futurehead

Further thoughts on Detox

The other day I proposed a seemingly simple plan for addressing the mortgage and financial crises: have the government pay the mortgages of those who go into default -- and assume commensurate ownership in the real estate.

I had a chance to poke around and look at some quick numbers. For the 12 months through January 2009, there were an average of 247,913 foreclosures in the United States, or about 3 million for the year.  If you figure that each monthly mortgage payment is $1,700 (the national median), the government would have to shell out $5 billion per month -- $60 billion per year, or roughly 10% of our annual defense budget -- to pay all those mortgages. That's a lot of money -- except in today's context. AIG alone, for example, has received government commitments of $160 billion to keep it afloat.  And (though there would inevitably be losses due to bubble-priced real estate that will not regain its value for decades) the government will be gaining equity in all these properties and in some cases will make profits, so it will recoup a large percentage of these billions. 

A letter writer in the March 5 Washington Post, one Edward Y. Carp, points out another benefit that this plan would have: it would help bolster real estate values by keeping foreclosed properties from flooding the market and driving down prices.  

The day after I made this post, the Obama Administration announced a foreclosure plan. I haven't looked at it closely yet, but instead of my plan or something similarly clean, simple and effective, it appears that the administration has pursued the path described so well by Michael Lind here: opting for complex, inefficient private-sector rube goldberg mechanisms instead of simple, direct government provision of public services. I call this Democratic "deep wimpiness" -- wimpiness that runs deep into the intellectual orientation of the party, as opposed to shallower tactical wimpiness of, say, (pre-compromising on legislation when one holds all the cards).

Okay I realize the chance is good there is some huge looming practical problem with this plan that some expert could point out to me in 2 seconds, but right now this or perhaps some suitably modified plan along these lines, seems a helluva lot better than what they're doing now.

Bottom-up Financial Detox

I don't understand why the government does not address the financial crisis at the root of the problem. A big part of the problem is "toxic assets" (which as far as I can tell are assets that under normal circumstances would not be called "toxic" but "worthless" -- it's just that no one can admit they're worthless yet because to do so would collapse these giant firms and a lot else besides).  These assets are worthless because they were based on unsustainable mortgages.  A lot of the problem is also lack of transparency -- nobody knows what various assets are worth, so everybody suspects everybody of being in danger of insolvency, so nobody is willing to lend to anybody, even people who may be perfectly solvent, because they aren't sure whether to believe that.

One way of addressing the root of the problem might be as follows:

Stop all foreclosures.  When someone can no longer pay their mortgage, the government begins paying it.  The homeowners (maybe that should be home "owners") get to stay in the house that they "bought."  The mortgage holder gets to continue receiving payments.  However, the government receives equity in the house proportional to the number and proportion of payments that it makes, relative to the life of the mortgage.  So if the government has to pay your mortgage for you for one year of a 30-year mortgage, it assumes 1/30th of the equity in the house.  Or perhaps that should be equity equal to 1/30th of the value of the mortgage.  Perhaps the government's contribution would be deemed to go straight toward the principal, so the mortgage holder would take a hit as well as the homeowner. 

Someone who knows a lot more than me about the realities of these things would need to work out the details, but the basic concept is:

1. Residents can stay in their homes
2. Mortgages continue to provide returns so the value of toxic assets stabilizes and becomes transparent, even if at a reduced value, and
3. The government & taxpayers gain a whole lot of equity in a whole lot of real estate, which eventually will be recouped as residents get back on their feet, real estate is sold, values recover, etc.

Whether this is feasible would depend upon the numbers.  It could be that the numbers of mortgages involved are just too towering -- but let's just pause to remember that the numbers that are being tossed around already are very large, trillions of dollars.  And under a scheme like this, the government would in theory eventually get much of its money back. It would also recoup a lot through greater tax revenues from communities and individuals who are not ruined that would otherwise be.  I haven't checked but no doubt there are other such schemes floating around the internet, but it just seems like the way to go to me.  There hasn't been enough focus on the role that lack of *transparency* is playing in the credit crisis. 

Of course by now the financial crisis has gotten much bigger than the mortgage crisis. But this kind of scheme if possible would help an awful lot of people and at the same time at least make a big start at addressing the Wall Street crisis.

Arbortrary judgments

On my daily ride through Arlington National Cemetery the other day there was a big truck parked in the middle of a row of gravestones, with a crane on which were workers taking down a tree.  I looked around at all the trees in the cemetery -- big, beautiful trees, many of them, and as I coasted by Robert E. Lee's old house, I wondered how many of them were standing when he lived there.

