Commentary Magazine


Topic: housing bubble

Smash the Regulatory State from Within

The rise of the regulatory state is not something conservatives need to make peace with, nor should they accept the role that unaccountable bureaucrats are increasingly playing in American governance. But they should also understand that working within that system while working to dismantle aspects of it are not mutually exclusive activities.

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The rise of the regulatory state is not something conservatives need to make peace with, nor should they accept the role that unaccountable bureaucrats are increasingly playing in American governance. But they should also understand that working within that system while working to dismantle aspects of it are not mutually exclusive activities.

With all the talk of reform conservatism, this is a more limited variant of the ambitious reform efforts gaining momentum. There are two categories of such reform, and the abuse-of-power scandals proliferating throughout the Obama administration’s bureaucratic power agencies make it all the more necessary to realize the opportunity they present to conservatives seeking to protect the public from big government.

The first has to do with regulations, and Texas presents a good example. Because so much of the Obama-era Democratic regulations are poorly thought-out and destructive, it’s easy to get the impression that when the government regulates something, it will do so in a deeply stupid way. But it doesn’t have to.

In April 2010, the Washington Post ran an interesting article investigating the following question: Why did Texas escape the real-estate bust? As the Post explained:

Texas’s 3.1 million mortgage borrowers are a breed of their own among big states with big cities. Fewer than 6 percent of them are in or near foreclosure, according to the Mortgage Bankers Association; the national average is nearly 10 percent. …

Texan subprime borrowers do especially well compared with their counterparts elsewhere. The foreclosure rate among subprime borrowers in Texas, at less than 19 percent, is the lowest of any state except Alaska.

Part of the answer seemed to be restrictions on refinancing and home-equity lending:

A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans cannot total more than 80 percent of a home’s appraised value. There’s a 12-day cooling-off period after an application, during which the borrower can pull out. And when a borrower refinances a mortgage, it’s illegal to get even a dollar back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date from the first days of statehood in 1845, when the constitution banned home loans.

It turns out such restrictions went a long way toward preventing homeowners from taking out the kind of loans and refinancing that increased the chances of default when the bubble burst, protecting many in Texas from suffering the same fate. It’s the kind of “smart” regulation that not only benefits the private sector but also can prevent future “dumb” regulations: the less prone to such crises states (and especially the federal government) are, the less demand there will be for the kind of “do-something” regulatory pile-ons and bailouts that follow those crises.

Texas is also, of course, a testament to the benefits of limited regulations in other areas of ownership and private property. Another part of the state’s insulation from the real-estate bubble was, as Wendell Cox explained, “the state’s liberal, market oriented land use policies. This served to help keep the price of land low while profligate lending increased demand.” Overregulated housing markets inflated prices and restricted supply. Texas got the balance just right.

So there’s “smart” regulations vs. “dumb” regulations. But the other category of this kind of reform has to do with the bureaucracy. Especially in the Obama era, policy is being made more and more by unelected bureaucrats. As the IRS scandal (and others) showed, the power and insulation from the public eye is a dangerous combination.

Conservatives have generally approached this by concentrating on the need to eliminate either bureaucratic agencies or the powers of those agencies. They should also, however, keep in mind that as long as those agencies exist, personnel is policy. Perhaps no one on the right has internalized this message more than Senate Minority Leader Mitch McConnell.

In a piece for National Review last year (still paywalled, alas), Daniel Foster wrote about McConnell’s attitude toward staffing decisions made by each party. When bureaucratic commission openings must be filled, it generally falls to the leadership. That means President Obama for the Democrats and McConnell for the Republicans. The Democrats still tend to view such job appointments as patronage positions. But McConnell has rejected the cronyism in favor of competence:

To translate his instincts into names, he brought in GOP veteran Dan Schneider. To look at Schneider’s government rap sheet — stints at the Department of Health and Human Services, the National Endowment for the Humanities, the Labor Department — you’d think he was a die-cast liberal. But when I spoke with him for this story, he said he likes to think of himself as a loyal conservative sent behind enemy lines “to monitor the radicals.”

Schneider came onto McConnell’s radar via the senator’s wife, Elaine Chao. When George W. Bush appointed Chao to head his Department of Labor, Schneider became her first White House liaison, and she gave him free rein to find conservatives to fill more than 200 slots inside the department. He impressed, and, after the Obama transition, migrated into McConnell’s office, where he oversees a sort of national conservative talent search with the title “Policy Advisor and Counsel for Nominations.”

