futurehead

Blowing the Stimulus? Obama as Clinton or Reagan

So Obama is beginning to detail his recovery plan.  According to news summaries of a new  White House 4-page summary of Obama's stimulus proposal (which I can't find online yet), it looks like it contains a lot of good things -- HOWEVER, it is majorly disappointing that it does not appear to contain a significant investment in rail and public transportation, and generally includes "proposals designed to appeal to Republicans who have resisted the scale of federal spending."  This is enough to give any liberal who lived through the Clinton years a shudder. 

Under "infrastructure," the Washington Post reports that the plan would "repair and modernize thousands of miles of roadways," yet apparently Obama and the Democrats are shafting mass transit in favor of GOP-favored tax cuts.  

This is insane.  It's crazy on two levels: policy and politics. 

On policy, Obama has rightly been making a big fuss about combatting global climate change, which is perhaps not causing people to freak out with fear and alarm only because the problem is so big and frightening that people can't deal.  He's proposing weatherizing homes and increasing renewable energy -- but he's not going to use this one-in-a-generation opportunity to begin resetting the transportation landscape of America, which has gone so disastrously off course and which is responsible for so much of the global warming problem?  (In addition to our disastrous auto-centered transportation policy for moving people, see this fascinating article on the disastrous path that US policy on the moving of freight has taken. Our highways (which cost $32 million per mile to build and more to maintain) are choked with high-emission (and often dangerous) trucks, while trains are capable of delivering the same friend far more efficiently.  With a few hundred billion of stimulus dollars, author Phillip Longman argues, we could not only get 83% of long-haul trucks off our roads, but also create capacity for high-speed passenger rail.

On politics, Obama's strategy is downright alarming. It is heightening my worst fears that we have yet another weak Democratic president who does not know how to play offense and has no interest in aggressive attempts to move our nation forward into a more rational and humane future.  He is trying to please the Republicans?  Doesn't he realize that no matter what he does, the Republicans will attack him?  (sure enough, despite his GOP-friendly proposal, GOP leaders are attacking it).  He is putting forward crimped, inadequate proposals, tilted toward tax cuts instead of vigorous public investments that will pay dividents for years to come?  Doesn't he realize he can propose anything he wants right now?  If the Republicans attack him, he has an easy answer:  "We've tried the Republican economic philosophy for the last 8 years -- some would say the last 28 years -- and look where that's gotten us.  The great middle class economic boom that America experienced from the 1940s through the 1960s was the result of Democratic economic policy, and we could use some more of that right now.  Your economic philosophy has proven that it's a failure -- it's time to go back to what works."  etc., etc. 

For good measure, he could easily add, "The Republican economic ideology has already ruined our economy -- let's not let it now ruin our economic recovery plan, lest we end up in a deep prolonged recession."  In short, he should both threaten the Republicans with being blamed for the economy if it does not turn around, and set himself up to do so if it does not.  

Obama defenders say to me, "c'mon, give the guy a chance, it's only his first week on the job."  Yes, but this stimulus proposal is a once-every-50-year chance to begin reorienting the country, and he's got to move quickly, and it would be such a shame and a waste not to make the most of it.  It could be the biggest thing that Obama does in his entire presidency.  His first week on the job?  Tough. Things move fast when you're president.  He will be judged on this by history, first week or not.  More road projects?  Cutting taxes instead of shifting them upward?  Ug.

Might he have to compromise with conservatives (GOP or Democratic) eventually?  Sure.  But don't pre-compromise!  Don't do what Clinton habitually did, and bake the compromises into the proposal, because then you only end up compromising further.  Any child with a brother or sister knows that if you want 5 cookies, you ask for 7.  If you ask for 5, you'll end up with 3. And Obama has so much popularity and credibility right now, and the Republicans so little on the economy, that he probably could get 6.