The tree the workers were taking down had clearly been given a death sentence by some arborist.  I pictured the Arlington Cemetery staff arborist and how he must keep track of all those trees. That made me wonder how they know when a trees should be taken down.  And, how clear is it for an arborist when a tree needs to be taken down?  If you got 100 arborists and had them look at all the trees in Arlington Cemetery, how consistent would their recommendations be? 

Which raises the question, what about other professional fields?  Of 100 economists, how many would prescribe the same course of action when faced with a situation?  How many podiatrists would diagnose the same problem and prescribe the same solution.

It would be nice if there was a way to create a standardized measurement for this across fields -- an "intra-professional consistency" metric, if you will.  Of 100 specialists, how many reach the same conclusion?  And what is the standard deviation of their responses?  Which fields are the most unified, which the most fragmented?

Clearly, there would be a scale.  How many poets would describe love the same way?  Probably none.  On the other hand, how many physicists would calculate the mass of an object the same way?  Probably all of them.

In addition, intra-professional consistency varies not by profession, but by question. 100 physicists will agree on the mass of an object -- but not on the nature of a quark.  Here we spin off into the land of Thomas Kuhn and the complex questions of the philosophy of science.

That means that it will never really be possible to do this in any kind of genuinely standardized way across professions -- a standardized way of testing could be created *within each field* but not one that permits genuine rigorous comparison between, for example, astronomers and radiologists. 

Really, there are two core questions.  First, what are the questions on which a profession agrees. In physics, the basic questions of mass and motion and newtonian gravity are basically figured out in that the entire field agrees upon certain answers.  But there is much disagreement over the nature of energy.  Each field has its areas of agreement and its unknowns where the experts disagree.

The second question is whether the answers on which a profession does agree are actually correct.  It may be that 100 out of 100 podiatrists would all diagnose a runner with the same problem and prescribe the same arch supports -- and yet all of them could be under the sway of a false historical-cultural understanding of feet and be misguided in their prescription.  Similar errors can be made by any profession including physics.  At the same time, 100 poets describing love are certain to overlap very little in their "solutions" to the problem -- and yet a high number of them are likely to express truth of various kinds.  So, professional consistency does not necessarily correlate with the truth or usefulness of a profession's beliefs.  As I written about, there have always been groups of experts who are completely wrong.

That said, it is a useful analytic concept -- a concept that may not be found in nature but which is nonetheless useful for thinking about things.  I *would* be curious about the degree of consistency of recommendation of various experts on various matters.  It's no guarantee of correctness, but a lack of consistency sure tells you something (what philosophers might call a lack of intersubjectivity).

Economics of course is very low on the consistency meter -- nothing wrong with that, that's to be expected in the humanities; history is the same way. The only problem is that unlike with history and poetry and the like, too many people fail to perceive that economics is, in fact, one of the humanities (a particular, warped form of history, I would argue; others argue it's more like literature).  Instead our culture treats economics as if it were a science.  And that illusion of objectivity has very real damaging political and social effects.

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. 

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?

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. 

What do you do with a problem like Detroit?

I've been thinking and talking a lot about the issue of the Detroit bailout.  The reason is that it is a hard case for me.  What's to like about Detroit?  For all the reasons everybody talks about, they deserve no sympathy.  Prominent among these for me are their bad citizenship and anti-social activities in the environmental and transportation-policy areas, from their documented role in the destruction of perfectly good mass transit systems after WW II to their ceaseless lobbying against federal clean-air standards to their lawsuits against California for that state's progressive environmental efforts and so on.

They have been holding back the future and, it is no exaggeration, threatening the future of mankind.  Oh yeah, and they've been terrible businessmen.

Clearly, the idiots who run these companies do not deserve bailing out.  But there are two problems with letting them collapse:

1. Their workers, and the workers at all the companies that supply them, and all the workers at the restaurants that feed those workers, and so on and so on do not deserve to be hit.  But those are the people, not the executives, who will suffer drastic financial harm if we let car companies go out of business (or even one of them).
2. The national interest.  Do we really want to allow our national capacity for automobile building to slip away?

Death and renewal
Perhaps the solution is to a) let these companies go out of business and b) slap a steep tariff on car imports, and some kind of sanction on cars produced domestically by foreign companies as well.  The idea would be to create the space for a blooming of small, fresh, innovative new domestic manufacturers to spring up.  This "death and renewal" strategy would seek through public policy to prompt a renewal of the creativity and ferment that we saw early in the history of the auto industry. 

