Monday, May 9, 2011

The Cain Mutiny

Psychologists tell us that when people have an idea firmly fixed in their heads, it is very difficult for us to accept contrary information. In fact, contrary information may only cement that idea more firmly. Here is a possible example of that phenomenon in this clip of a Fox focus group (all Republicans) reacting to the South Carolina Republican presidential debate this past Thursday, attended by Tim Pawlenty, and several other lesser-known candidates.  Since the media always seem to focus on the horse race aspects of campaigns, the big news was the surprisingly strong showing for businessman Herman Cain, who still has to be judged a long shot candidate.

What I found interesting, however, was watching the clip that supposedly scored the most favorable audience reaction of anything said during the entire debate. It was Herman Cain saying that government doesn't create jobs; only the private sector creates jobs. And that the problem with government is that its regulations tie the hands of business and interfere with their ability to drive economic growth. Let's first consider how insulting this remark is to public sector employees. Now I would not denigrate the work of the people flipping pizzas in Cain's stores (I love pizza!), but at the same time I wouldn't rate that job as more important than that of a teacher or fire fighter or astronaut or soldier.

But more importantly, instead of dials moving upward so enthusiastically, shouldn't there have been at least a few raised eyebrows at the suggestion that the government has been inhibiting private sector growth? One wonders where these focus group members were in 2007 and 2008, when the private sector suffered its most spectacular failure since 1929. After about 30 years of increasingly lax regulation, demonization of government, and lowered taxes, precisely the remedies these people still believe in, the private sector wasn't exactly creating jobs; it was shedding jobs as fast as could be imagined. And the precipitating cause of that market failure was the banking industry's reckless financing of unsustainable debt to purchase homes that people could not afford, especially after the bubble inevitably burst. Most economists would agree that it was a lack of regulation, and not excessive government interference with private business, that caused the 2008 crash.

That information simply does not compute with people who have so strongly absorbed the message that government is the enemy. Even after they have watched with their own eyes as the government rescued the banking industry, and the automobile industry, and much of the insurance industry, they still go on believing that government is the enemy, instead of the savior of the economy. In fact, the government's rescue of a failed private economy has probably only fed the resentment of this group of voters. The only thing that seems to fuel this group of voters' rage more than the perceived failure of the Obama administration's economic policies, is the perceived success of those policies.

If people continue to turn their meters all the way up in response to this tired, and false, argument that the private sector is always contributing positively to the economy, while government is always harming the economy, even after the experience of the last couple of years, there is probably nothing anyone can say to change these voters' minds. Change can only come slowly, with the gradual acceptance of a new paradigm that recognizes that business is not always right, and government is not always wrong.

(Humphrey Bogart in the film The Caine Mutiny)


  1. Captain Quiggs everywhere eh?

    I think what people are failing to realize is that we need to strike the right balance between private and public economic impact.

    I think if we're going too far in either direction that we'll suffer some negative consequences. Too much government and we run the risk of limiting oportunity and choice, stifling innovation, etc. Too little government and we run the risk of allowing those with money and greed exploiting the little guy.

    I don't pretend to know what that right balance is.

  2. The good thing is that there is a very large margin for error in striking the right balance between the public and private sectors. We know that countries that have nearly abolished private enterprise, like North Korea, don't do very well. We also know that countries with no functioning government and public infrastructure, like Somalia, also don't do very well. Between those extremes, there is a very large range of successful economies.

  3. Very true. That's probably why it's so difficult to make things work just right.

    Great movie character to use. Excellent movie.

  4. << Most economists would agree that it was a lack of regulation, and not excessive government interference with private business, that caused the 2008 crash.>>

    Are you sure?

    The housing bubble was at the heart of the crash. Would you ascribe any blame to the federal government for using excessive interference with private business when it coerced banks to make loans to unqualified buyers?

    Didn't that help to lead to the crash?

    Fannie and Freddie?

  5. If you are asking me my opinion, I would say there is plenty of blame to go around for the crash of 2008, but mostly I would blame plain old greed, both by home buyers who foolishly believed that prices would keep going up, and by lenders who foolishly believed the same thing. And I also think that government failure to regulate new financial products was a significant contributing factor. I don't think the government forced (or even coerced) anybody to loan anybody else money.

    What I said in my post, however, was simply my understanding of what most economists have said. I could be wrong about that also, however, and I appreciate your trying to keep me honest. I have not taken a poll of economists, and I know there are a lot of arguments among economists about the causes of the recession. They will probably be debating that issue for decades.

  6. Thanks for your thoughts. This is not a left vs right issue. It is both parties at fault and government run amok.

    There is plenty of blame to go around. However, the feds intrusion that required private banks to lend to less than qualified buyers set up the opportunity for greedy banks, greedy buyers and greedy government entities (Fannie and Freddie) to gamble with the life savings of millions of Americans who played by the rules, paid their mortgages and taxes and lived within their means. They got screwed. So often, the feds, who mean to do well, intervene where they do not belong.

    They were a big part of the problem and fertilized the big bank and greedy home buyer schemes. Since the real estate collapse the feds have spent $400 billion (with a B) at the federal level to help people pay their mortgages. As well, the federal reserve bank now owns about a trillion dollars worth of bad mortgages. What does this do to home prices?

    Talk about meddling! When will Uncle Sam understand that it cannot artificially stop declining home prices that it caused in the first place? Had Obama and the Goldman advisors he hired from Wall Street allowed home prices to fall after their in a natural way after their debacle they would be rising by now. Instead, this real estate mayhem will continue for years and the good people who are still paying their mortgages, in some cases have lost their jobs or a good chunk of their life savings have been screwed by the same people twice: the feds and the people who work for the feeds who screwed while at Goldman.

  7. I believe you are talking about the Community Reinvestment Act, which has been around since the 1970's. I understand there is an argument that this act led to lax lending practices, but I still don't think it is fair to say that it required banks to lend to unqualified buyers.

    As for what has been done since the crash, I understand the argument that the government should have let prices fall even further, but politically that would have been a disastrous policy. Most people thought the government should have been doing even more to help people stay in their homes. And as a matter of economic policy, who can say for sure whether a more hands off policy would have been better? That could have led to even more foreclosures, as millions of people would have found it advantageous to walk away from their homes. We know that boom and bust cycles tend to be self-reinforcing, and who knows how much pain could have been caused by letting prices fall to some kind of equilibrium level? We could have been in another Great Depression.

  8. I was alluding to Buycks-Roberson v. Citibank, where attorneys (including Obama) started the government on a course of forcing lenders to give more loans to those who had poor credit.

    Some believe sub-prime lending was born as a result. The NYT reported "In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders, under increasing pressure from the Clinton Administration."

    "Fannie Mae has expanded home ownership for millions of families by reducing down payment requirements," said Franklin Raines, Fannie Mae's chairman and chief executive officer. "Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."

    Lending companies were driven to come up with imaginative ways of fulfilling the quota that was required.