The only good direction I can imagine this going is if Obama does a Reagan.  Apparently, in the early 1980s, Reagan proposed tax cuts that were rejected by the Democratic Congress.  So he went back to them with another proposal -- for even bigger tax cuts!  Reagan was a bad influence on the world -- but that's leadership!  Best case scenario is that Obama will let the GOP make a lot of noise, declare that he's tried to compromise and reason with them but finds he can't and is determined not to let them ruin our future, and then propose a new stimulus proposal that is even bolder than the current one.

Quantitative naivite

The New York Times Magazine recently ran a fascinating article by Joe Nocera on the quantitative "risk management" that prevailed on Wall Street in recent years leading up to the crash.  But, the experts interviewed in the story seem to me to miss a very major point of failure of the Wall Street risk analysts in recent years.

First let me say that the story is an almost comical story of people who believe that our analog, chaotic world can be quantified.  Too many people believe this.  They reify IQ tests, body counts, heart rate monitor readings, and medical tests of all kinds, dollar flows, and economic measures of all kinds. 

One problem is that the world of human social relations is simply far too complicated to ever be quantified.  This is the core problem with the discipline of economics, which in this case appeared to have helped lead some people into the mistaken belief that history can be regularized.  Books have been written on this subject, but the nub of the problem is that regularities never last very long in history (not to mention the fact that even where a local regularity is discovered, the market quickly incorporates that regularity into its understanding of the world and therefore destroys it by "jumping out of the system").

In the Times article the historicist view (which anyone with a sense of history and discontinuity and a healthy skepticism toward economics should feel in their bones) is represented by Black Swan author Nicholas Taleb.  As I have mentioned, I sometimes think of the possibility of discontinuity in terms of the movie "Empire of the Sun," in which a boy's stable, steady world collapses around him.  But there is a more specific way to explain where Wall Street went wrong in its overreliance on the "Value at Risk" (VaR) quantitative model for measuring risk. 

The basic problem appears to be that the VaR model used on Wall St. is essentially linear. The key thing that the risk analysts needed to track, but did not, was where in the range of possible market behavior the boundaries lay where the effects of market fluctuations upon their assets would go nonlinear -- where the feedback effects would kick in.  Many disasters occur when organizations allow things to be set up in ways that permit some negative fluctuations set off chain reactions that quickly become far bigger in their effects than the factors that set them off.

The implosion of AIG and its 116,000 employees, for example, resulted from the activities of one small 377-person unit in London, according to another fascinating piece of reporting by the New York Times (which will surely win a Pulitzer for its superb explorations of the crisis).  That unit began messing with credit derivatives, through which AIG insured the holders of packages of debt known as "collateralized debt obligations" (CDOs) -- basically, as the Times explains, the equivalent of mortgage insurance, only instead of for homeowners, it was for the owners of toxic mortgage debt.  The CDOs served as amplifiers, taking the misfortune of AIG's clients and funneling it with greatly intensified force at AIG itself. 

A similar story seems to have taken place with Merrill Lynch, which invested heavily in subprime mortgages.  As the subprime market weakened, it makes sense that Merrill's investments would go down -- but it seems surprising at first glance that such a large company could not withstand the blows.  In a linear world, that is what would have happened.  But again, the problem is that it did not just invest in the subprime market, it also tried to amplify its profits through the use of CDOs, and when the market went sour those derivatives had set Merrill up for a negative feedback spiral that killed the whole giant company.  Similar feedback mechanisms killed Enron (which hid the problem for a time through fraudulent activities, but the fraud is a separate issue from the stupidity).

The lesson for everyone: keep a sharp eye on situations where feedback mechanisms are created. 

The Boy in the Bubble Paradox

I tend to be critical of inconvenient security and safety measures. Although some make sense, most appear to be stupid and cowardly and unnecessary.  I find I am bothered by our nation's and our culture's increasing risk-aversion and what is often basically cowardice.  But there is a difficult conundrum at the heart of the issue.