Schneider operates according to a set of five criteria for screening potential nominees first developed by E. Pendleton “Pen” James, Ronald Reagan’s director of personnel management. First, were the nominees competent in the subject matter? Second, were they philosophically compatible with Senator McConnell? Third, did they possess high character and integrity? Fourth, were they tough? Fifth, were they team players?

The result, two or three hundred appointees later, is measurable.

Of course the ultimate aim for such bureaucracies should be to get rid of them or limit their power–something McConnell also engages in, as when he spearheaded the challenge to Obama’s unconstitutional recess appointments, which resulted recently in a unanimous Supreme Court rejection of Obama’s power grab.

But conservatives can fight those fights while engaging in limited reform from within the regulatory state. They don’t have to cede ground just because they wish that ground didn’t exist.

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Race, Reparations, and the Idea of America

Ta-Nehisi Coates’s Atlantic cover essay making the case for reparations has something for everyone to like and to dislike, because a wise and serious depiction of the subject–which Coates provides–scrambles ideological predispositions. Conservatives will be hesitant toward this essay because they are generally accused of racial animus at the drop of a hat. But conservatives should give the essay a chance, not only because of the parts they will agree with but because of the parts of the essay that challenge them.

Conservatives who decry the corrosive power of welfare-state institutions to insinuate poisonous effects into the fibers of family and community are often right, but they tend to forget how much more poisonous, yet less visible, are the generational effects of slavery and Jim Crow. A good explanation of this comes from the political scientists Daron Acemoglu and James A. Robinson in their bestseller Why Nations Fail. In a chapter on the “vicious circle” of extractive institutions, they write that the South’s economic doldrums caused by its reliance on slavery should have been shaken off after abolition. Instead:

A continuation of extractive institutions, this time of the Jim Crow kind rather than of slavery, emerged in the South. … These persisted for almost another century, until yet another major upheaval, the civil rights movement. In the meantime, blacks continued to be excluded from power and repressed. Plantation-type agriculture based on low-wage, poorly educated labor persisted, and southern incomes fell further relative to the U.S. average. The vicious circle of extractive institutions was stronger than many had expected at the time.

Political and economic institutions must be reformed and rerouted, not just declared over, if they are to be undone. Slavery was obviously a system that needed to be undone, and it was–but the broader economic framework of exploitation and aristocratic elitism in the South was not. Conservatives are right to want a political system that doesn’t play favorites at all. But they’re wrong to think that such a system is all that’s needed to erase the stain of Jim Crow.

However, in the course of arguing for reparations (and its attendant “national reckoning”) Coates makes an extremely important point about black poverty:

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Ta-Nehisi Coates’s Atlantic cover essay making the case for reparations has something for everyone to like and to dislike, because a wise and serious depiction of the subject–which Coates provides–scrambles ideological predispositions. Conservatives will be hesitant toward this essay because they are generally accused of racial animus at the drop of a hat. But conservatives should give the essay a chance, not only because of the parts they will agree with but because of the parts of the essay that challenge them.

Conservatives who decry the corrosive power of welfare-state institutions to insinuate poisonous effects into the fibers of family and community are often right, but they tend to forget how much more poisonous, yet less visible, are the generational effects of slavery and Jim Crow. A good explanation of this comes from the political scientists Daron Acemoglu and James A. Robinson in their bestseller Why Nations Fail. In a chapter on the “vicious circle” of extractive institutions, they write that the South’s economic doldrums caused by its reliance on slavery should have been shaken off after abolition. Instead:

A continuation of extractive institutions, this time of the Jim Crow kind rather than of slavery, emerged in the South. … These persisted for almost another century, until yet another major upheaval, the civil rights movement. In the meantime, blacks continued to be excluded from power and repressed. Plantation-type agriculture based on low-wage, poorly educated labor persisted, and southern incomes fell further relative to the U.S. average. The vicious circle of extractive institutions was stronger than many had expected at the time.

Political and economic institutions must be reformed and rerouted, not just declared over, if they are to be undone. Slavery was obviously a system that needed to be undone, and it was–but the broader economic framework of exploitation and aristocratic elitism in the South was not. Conservatives are right to want a political system that doesn’t play favorites at all. But they’re wrong to think that such a system is all that’s needed to erase the stain of Jim Crow.

