Thursday, January 08, 2009

The Nature of Politics -- Fannie & Freddie

"When Republican Richard Shelby of Alabama, then chairman of the Senate Banking Committee, pushed for comprehensive GSE reform in 2005, Democrat Sen. Chris Dodd of Connecticut successfully threatened a filibuster. Later, after Fannie and Freddie collapsed, Mr. Dodd asked, 'Why weren't we doing more?' He then voted for the Bush reforms that he once called 'ill-advised.'

But Mr. Dodd wasn't the only Democrat to heap abuse on the Bush reforms. Rep. Barney Frank of Massachusetts defended Fannie and Freddie as 'fundamentally sound' and labeled the president's proposals as 'inane.' He later voted for the reforms. Sen. Charles Schumer of New York dismissed Mr. Bush's 'safety and soundness concerns' as 'a straw man.' 'If it ain't broke, don't fix it,' was the helpful advice of both Sen. Thomas Carper of Delaware and Rep. Maxine Waters of California. Rep. Kendrick Meeks of Florida berated a Bush official at a hearing, saying, 'I am just pissed off' at the administration for raising the issue."
Politicians are such interesting people, wouldn't you say?

Part of my upcoming semester will be devoted to talking with students about public choice economics. One of the basic ideas that we will explore is that voters choose to be rationally ignorant. The idea is that an individual voter likely believes that he or she cannot determine the outcome of an election, and therefore decides to spend little, if any, time becoming well-informed about issues and about the positions and records of politicians. It seems to me that Mr. Rove's commentary illustrates one of the implications of such rational ignorance. Specifically, politicians are able to get away with saying in the present things that are not at all true about their votes and positions in the past.

I would also say that politicians are themselves well aware that most voters are rationally ignorant.

One might hope that a free press would mitigate the unfortunate implications of rational ignorance, but I think Mr. Rove's commentary points out why I think that this is not really to be expected. Even if the press and the news industry work hard at holding politicians accountable for their past actions vis a vis their present assertions, the rationally ignorant voter is paying very little attention. I suspect the press and the news industry has come to recognize the electorate is largely rationally ignorant, and this means members of the press and the news industry know that they too cannot be easily held accountable for inconsistencies between past stories and present stories. In addition, most voters simply are unlikely to spend the time to discover which news suppliers are keeping tabs on the inconsistencies and the outright lies of the politicians.

A few of my friends have wondered why it seems no one saw the problems that were to result from public policy with respect to Fannie & Freddie. I don't think no one saw the potential problems. Economists often point out to their students, and anyone one else who will listen for that matter, that when government subsidizes risk taking the result is too much risk taking, and eventually the (overly risky) chickens will come home to roost. This is a large part of the story of the present financial situation. What is not possible to predict is specifically when and in what specific ways those chickens will come home to roost. Mr. Rove's commentary points out that there were people, economists and even politicians, who made efforts to mitigate the problems that were to come as a result of bad public policy toward mortgages, but successful politics is often bad economic policy. The politics of Fannie & Freddie ruled the day, and the politicians who failed to act to mitigate or reduce the risk of this financial failure seem to be largely escaping accountability. This seems the nature of politics because voters choose to be rationally ignorant.

Some people understand this about the nature of politics, and they suggest making efforts toward political reforms. But, politics is politics. I don't think much of this can be changed, especially when the unfortunate aspects of politics follow from the choices of voters to be rationally ignorant. If we understand the inherent nature of politics and government, then we should understand that this nature cannot be changed, and instead efforts and attention should be focused on constraining the list of things government is allowed to do. Governments really should not be allowed to subsidize risk taking.

1 comment:

Tim Canon said...

I don't know; maybe if we changed the system up a bit so it's not majority always rules. That way we could have a multiparty system, and maybe give voters more than one vote. I haven't thought through the economics of this, but it might make at least some folks think their votes are worthwhile...then, perhaps, they would choose to be informed.

Of course, it won't matter as long as the FCC grants 90% of all media control to 7 corporations, which rely on the FCC for permission to run. I don't think it's too much of a stretch to expect our news to be a bit watered down, given the lack of competition in the industry (thank you, FDR.)