08/22/2010 03:57 pm ET Updated May 25, 2011

The "Nanny State" Question

The recent debate on the financial reform package featured a number of arguments that, objectively, made no sense at all. While this will come as no surprise to veteran Congress-watchers, such statements are usually recognized as political posturing by press and public alike, and ignored by even their proponents. But in these unsettled times, such senseless arguments have begun to resonate - at least with the "flat world" crowd - and therefore warrant comment.

Consider a prominent argument first raised during the health care debate, but that came into its own as meaningless claptrap only in the run up to passage of the financial reform bill: "they are trying to create a 'nanny state' in which government will make us brush our teeth and eat our vegetables."
Well, not really, of course. In fact, nothing of the sort was contained in the financial reform measure. But even reigning in the excesses of a financial system that left the world teetering on the edge of ruin is too "prescriptive" a solution for the new Objectivists.

Topping the scolding parent metaphor was the mind-boggling and logic-twisting plaint most frequently heard from rapacious lenders: "if we can't loan money to people who can't afford to borrow it, how are poor people ever going to put a roof over their heads?!"

The fact that arguments like these not only aren't ridiculed, but actually catch on - deeply among a fringe that may or may not be lunatic, and more broadly among a general public not particularly well-versed on the issues at hand - underlies a mounting challenge for our maturing democracy: preserving the integrity of political debate in an era of increasingly complex and difficult problems that defy both easy understanding and simple solutions.

The root of this problem, sadly, is that too few people understand the abstract concepts and principles that are essential to grappling with the realities of our economic system. Not only grasping, but mastering, those concepts is essential to ensure that the country enjoys full employment and a financial system that can grease the wheels of the economy. We not only need, but expect, government to fill that role - to consult the experts who do understand and to craft solutions that reflect the realities of a given situation.

But the complexities also ensure that the vast majority of the public will not - cannot - understand enough to assess the validity of a particular argument for or against a proposed solution. That, in turn, leaves us vulnerable to the "through the looking glass" distortions of people who put party before principle, or self-interest before the public interest. When their specious claims take hold - as in the health care and financial reform debates - the desirable falls victim to the possible, itself sorely limited by the inanity of the arguments around it.

How, then, can we expect elected officials to act responsibly, when their employers (constituents) are mesmerized by simple, and utterly false, assertions?

Consider an example. A few years back a professor at the Harvard Business School was making this same point to a class of second-year MBA students, and asked, "Can you tell me, in a few words and a couple of minutes, why there is an inverse relationship between bond yields and bond prices?" One might think that would be a cakewalk for such a group of elite business scholars. A show of hands, however, disclosed that less than a third of them even thought they could answer.

The answer is simply that when a new bond is issued with a 6 percent coupon, the older bond with a 5 percent coupon has to drop in price to be competitive with the new bond, because all bonds are priced in the same market by "yield to maturity." There are many other aspects to bond markets, of course, but if you do not understand this first principle, you cannot understand how the bond market works and therefore you will never appreciate or understand how the whole financial system works. As a result, if you had to vote on something involving the financial system, you would be likely, given your obvious ignorance of even the most basic principles, to get it wrong.

It's not exactly a new problem, but it is exacerbated by a world that is unimaginably more complex than that faced by the framers of our system of government. It wasn't simply racism or sexism that compelled Alexander Hamilton's clearly wrongheaded idea that only educated landowners should be allowed to vote. It was also fueled by a belief, going all the way back to Plato, that responsible citizenship required a foundation in knowledge and wisdom.

No one today, of course, is longing for - or would long tolerate - philosopher-kings or standardized tests at the polls. And I doubt that there are many people out there who want to go back to Hamilton's idea. So what is to be done? The problem is real, and there is no clear or easy answer.

There might, however, be some ideas or approaches that can mitigate the problem. One of them was invented over 50 years ago when, to get trade legislation through Congress, it was agreed that when a complicated package of proposals was ready for a vote, the normal parliamentary processes would, after a full debate, be suspended, and a simple up or down vote taken, with no amendments allowed. Because there is a vital need for such trade legislation from time to time, the goal of getting an overall solution in place takes precedence over trying to get everybody's special interest input, which more often than not does little to improve a solution, and frequently is intended to undermine it entirely.

That takes us back to the beginning of this thought process. The financial reform bill sought to address the most serious problems of the last few years. One of them was the "no doc, no down payment" loans that lured millions of unsuspecting and eager prospective homeowners into deals that made lenders and brokers millions in fees while turning those "poor" folks into deadbeats, and nearly bringing down the financial system with them. When the Congress declared the practice could not be continued, critics said it was not fair to deprive even abjectly unqualified applicants the opportunity to be homeowners, despite the fact that many of these applicants have already lost the homes they couldn't have purchased if they were not being taken advantage of by rapacious lenders. Get it? It reminds me of the defendant standing accused of murdering his parents and pleading for clemency because he was now an orphan!

Similarly, when the new stimulus package was proposed, opponents argued that it was not needed - that lower taxes and less government debt would bring the economy back to life. In this tale, they fill the role of the two-thirds the class of Harvard MBA students who couldn't explain bond pricing. They, obviously and objectively, do not understand the rudiments of economics. Lower taxes do nothing for the unemployed; less debt does not spur consumption and thus demand, which is how jobs are created.

So we are facing a conundrum in how to break the vicious cycle of misunderstanding that can lead to perverse government policy action and mistakes. If knowledgeable and sincere elected officials are out of reach, along with a well-educated citizenry, perhaps something like the trade legislation method is needed to get complex economic/tax/financial matters passed through Congress. Such an approach might allow us to overcome the limited understanding that undermines our democracy and puts us all at risk.

Elizabeth Warren, the distinguished Harvard Law School Professor who was one of the driving brains behind the recent protections for retail financial customers, exercised extreme politesse when she characterized the problem as "cognitive impairment." While she is correct, perhaps the description in this piece might be more persuasive, though more controversial.