However, in the course of arguing for reparations (and its attendant “national reckoning”) Coates makes an extremely important point about black poverty:

Liberals today mostly view racism not as an active, distinct evil but as a relative of white poverty and inequality. They ignore the long tradition of this country actively punishing black success—and the elevation of that punishment, in the mid-20th century, to federal policy. President Lyndon Johnson may have noted in his historic civil-rights speech at Howard University in 1965 that “Negro poverty is not white poverty.” But his advisers and their successors were, and still are, loath to craft any policy that recognizes the difference.

It may not be intended as such, but this is, in reality, a stern rebuke to the leftist tendency to hijack the black struggle and tether African Americans to their preferred policy aims. The left does this with regard to women and other minorities as well–the old joke about the New York Times reporting the apocalypse: World Ends, Women and Minorities Hardest Hit. But the struggle of African Americans was and is different; the left’s insistence that the issue of the day–climate change, inequality, environmental regulations–can or should be reduced to a “black issue” is precisely the act of ignoring African Americans’ history in the service of white liberals’ power.

Coates’s essay also highlights the tendency of well-intentioned liberal initiatives that end up exacerbating black economic dislocation and discrimination instead of alleviating it. For example, Coates discusses residential segregation, redlining, block busting, federally blessed “restrictive covenants,” and other methods of housing discrimination whose effects are still felt especially in or near major cities. This made them particularly vulnerable to predatory lending and the housing bubble. Here’s Coates:

Plunder in the past made plunder in the present efficient. The banks of America understood this. In 2005, Wells Fargo promoted a series of Wealth Building Strategies seminars. Dubbing itself “the nation’s leading originator of home loans to ethnic minority customers,” the bank enrolled black public figures in an ostensible effort to educate blacks on building “generational wealth.” But the “wealth building” seminars were a front for wealth theft. In 2010, the Justice Department filed a discrimination suit against Wells Fargo alleging that the bank had shunted blacks into predatory loans regardless of their creditworthiness. This was not magic or coincidence or misfortune. It was racism reifying itself.

The government’s involvement in efforts to sell mortgages to uncreditworthy black potential homeowners in such areas was supposed to be the antidote to redlining, a major historical correction. But in many cases lenders were pressured by the government to ignore the creditworthiness of minority applicants, and the result is something like: Housing Bubble Ends, Minorities Hardest Hit.

Aside from a cautionary tale about government intervention in the marketplace, this geographic isolation would also seem to argue for ways not only to help improve minority neighborhoods but also to get kids from those neighborhoods into better schools. The current government monopoly on such education, supported by the unions and Democrats at the highest levels including President Obama, guarantees the promulgation of an effective segregation and the breathing of life into a particularly insidious legacy of the Jim Crow era that the Great Migration could have, but did not, undo.

And that brings us back to the issue of reparations (to close the “wealth gap,” as Coates says) and the reason Coates wants to have this “national reckoning.” He writes:

A nation outlives its generations…. If Thomas Jefferson’s genius matters, then so does his taking of Sally Hemings’s body. If George Washington crossing the Delaware matters, so must his ruthless pursuit of the runagate Oney Judge.

Should the slaveholding of the Founders be as relevant as their political ideas in understanding the founding philosophical underpinnings of our nation’s identity? Coates seems to think so; later he writes that “white supremacy is not merely the work of hotheaded demagogues, or a matter of false consciousness, but a force so fundamental to America that it is difficult to imagine the country without it,” adding: “And so we must imagine a new country.”

Which opinions of the Founders must we carry as an addendum to the Constitution? Slavery was a violation of our founding principles. But the case for abolition was not just a moral one; it was also an economic one. This is what Acemoglu and Robinson show, and it’s what the historian David Brion Davis notes in his latest book, The Problem of Slavery in the Age of Emancipation. He writes of Connecticut abolitionist Leonard Bacon’s argument that slavery was a long-term strain on the American economy:

Even apart from the desire for racial homogeneity, most American commentators shared this republican conviction that slavery subverted the nation’s prospects for balanced economic growth and prosperity, at least in the longer term.

Bacon wasn’t claiming that the institution of slavery didn’t provide economic benefits to those who practiced it, of course. But he, like many of his age, understood slavery as a betrayal of the American system, not just a moral failing. It was a bug, not a feature.

So yes, a tremendous amount of wealth was built up in America from the subjugation and plunder of black slaves. But to argue that the American identity and the country’s conception of self is not separate at all from its history, to argue that the idea of America is inseparable from the idea of racism and oppression, requires its own selective reading of America’s past and produces a false rendering of the American project.

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