On the one hand, we threaten to turn ourselves into creatures living in risk-free bubbles (though such bubbles can bring distinct risks of their own).  Every last small risk is ferreted out and eliminated until we are safe as we can possibly manage. But the result is that in our daily lives, we are closed in by more and more rules and directions and safety devices and petty authorities snapping orders at us for our own safety and it all adds up to a severe loss of freedom and autonomy.  Just to take one example, I see this at our local swimming pool, where the list of activities that the kids and often adults are banned from engaging in is long.

At the same time, when any one rule is considered, is it not a small price to pay to save the lives of even a handful of children or others? 

Should hundreds of millions of people accept incursions on their freedom that are relatively miniscule for the individual, in order that a few people do not suffer catastrophic, life-ruining tragedies?  That is not an easy question to answer.

This conundrum is closely connected to the paradoxes of generalization.  Accidents happen in a variety of specific circumstances, which are then used to generate general rules for conduct that are inevitably overbroad. Every stupid thing that someone does somewhere, or freakish accident, leads to new rules designed to ensure it can never happen again.

There is an probably an "aging" process that takes place over time within a society, in which rules are put in place that apply to everyone to stop problems as they arise.  Over time, the layers of rules become thicker and thicker.  The thickness of those rules would be a function of

(time) x (size of population covered)

Of course, such a dynamic is based on the notion that every bad thing that happens must be responded to with systemic changes to ensure that such a thing does not recur. This is partly cultural -- especially characteristic of American can-do attitudes.  In the Third World people often tolerate terrible things without acting. Or perhaps they just tolerate different things -- we seem to have no problem with Vietnam War-level casualties on an annual basis as a result of auto accidents.

So, a more accurate formula for the accumulation of rules is probably:

(time) x (size of population covered) x (sensitivity to incidents)

For Americans, each factor seems to be increasing:

• Time, which despite many people's best efforts marches on.
• Size of population, not primarily because of population growth, but because size of our media-tied world shrinks and the size of those who are tied together rises. In the past an accident in New Jersey may not have led to responsive law in Oregon, but now it's on CNN so it is. The Internet accelerates this factor even more.
• Sensitivity is rising as our tolerance for risk lowers.  This sensitivity to risk could be seen as a sign of a cowardly, soft people -- or as a sign of civilization, which values life more highly than ever.
  

It's tempting to speculate that there must be some kind of cycle, where there is accumulation and calcification, followed by revolution and renewal and freshness.  But it's possible, since we are living in arguably the longest-lived stable bureaucratic state in the history of the world, that we are confronting a situation that's genuinely unprecedented. In our lifetimes we will probably be forced to confront the contradictions of this dilemma in a way that no society ever has before.  Do we want to live bubbled safe lives, and give up a tremendous amount of freedom, or get out there and really live and embrace risk, and condemn a certain, often quite predictable number of our peers to tragic deaths or other terrible fates?

Thoughts on the economy

I'm not surprised by the economic disasters we've been witnessing the last several months.  As I wrote in February, I have long felt this kind of thing was coming. In fact, in early March I put all my 401(k) into the safest category, cash or something close to it, with the result that my account sunk around 5% in 2008 instead of 40% or more like most people.  (You have to wonder if I could see the writing on the wall, why couldn't all these financial geniuses on Wall St. and at so many other large institutions around the world? )

In a rational world, any holdout deadenders who still think markets work well when left alone, would abandon that article of faith and embrace the real world we live in. Undoubtedly libertarian academics and think tankers are busy trying to construct a narrative in which regulation is to blame for this fiasco, but it seems pretty clear that what we're seeing, on the broadest level, is that, beginning in 1929:

1. The unregulated markets imploded
2. The government set up regulatory mechanisms to protect people from the unacceptable costs of such implosions by insuring against them
3. Since the government had to regulate the banks that it insured (to make sure that the banks wouldn't take wild risks with the taxpayers' money), when boom times came, and institutions were competing for capital, the money flowed around the regulated institutions and sought out deregulated ones where it could earn much higher returns (by taking much higher risks).  Thus the rise of the "shadow banking system."
4. Go to step 1 and repeat

As this formulation suggests, it may not be sufficient to simply plug the new holes by extending government regulation from the old banking system, to the new (shadow) banking system.  The next time boom times hit, money will again seek out high-risk, high-return, unregulated investments.  It will probably once again end up being more money than can be allowed to fail. 

