Reform

Chicago teachers are on strike, and the issue is school reform.  What does “reform” mean in education?  It means the end of tenure for teachers, so that they are always at risk of losing their jobs.  Teachers should be evaluated by productivity (output) metrics, like student test scores, rather than effort or skill-upgrading (inputs).  Schools themselves should lose “tenure”: if the test scores or graduation rates of their students don’t improve, they should be downsized or go out of business completely.  In any case, tax money should shift away from the protected realm of traditional public schools to the competitive, entrepreneurial world of charter schools.  Chicago teachers don’t like these things, so they’ve gone on strike.  What Paul Ryan and Rahm Emanuel can both agree on is that teacher unions should not be allowed to stand in the way of reform.

As an economist, I feel a certain resonance in this word “reform”.  There is a program of economic reform too, and the word is used by a broad spectrum of economists to refer to a set of institutional and policy changes that all countries should adopt—and would adopt if it were not for the obstructionism of special interests.  Here are some of the key items:

Entitlement reform: Reduce public pensions by cutting benefits and raising the retirement age.  Public health insurance should require substantial co-payments for all but the most essential services.

Monetary reform: Insulate the central bank from political pressure, above all the pressure to loosen monetary policy when politicians want to increase the fiscal deficit.

Labor market reform: Reduce impediments to firing or laying off workers; cut unemployment insurance benefits; eliminate rules that restrict entry into certain occupations by requiring apprenticeship or training; reduce the ability of unions to standardize wages across employers or industries.

Legal reform: Strengthen property rights by reducing the ability of courts or other institutions to impose restrictions, obligations or encumbrances on property owners and their transactions.

Public sector reform: Privatize public enterprises to the maximum possible extent; reduce regulation; eliminate subsidies.  Get rid of anything that looks like industrial policy.

There was a time, back in the 1980s and ‘90s, when these items would be put forward explicitly and arguments made on their behalf.  For the most part, those days have vanished.  Today, it is enough to just say “reform”.  Deficit countries in the Eurozone will be supported, but they have to agree to reforms.  Will the slowdown in China convince its leaders that they finally have to undertake reforms?  Populism in Latin America is putting at risk the reforms accomplished over the past 25 years.  Does sub-Saharan Africa need more foreign aid, or is the main problem the lack of reform?

Reform is a word that is difficult to resist.  It carries not only a connotation of progress (reforming something makes it better), but also a certain virtue for the reformer.  Reforms are resisted by entrenched interests, who can be dislodged only through idealism, perseverance and moral courage.  It is good to be a reformer and bad to stand in the way of reforms.

What underlies all these conceptions of reform, from central bank independence to education’s “Race to the Top”?  I would say it comes down to a single, all-encompassing notion of how the world works and a corresponding approach to policy.  The notion is that people are motivated primarily by material self-interest, so that effective institutions depend on engineering appropriate material incentives.  The policy implication is sink or swim: each individual must prosper or face hardship based on the outcome of their choices.  This will be hard for some, but in the long run it is the only way to ensure that the best choices are made and society progresses.

To put it negatively, reform is against insurance, group guarantees of security and other means to insulate from or patch up losses.  If you don’t earn enough money during your working life and save enough of it for retirement, tough luck when you’re old.  If an enterprise can’t earn a profit without government support, it should shut down.  If governments can’t or won’t balance their books, they should be disciplined by financial markets.  If teachers can’t figure out a way to improve their students’ test scores, cut their pay or fire them.

Intellectual historians will recognize this philosophy as a return to the “system of natural rewards and punishments” that was promulgated in England during the eighteenth and nineteenth centuries.  In practical terms, it signifies that institutional developments, especially in the harnessing of political parties, have reversed the effect of extending the franchise, which was responsible for moderating competitive individualism in England and elsewhere.  (Note: it is a commonplace of international political economy that the gold standard, which depended on deflation to achieve adjustment, was rendered obsolete by the emergence of modern democracy.  The imposition of deflation as an adjustment mechanism for the euro suggests that this democratic obstreperousness has abated.)  In fact, it is not clear that majority opinion has shifted on these topics in any country, only that majority opinion is less consequential.

And as for elite opinion, there is much to be said.  A thorough analysis would have to examine the arguments in favor of putting material incentives at the center of policy, and this is a topic for another day.  Here I would just like to take note of the psychological attractiveness of sink-or-swim to those who are already successful: it explains why they are where they are.  Just as those facing poverty and bankruptcy are the victims of their own failures, those who have high incomes and wide social influence are reaping the fruits of their own skill and ambition.  It’s difficult to think of a less threatening narrative than “If you’ve got a problem, try being more like me.”