding the alarm, but the election horse race appeared to keep MSM editors from promoting this story out of the back sections. If the press is a watchdog, does it have an obligation to our democracy beyond partisan election fever?

I am not going to claim any credit for calling this crisis because I had no idea it would be as significant as it has become. Based on my prior and current experience trying to work within these capital markets, problems were painfully evident going back to the summer of 2007. Even after Treasury Secretary Paulson said that the crisis was under control, conditions in the real estate markets were still deteriorating, both in terms of property values and financing availability. To this day, the public debt market (a $240 billion per quarter credit machine at its peak) is virtually shut down. The more I read on this situation and understand the drivers involved, the less and less this all becomes a mystery.

As such, I find it absurd that the same financial press who attempted to sound off the warning bells to the general public consumed by election year politics is somehow "projecting fear". I can understand if people are fearful about what is going but that has less to do with the media and more do to with the fact that the news is just plain awful. Blame for that should and does lie elsewhere.

As a minor matter, the same article has this rather odd tidbit:

Richard L. Scheff, a national expert on corporate liability and white collar crime issues, warns media that they could potentially be exposed to liability despite apparent constitutional protections:

"Although statements by the media are protected by the First Amendment, the survey results demonstrate that the public believes that the press bears some responsibility for the lack of confidence in the economy. One would hope that these media would act less out of self-interest in these times of national crisis. I could see creative lawyers attempting to pierce constitutional protections by constructing theories of liability for losses they may allege were driven by irresponsible news releases," said Mr. Scheff, vice chairman and partner with Philadelphia-based law firm Montgomery McCracken Walker & Rhoads.

I suppose what strikes me about the quote is that I have never seen or heard about anything of its kind where there has been a conflict between the First Amendment and corporate liability. Perhaps trained-legal minds know something I don't. As frivolous as it appears, I would think that such a legal challenge would fail miserably.

Tuesday, December 16, 2008

Substituting One Problem for the Same Problem...

Eric Martin's recent post The Open Road to Serfdom suggests that regulations that would reduce the conflict between issuers and the ratings agencies is "a good to place to start". A post by Matt Yglesias suggests that it makes a lot of sense to consider a public agency that rates fixed income instruments. Matt's justification for a public ratings agency is as follows:

All of which is a long-winded way of saying that it would make a lot of sense to try to develop a public agency that rates credit instruments. Wouldn’t stop anyone from relying on private sector ratings if they wanted to. Nor would it guarantee that the public agency would always get things right. But it would provide a check on some of the distortions that the current system produces.

I don't necessarily agree. Yes, the agency-issuer conflict was, I believe, a factor that led to some of the more serious problems in the capital markets, but this was not the only contribution to the problem given to us by the ratings agencies. There were two others:

1) To paraphrase Roger Lowenstein, the ratings agencies were using 100 years of historical weather data in Antarctica to forecast the weather in Hawaii as far as rating mortgage backed securities. Nothing in the historical data could have addressed the then-current lending environment. Furthermore, nothing in the historical data could have given any warning signs to the trouble that was to come. Am I to believe that a public ratings agency, given the same data and, most likely, an underwriting methodology not dissimilar to what a Moody's would probably do would have been able to accurately rate these securities?

2) The increased complexity of exotic structured finance products like mortgage-related collateralized debt obligations presents a signficant knowledge problem for any ratings agency that is tasked with having to rate them. In these situations, the people that would be the best help to those analysts responsible for understanding them would be the underwriters themselves. In a real-time, fast-paced capital markets environment where everything has to be done yesterday, who else are the analysts going to reach out to? Assuming a public ratings agency was to rate mortgage CDO's, how would the process been any different?

I think difficulties in dealing with an ahistorical situation in the market, rating complicated structured finance products that, in hindsight, clearly did not understand combined with the relationship between the issuers and the ratings agencies all played roles in this situation. With respect to (1) and (2), while I am not suggesting that the ratings agencies were afflicted only by bad circumstances (there are steps they could have taken especially with due diligence and document verification), it is not clear to me how these "current distortions" could have been mitigated by a public ratings agency.

Even if a public ratings agency would, in effect, directly eliminate any conflict between issuer and ratings agency, it would be incredulous to believe that a public ratings agency would not be subject to the same sort of pressure from politicians, lobbyists and interest groups, all of whom are looking out for the interests of their own respective factions. Like any regulatory body, this agency would not turn out to be some neutral, virtuous gatekeeper who will only keep market participants in check but rather another regulatory body that will ultimately be influenced by those it is supposed to keep in check. Eric may want to believe that such a thing is the modus operandi of the modern GOP. I respectfully disagree. This is the modus operandi of government. Whether it is the Securities and Exchange Commission today or the Interstate Commerce Commission of 100 years ago (as documented by Milton Friedman in Free to Choose and Capitalism and Freedom), the story is the same.

Personally, I think the ratings agencies may have made the mother-of-all-screw-ups or something close to it. That said, I am not convinced that had a public ratings agency been in place, the crisis would be any less than it is. I am also not convinced that the appropriate response is a public ratings agency for the reasons I mentioned above.

As a final note, all of what I wrote above ignores two other considerations which I don't spend a lot of time addressing and will only mention here: 1) the fact that the ratings agencies cover a lot more than mortgages and nothing of this magnitude has reared its ugly head elsewhere, which may suggest that the agency-issuer conflict with respect to, say, municipal bonds, isn't as much of an issue; and, 2) indirectly addressing a question posed to me in a previous post, the public debt markets that were dependent on being able to successfully sell mortgage backed securities have shut down. Investor demand is nonexistent and origination volume is next to nothing for the year. Furthermore, for a lot of reasons, some having to do with basic market principles and others a revamped regulatory environment, it is very, very unlikely that this anomoly in the capital markets will rear its head again for a long time, if ever.