So, in an ideal world, our policymakers would not just extend New Deal-style regulation to the shadow banking system, but fashion some kind of meta-solution to this problem.  In a less ideal world, our policymakers would simply extend regulation.

But, incredibly, in the real world, policymakers voted through a huge $700 billion bailout, with no attempt whatsoever to actually fix the problems that led to the fiasco.  We'll see what happens now that Obama is president. 

Other thoughts:

Stir the pot.  Aside from the financial shenanigans, there may well be a systematic problem with our economy.  I suspect that when things are left to themselves, money tends to rise to the top and concentrate there, until there isn't enough circulating down below to keep the economy healthy.  This is the old liberal interpretation of the Great Depression: the productive capacity of the economy exceeded the ability of people to buy what was being produced.  After WW II, the New Dealers who were still in power went about constructing an artificial, unnatural, man-made economy in which individuals got government subsidies for going to college, and buying a home, in which the government created vast industries such as defense and aerospace, and money was aggressively redistributed (as I mentioned last week, the top marginal tax rate was 95% between 1951 and 1963 and 70% until 1980). The result was the greatest middle class society and sustained period of prosperity in US history. 

International reverberation. I wonder if there isn't a serious danger that all the globalization that has been taking place in recent decades won't greatly worsen the economic downturn.  That would be based on the intuition that economic interconnectivity will intensify the feedback cycles at work.  When you see a gas tanker driving down the highway, the liquid is not stored in one big tank.  That would be far too unstable -- if the tanker began to tilt to one side, all the liquid would slosh in that direction, further driving the tanker that direction, until it tipped over.  Instead, the liquid is stored in numerous separate cells.  Globalization may have had the effect of breaking apart those cells so that we are positioned for some serious negative feedback effects.  Put another way, the economic downturn may resonate like like the famous bridge that shook itself to pieces, apparently because the frequency of its vibration matched the length of its span, with the result that instead of dampening each other, the vibrations that the wind created in the bridge were in phase and reinforced each other, building the intensity of the bridge's shaking until it shook apart.

Management vs. Ownership.  There's been a lot of analysis of the problems with Wall Street leading up to the economic crisis.  The problem was not just stupidity, it was the gap between ownership and management.  That is a structural problem: managers of many, many companies in corporate America are looking out for themselves, not for the owners of their companies as is supposed to be their job.  All the gnashing of teeth about the "short term thinking" of so many companies, about their greed, and about their supposed "stupidity," is a waste of energy.  It all makes much more sense when you realize that the corporate managers were acting in their own narrow self-interest.  If you view companies and the economy through the lens of economics, this problem will be somewhat obscured for you.  If you look at it in sociological terms, it is clear that CEOs and Boards of Directors have not been acting for the good of the owners they are supposedly working for, and there is nothing to make sure they do so. This is why corporate salaries have skyrocketed, and why CEOs do well even when they don't.  This seems to be the real scandal behind the scandal -- the entire structure of our capitalism has a bug or a contradiction, and it just got ripped open.

Security taxes.  Economists always spend a great deal of time thinking and talking about taxes, which the field regards as a drain on the economy.  What about the raft of security measures that have been imposed in the last 8 years?  Most security measures I would think must behave economically the way that taxes are supposed to behave:  they act as a drag on other activities, they reduce the efficiency of transactions and other key ingredients of an economy, and they suck up funds without providing any tangible benefit in return the way an infrastructure investment does.  Perhaps security expenditures (especially the inefficiencies they impose) are far more difficult to measure than taxes, but that does not mean they are necessarily less important dollar for dollar).  Could it be that the explosion in security measures that we have seen in the past 8 years bears some relationship to the weakness of the decades's economic recovery and the strength of its downturn?

