The ideological significance of the financial crisis

The financial crisis is nearing its three year anniversary, and the ideologically-tinged battles over identifying its causes are still roaring on. For champions of the free market, much is at stake in explaining what led to the 2008 financial meltdown. On its face, it appears that banks and investors foolishly jumped on the bandwagon of an asset bubble driven by the extension of easy credit. When that bubble popped, the investment vehicles built on top of it saw a huge loss in value, causing a panic that would have — if not for government intervention — precipitated a world-wide financial collapse and great depression.

Investors and banks incompetently bankrupting themselves and bringing down the rest of the world with them is hard to reconcile with the usual rhetoric about the self-correcting, rational, efficient market. Defenders of that particular ideology are then pressed to find some way to explain away the crisis that absolves the market actors from the colossal mistakes that they made. If they can blame their actions on something else — ideally government behavior — then they can protect their free market ideology from what would otherwise be a devastating counter-example to its practicality.

Efforts to provide a government-blaming explanation have revolved around two main claims. The first is that the Community Reinvestment Act — a 1977 law that outlaws the racist practice of redlining — forced banks to make the bad mortgages that drove the asset bubble and the eventual financial collapse. At first glance, this argument is very implausible given that the law has been around for three decades, and only requires community banks not to discriminate between equally creditworthy individuals. Whatever one thought of the viability of the argument, it was crushed in the Financial Crisis Inquiry Commission report which found the following:

The Commission concludes the CRA [Community Reinvestment Act] was not a signifcant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans — a proxy for subprime loans — had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.

With that attempt to blame the government defeated, the only other argument coming from those trying to defend the market ideology centers around Fannie and Freddie. The arguments surrounding that are fairly technical and largely depend on disputes about definitions. I wont go into the discussion in depth here, but Mark Thoma provides an abundance of different analyses explaining where those arguments go wrong. The short of it is this: even though Fannie and Freddie did foolishly participate in subprime lending and securitization, they were late to the game and were only responding to existing market trends set by private originators and investment houses.

To that analysis, I would add that even if the behavior of Fannie and Freddie did lead banks and investors to create a speculative bubble, there is no reason it should have. Private market actors were under no obligation to buy mortgage-backed securities; ratings agencies were under no obligation to provide AAA ratings to those securities; investment firms were under no obligation to leverage themselves in a way that left them insolvent when the bubble burst; AIG was under no obligation to insure the mortgage-backed securities in a way that would eventually leave the firm bankrupt; and, other mortgage originators and investment banks were under no obligation to copy the practices of Fannie and Freddie (although we know that Fannie and Freddie were actually copying their bad practices).

The fact that market actors freely chose to do all of these things reflect that they had misjudged the risk the housing bubble posed, a sector-wide misjudgment that had catastrophic consequences for the entire world. Defenders of the ideology of unrestrained markets have nothing that they can say about those freely chosen decisions. Market actors are supposed to be acting on all of the knowledge that is available to them, including any distortions that Fannie and Freddie introduce, information about which was public and accessible. They are not supposed to make decisions which bankrupt their own firms and bring down the entire financial sector, certainly not en masse. But in this case, they did exactly that.

What the financial crisis represents is a real-world refutation of the idea that the market is rational and can be counted upon to self-regulate. In theory that argument has some compelling features. After all, why would a firm trying to maximize profits take actions which destroys itself. Whatever the reason is — incompetence, misplaced incentives, or irrational exuberance — we have a perfect example of firms doing just that.

If proponents of a wide-open free market were intellectually honest about this financial crisis, they would have to revise their views in the same way that Alan Greenspan — previously a proponent of the ideology of self-regulating markets — did soon after the meltdown took place. Of course, just because they should do it does not mean that they will. Given the central importance of this view for the entire ideology of the right wing, I am doubtful anything could ever convince them to abandon it.

The silver lining of the food desert study

A study published earlier this week debunked one of the primary explanations for why obesity disproportionately affects poor people. According to the Los Angeles Times, researchers found that better access to supermarkets did not positively affect the diets of poor people. The findings contradict the argument that food deserts — geographical areas that are devoid of healthy food options — are a driving factor for obesity among poor people.

The food desert argument is a very plausible one. Urban and rural areas inhabited by poor people often do not have supermarkets in their immediate vicinity. Consequently, residents of those areas have to rely on fast food restaurants and convenience stores to access food. These food sources primarily feature highly caloric items which, when consumed often enough, can drive obesity. On this view, the lack of access to healthy food options for poor communities is driving the obesity epidemic. If we want to remedy the problem, we need to find ways to end food deserts, and bring healthy food options to those who do not currently have them.

Although this argument makes good sense, it is apparently not supported by the data. In this particular study, researchers analyzed the diets of 5,000 study participants and found that their food choices did not change when healthier options came into their areas. The study does not prove that geographical access to healthy food is not necessary for a good diet. But it does prove that access alone is not sufficient. Individuals with low incomes and a proximity to fast food options still pursue those options whether healthier food is available or not.

