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This Is Not the Invisible Hand Adam Smith Had in Mind

4 January 2009

The upshot of this George Will piece on the unintended consequences of legislative nanny impulses is worth pondering.  I’ll try to distill the argument below, but it’s better if you read it slowly and carefully yourself.

1.  The Civil Rights Act of 1964 and subsequent Court decisions relating to it pretty well eliminated the use of customized aptitude tests for the evaluation of prospective employees.  The rationale boils down to this:  such tests were inherently discriminatory, not because they were intended to discriminate, but because they had the effect of discriminating between those who had certain backgrounds and those who did not.  (Imagine.)  Given that the strata of “certain backgrounds” often fractured along racial lines, even if the tests were as objectively related to particular job skills as humanly possible, they were still discriminatory.  The risk of getting hauled into court for violating a minority’s civil rights thus became too great, and aptitude tests were largely abandoned.

2.  In place of the aptitude test, many employers decided to use a surrogate for aptitude testing:  requiring a college degree instead.  (Oh, that’s rich, isn’t it?  A college education indicates aptitude?  But I’ll save that cynical detour for another day.)

3.  The nationwide demand for college degrees thus skyrocketed.

4.  The cost of a college education followed suit.

At this piont, the argument can go a lot of different directions.  Did the accelerating cost of college education (a) “exacerbate the widening income disparities between high school and college graduates?” (b) “make employment more difficult for minorities” by sealing off a great number of jobs from those who had the requisite intelligence and aptitude but could not afford a college education?  (c)  create the conditions under which a college education becomes an undifferentiated commodity like, say, USB cables or diet cola?  (d) all of those and more?

And were the benefits of the outcomes commensurate with the costs?  Will does not say, and neither (apparently) did the authors he cites.

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Possibility (c) has me intrigued, too, given its (somewhat torturous, admittedly) relation to the Freddie Mac/Fannie Mae mess and the Community Reinvestment Act.  The CRA appears to have been intended to increase home ownership by lowering apparent mortgage costs.  (“Apparent?”  As it turns out, we’re passing the hidden portion of the costs along to our kids and their kids in the form of the multi-trillion-dollar “rescues” and “bailouts” and “stimulus packages.”  Think of the bailouts as a post hoc balloon payment that underwrites the difference between (a) the monthly payments the housing market actually required for a given house and (b) the monthly payments facilitated by the CRA, aggregated over population and time, with interest etc.)  What it appears to have created, however, was a massive credit bubble.

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Bubbles burst.  Go look it up.

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We now have a society in which former luxuries are now an entitlement for all.  From college education to flat-screen TVs to home ownership, we’ve discovered that we don’t have to save to build equity so that we can afford a special something; we just put it on someone’s card and pay it forward.  The special somethings that depreciate rapidly – commodities, or things in the process of being commodified – end up being worth less than what we owe on them, and when we can’t (or aren’t willing to save enough to) pay the tab, we run beggingly to Uncle Sam, who gladly forks over our children’s inheritance to help us pay off our debts.

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By the way, all of this makes Dave Ramsey somewhat of a prophet.  Savings matters.  Equity matters.  Cash matters.  Blue-chip investments matter.  

In fact, equity – actual ownership, free and clear – is the same sort of aptitude indicator as the results of a well crafted aptitude test.  It says, “I can and will pay for this thing, sooner rather than later, and here’s my proof.”  

There’s a reason putting 10% or more down on a mortgage is known as “conventional” financing.

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I wonder if a AAA credit rating (or a Texas A&M engineering degree, for that matter) today means the same thing it meant 20 years ago.

qb

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