Obama Inauguration

I can't help feeling a little crabby about Obama.  The Obama Inauguration yesterday was certainly stirring, and deeply gratifying on several levels:

1. Bush is out of there.
2. The fact that we have a black president.  When Toni Morrison poetically described Bill Clinton as the nation's "first black president," who would have ever thought that the second president after Clinton really would be? 
3. Obama beat the Republicans and won the presidency, you've certainly got to be thankful to him for that.
4. Obama is clearly a very intelligent and thoughful individual.  Halfway through his inaugural address, I found myself thinking, "I can't believe this guy really is our president!"  I never watched Bush's speeches because a) you know he didn't write any of them himself, so they did not shed any light on his state of mind, b) they bore no relationship to his policies, so they were no guide to the future behavior of the administration, and c) they were always terribly delivered and generally unenjoyable. Clearly (a) and (c) no longer apply; we'll have to see about (b).

That said, amid all the Obama mania that has surrounded me this week here in Washington, I just can't let go of the fact of some of my skepticism about him -- the fact that a lot of this "hope" remains very short on substance, that Obama has never clearly demonstrated that he's a political progressive, that a number of initial signs have not been good. 

Don't get me wrong, I'm very very happy to have Obama in the White House; a pall has been lifted from this city.  And I'm cautiously hopeful that he will accomplish some really great things.  I just find myself reacting to all the hype, which seems a bit naiive and over the top.

It is also possibly a sign of an unhealthy maybe even slightly authoritarian political culture. When push comes to shove, presidents rarely stray far from the center of where the American people are.  To bring about real change you have to change where that center lies.  True, Bush did depart from that center (albeit in the wrong direction), but he and his party also paid a steep price politically. You just can't expect that.  By focusing their hopes so intensely, liberals and progressives may be making the mistake of excessively personalizing our politics and looking too much for a "great man" to step in and save the day. I may be guilty of this as much as anyone.

Well, regardless, good luck President Obama, go get 'em!

Hope's Meat: Five Things Obama Must Do

Every day I ride past the White House on the way to my office and have been watching the construction of the Inaugural reviewing stand on the pedestrian plaza formerly known as Pennsylvania Avenue before it was shut to traffic (who says security mania is all bad?).  Soon Obama will be president.  What then?

We've been hearing a lot about hope in the past year.  Okay.  So here's what I find myself hoping for as we all await the end of the grim Bush era at long last.  These are items that are both exciting and yet which it is just possible at this moment to imagine maybe being enacted or at least pushed by the new president.  In no particular order:

• National health insurance. Employer-based health insurance makes no sense. The insurance companies are little more than parasitical leeches, sucking money out of the health care pipeline while providing no actual social benefit, and in fact doing active harm by spending many of the dollars they suck our of the health care system on figuring out how to avoid paying for people's health care (when they're not using it to lobby against reform).  They are enemies of the public good.  Obama should use the crisis of the car companies which are hurt by our stupid system (though they and other US companies seem too dumb or ideologically blinded to see it)to help explain why the United States needs to do this. It's time to restore some humanity and morality to our healthcare system -- this may be the top thing that can be done in America today to eliminate unnecessary human suffering.
  

• Build a rail infrastructure. As Congress contemplates a stimulus package of up to a trillion dollars, a top priority must be the construction of a world-class public train network. I say public because there's scarcely a passenger rail system in the world that runs a profit - it should be regarded as a public utility like the interstate highway system, not like a company. When is the last time interstate 95 made a profit, or that any conservatives demanded that it do so?  With global climate change, peak oil, continued concentration of population - not to mention horrible traffic congestion just about everywhere - it should be a no-brainer.  Trains are so much more energy efficient than cars; this is a vital investment in our future. Also more efficient than jets; there is no reason anyone should be taking flights of less than 300 miles.  If Congress wants to add provisions to encourage the creation of a domestic rail industry, that would be all the better (perhaps GM could do that and actually contribute something beneficial to the world for a change).  With all the billions that are going to be thrown around as part of the stimulus plan, now is the time to make a major investment that will pay dividends for many years.