These findings do not conflict with the idea that the conditions of poverty are a driving factor in the obesity epidemic. In fact, the researchers claim that having a low income was one of the primary factors that predicted a bad diet. Given that healthy foods cost more than unhealthy foods, low-income individuals are in a position where genuine access — not just geographical access — is not present. As long as healthier food remains more expensive and more time consuming than unhealthier food and poor people remain poor, the obesity epidemic will continue to plague poor communities whether food deserts exist or not.

Although the findings are somewhat disappointing, there is a silver lining to it. Recently Walmart has used the claim that they can help alleviate food deserts to try to get approval to build in cities in which they were previously unable. With this new study, that rhetorical approach suffers a serious blow.

It is clear that simply providing access to healthy food will not be enough. If poor communities do not also receive higher wages — something Walmart certainly will not provide — the increased geographical access will amount to nothing. Poor residents will still be forced to resort to unhealthy food options, and obesity and other diseases related to poor food will not be curbed at all. Walmart’s expansion might alleviate the problem of geographical access to healthy food, but its employment policies exacerbate the problem of genuine access to it.

Now that we know that geographical access does not, by itself, help with problems of food inequality, we can focus on the issue that everyone always hates to focus on instead — poverty.

Teacher-blaming education reform efforts continue in DC

The Washington D.C. school system fired 206 teachers Friday in the latest installment of the teacher-blaming reform efforts implemented by the now disgraced former chancellor of the school system, Michelle Rhee. According to the Washington Post, the 206 teachers were let go because they scored poorly on the IMPACT evaluation system that now dictates much of the District’s personnel decisions.

It was also revealed that 663 teachers scored very highly on the evaluation system which qualified them for high bonus payments of up to $25,000. This piece of the DC system was highlighted by Matthew Yglesias, who then remarked that the “idea that it’s somehow ‘anti-teacher’ to want to identify and compensate the best people in the system is bizarre.”

This ignorance-fueled dismissal of the substantive criticisms of the new, teacher-focused brand of education reform has sadly become common. Instead of engaging the critics of the present reform movement, proponents of it — especially those with technocratic leanings like Yglesias — just disregard the critiques as foolish and bizarre. When critics are not being depicted as laughably off-base, they are often decried as being apologists for greedy union teachers who obviously do not care if their students learn or not.

The reality of course is much different than that. If you were to only read the perspectives and polished public relations pieces of the education reformers, you would think that those opposing these reforms were grasping at straws to fight against a movement with overwhelming evidence and reason on its side. However, the actual case is the exact opposite of that: it is the education reformers who are desperately trying to cling to their position in the face of decisive evidence to the contrary.

For example, consider standardized testing as a means to measure teacher performance, this the dominant feature of the Rhee reforms in DC. Using standardized tests in this way runs into a litany of problems that reform proponents cannot explain away no matter how many times they flippantly ignore them.

The first problem is that it remains debatable what standardized tests actually measure. On the most fundamental level, it is not clear that standardized tests are precisely measuring anything at all. In addition to the obvious objections that testing acumen might not line up with knowledge acquired, there are more subtle objections about the testing process itself. Not only is it narrow, but it also can be gamed in ways that increase scores for reasons other than learning. Test-taking strategies, which are apparently taught in DC schools, are able to boost scores just by teaching students to approach the test differently, something unrelated to knowledge acquired. That alone should indicate how unreliable testing is in capturing just how much someone has learned.

But even if we assume that standardized testing is an accurate reflection of how much a student has learned, that does nothing to tell us what role the teacher had in that learning. Reformers try to get around that problem by using “value-added methods” of evaluation which only measure how much a student has improved under a specific teacher, not what their overall proficiency is. But even this does not tell us what is actually accounting for the improvement or lack thereof. In fact, an Economic Policy Institute paper noted the following about value-added methods:

One study found that across five large urban districts, among teachers who were ranked in the top 20% of effectiveness in the first year, fewer than a third were in that top group the next year, and another third moved all the way down to the bottom 40%.

If value-added methods of evaluation truly reflected the impact teachers are having on their students, this kind of variability would be impossible. Clearly, something else is in play that is outside of the scope of teacher performance.

The final objection to standardized testing is that it distorts teacher incentives in a way that encourages narrowly teaching to the test. Placing high stakes on the testing results also encourages cheating on the tests, a reality that befell the DC school district after Rhee implemented her testing-focused reforms.

With all of these clear problems, it is bizarre that these testing-heavy approaches are getting so much play by Yglesias and those like him. What is especially alarming is those who cheer along the firing of hundreds of teachers based on testing scores which the evidence actually shows are significantly influenced by things outside of the teacher’s control.

That last bit — ignoring factors outside of the teacher’s control — is really what is most disappointing about this whole movement. It avoids the sticky problems of massive childhood poverty and social inequality which clearly have an enormously negative impact on the homes and lives of children who are affected by them. It is those children who do poorly in school, and the conditions of poverty that they have to fight against are not imposed on them by teachers, but by society at large.

This more recent reform movement has totally abandoned any discussion about improving the non-school conditions of these students which I would argue have a much more serious impact on their performance. Instead, they have decided to blame and praise teachers for student failures and successes despite the fact that teachers are not the only factor, and are arguably not even the predominant one. That is why this reform movement is anti-teacher, and there is nothing bizarre about labeling it as such.