Book Review: Fault Lines

Recently, The Economist ranked Raghu Rajan as the top economist of the post-financial crisis era (second was Robert Shiller, who I saw speak at the AEA conference in Denver). Having never read any of his academic papers, it’s hard to say whether I agree completely with that verdict, but if his book is any suggestion then it is quite possible I would.

Fault Lines is somewhat revolutionary because it does not attempt to place all the blame for the housing bubble and recession on just one issue. Instead, it is wise enough to address the various “fault lines” in the US economy that led to the crisis. A friend of mine’s conservative father argues that the source of the housing bubble was solely the liberal credit push on low-income families; this book does a great job of proving him wrong. Not only was it subsidized lending to poor families, but deregulated financial arms and international pressure led to the financial crisis.

I think this book is a necessity for anyone who wants to understand the future needs of the world economy. There is a lot that needs to be done to clean up the system. I’ve always been a proponent of cutting bureaucracy - wasted money - and reforming the political system in the US. In addition to some of his recommendations, here are some of mine:

1. Eliminate the Dept. of Education - kind of
   

The Department of Education is a big waste of money as far as I’m concerned. If I could have one wish it would be for a nationalized charter school system. The DOE needs to exist (much to the chagrin of Ken Buck and a bunch of Tea-Partyers), however, it needs a face lift. Rather than set standards and build up a bureaucracy, the DOE should find ways to bring competition and results from a dying system. Every child in America should have a voucher for 13 years of schooling (K-12) that they can use anywhere and in any increments. Schools would have to compete for this funding if we place restrictions on other sources of revenue: you can make additional money directly from alumni and sports revenue, but nowhere else. As a result, schools will be built where there are students and principles will be held responsible for outcomes.

Teachers also need incentives. The teacher’s unions are incredibly strong and as a result the future generations of this nation are in jeopardy. Tests should be written to test outcomes but they should not come from the government; private firms can write better and less inane tests so that teaching to the test doesn’t occur. They can hand out rankings accordingly and base grades on a normal scale.

2. End Farm Subsidies
   

Why do these still exists? Because of a strong farm lobby. Why do they need to leave? Because it is a waste of money and it diverts attention away from where it can do a lot more good. In 2009, over $180 billion were spent on farm subsidies from all forms of government - billion with a b. Some may argue that these subsidies (or bailouts) are necessary to maintain production and stabilize income. However, any good trade theory says that if we can’t make it cheap enough, we shouldn’t be making it. Additionally, if farms want to stabilize incomes they should invest in futures with all that subsidy money they have lying around already. Let’s be honest, this whole thing is just a political fund that needs to be rid of.

3. Reverse grade inflation
   

Grade inflation makes college worth less. Students graduate and are not ready to compete in the world economy because they have been taught to believe that a C-average is okay. This is a bad idea since a C-average today is the D-average yesterday and probably the F-average of China (at least for universities). Students need to stop going to frat parties and realize that their kind is decline. We’d all love to be driving a BMW to the rec center but nobody will be able to afford that luxury for their spoiled child if we keep this pace.

Another thing about college: we need to change our perceptions. I just watched The Social Network and one of my favorite quotes (loosely) is, “at Harvard, we teach that the best job is one you create, not one you find.” I’ve never heard this philosophy at my state school. Why not? Why are we teaching our students that our ambitions are to work for a company that visits for a career day rather than a company run out of our own basement? The companies of tomorrow don’t exist today. Period.

Rajan offers a lot more insight, definitely check out Fault Lines. It’s always important to stay up to date on current economics and this is one of the leading scholars.