• Undo the Bush attack on civil liberties. In 1998, President Clinton was impeached for lying under oath about sex was not a "high crime or misdemeanor," undermining the rule of law.  It is true, despite our written Constitution, that when push comes to shove the law is nothing more than practice and social agreement.  Perhaps conservatives recognized that reality and just took it *really* seriously, despite fact that Clinton's lie didn't seem to be an especially pertinent violation. (The primary flaw in this logic, which I never saw spelled out in all the commentary at the time, is that *any* violation of the law violates the "rule of law," yet the Constitution specifies impeachment only for "high crimes and misdemeanors").  Anyway, all that talk about rule of law by conservatives now stands revealed as just so much cynical political posturing, because these same conservatives (with a few exceptions such as Bob Barr) have spent the past couple of years defending far, far more serious violations of the law -- violations with the potential to undermine our constitutional structure itself.  Obama needs to rapidly and decisively overturn and repudiate these policies. If he does, Bush's crimes become an aberration. If he does not, they become the new status quo.  More broadly, Obama needs to curb the burgeoning power of the national security state, which is growing at a genuinely frightening pace.

• Repair our relationship with the Arab & Muslim world. Our nation's foreign policy has been a disaster with respect to the Arab and Muslim world, harming the (true, non-short term) national interest, earning the hatred of a big slice of the world's population, bringing down upon our heads acts of terrorism (and the deep security costs and attendant drains and inefficiencies that have followed), and threatening to embroil us in a quasi-religious hot/cold war.  What's needed is to stop U.S. support for undemocratic regimes, end the stupid Iraq war, end the seemingly failing and possibly hopeless Afghan war, and rebalance our Israel policy to work for an end to the oppression of the Palestinians.

• Decisive moves to curb global warming. Any other kind of moves will be a disappointment.  Just two facts: Seven of the nine warmest years on record have been since 2000.  And half the polar ice cap has melted since 2000.  Be very afraid, we're not in Kansas anymore, we're entering new territory for the human race. (Unless you're conservative, then no need to worry -- only olive-skinned shoe bombers are a threat to our "national security," right?)

If these things are done, Obama will go down as a great president, who really rose to the challenge presented by the crises of our time, and moved our country forward and positioned it well for the future.  Even if he tries to accomplish these goals but cannot force all of them through, I will consider him great.  Of course, I'm alarmed by recent disturbing signs such as his suggestion that we might need to cut Social Security and Medicare.  NO no no!  We're not going to cut our nation's pathetic excuse for a social safety net, at a time when ordinary people are hurting and billions are being tossed to numerous, to put it mildly, less deserving parties?  Hopefully there's some explanation for these statements other than that this guy is going to be the biggest disappointment since Piltdown Man. 

There are of course many other things that need to be done as part of a full liberal program for restoring our country and moving it forward, but I don't expect Obama to attempt these (let alone for Congress to pass them) unless he proves to be an exceptionally formidable, forceful and strong progressive leader.  For example:

• Create a decent national retirement system to go along with our national health care system.  It is barbaric for 70-year-olds to be working at McDonald's in a country as rich as ours.
• Restore the progressivity of our tax structure to the reasonable levels it had before the conservative/Reagan revolution. From 1951-1963 -- hardly an economically stagnant time in U.S. history -- the top marginal tax rate was 91%.  Until 1980 it was 70%.  Since 1987 it's been in the 30s (since 2003, 35%).  Good for the rich, but nobody else.
• Curb the political power of corporations, which is at historically high levels and is distorting our political system and everything controlled by that political system.
• Shrink the military and security sector, which has been growing and gaining power rapidly.  That is dangerous in a democracy -- and a huge waste of money since unlike, say, a bridge, money spent on the military does not circle back and contribute to our economy and our quality of life for years to come.  The military should be cut, at a minimum, in half, and the money redirected to domestic projects that will actually help build a better nation.

We'll see how he does.  Meanwhile, I'll be watching the inauguration with no more than cautious optimism.