The outstanding question I have about such a strategy is whether it is possible for a thousand flowers to bloom in the transportation industry, or whether it is simply too capital intensive to be realistic.  Can a startup enter the car business?  The Big Three and their suppliers are gigantic organizations incorporating, if not a lot of foresight, wisdom, or good corporate citizenship, at least a lot of experience and expertise in building cars.  Would the nation be fine without big companies like the Detroit automakers, or are big industrial transportation companies a vital national resource?  Some things, like partical colliders, simply cannot be done by individual geniuses in their garages.

On the other hand, the shattering of the big companies would scatter that expertise but not necessarily destroy it.  After all, no one would die; all the Detroit engineers and experts could in theory be assimilated into a new ecosystem of automotive start-ups (a phrase that has been synonymous with "quixotic" for many decades) that might actually make much better use of them. 

Plus, it is not even clear whether the car industry itself isn't facing a long-term decline.  As the world oil supply starts shrinking -- even the optimists see peak oil as hitting in the teens of this century -- how big a part of our future will individual motorized transportation be?  Are we destined to evolve toward a nation of mass transportation, bicycles, and ecologically concentrated urban planning? 

Pure capitalism involves a radical degree of constant turmoil and change.  Yet our society requires a certain amount of stability -- families, neighborhoods, communities, etc.  Capitalism can just bring too much disruption on a human level; in its pure form it would require throwing our borders wide open (you can't have pure capitalism unless labor is free to move about as freely as capital) and having people pick up and move cities or countries at a furious pace as economic conditions dictate.  Too much stability, on the other hand, leads to stagnation.  Often the best course is to ameliorate the pace of change without standing in its way, and this may be one of those times. 

What might that look like?  Perhaps, a government rescue of some or all of these companies in combination with taxpayer ownership (which is what infusions of cash bring for everyone else, why not the taxpayers?)  Then the taxpayers (ie the government) could shift the focus of these companies (partly through an Obama stimulus package) toward more socially beneficial directions such as the construction of a world class rail system on the scale of the (misguided and disastrous) 1950s interstate highway system project.  (Once the taxpayers are forced to prop up the airlines perhaps we can use our new ownership stake in that industry to force them to stop lobbying against that as well.)

The figure-ground problem with economics

One of the many problems with economics, I believe, is that it suffers from what we might call “figure-ground” confusion.

First of all, by figure-ground I’m referring to the difference between the foreground and the background, as in this famous optical illusion, where, depending on what your brain decides is the figure and what is the (back)ground, you see either a vase/chalice, or two faces looking at each other:

Most economists probably know that there are times and areas in our economy when competition thrives, but there are also times and areas when competition is decidedly flat or missing altogether.  Still, most economics is oriented around describing the workings of competition.

In fact, I would argue that competition is actually a rare and transient quality in most situations.  It is an inherently unstable, disequilibrious (if that is a word), and fleeting.

First of all, businesses talk a lot about competition and the wonder of the marketplace, but one of the dirty little secrets of capitalism is that businesses actually hate competition and usually cannot survive unless they find a refuge from it. 

All of this is implicitly recognized in our culture (but not explicitly which is my point here).  For example, athough the general discourse is all about free market competition, there is an entire realm of law, a legal tradition, that is based on a frank recogntition that much of the time competition is absent:  anti-trust law. When I had cause to delve into antitrust law for a research project a number of years ago, I was stunned to discover the extent to which the utter absence of market competition is taken for granted by practitioners in this area of law. Concepts such as “market power” (the ability of an individual company to set prices arbitrarily because they are not subject to competition), “oligopoly” (the lack of competition and inevitable collusion that results when there are only a handful of competitors in a market – as is the case in a huge number of markets in our economy), are used routinely despite their flagrant violation of the broad cultural understanding of markets that dominates our discourse today.

In addition, business analysts talk about a (for companies) dreaded condition called “commodification,” which basically refers to situations in which companies have run out of ways to overwhelm customers with complex choices or otherwise confuse them, and must actually compete on price.  As is generally recognized by these same analysts, this generally leads to ruinous price competition. 

So when competition is not taking place in a market, what is?  There are a large variety of ways in which competitors escape competition; examples of such "competition dodges" that spring to mind include:

• Monopoly.  One company has vanquished its competitors and faces no competition.  Some monopolies are regulated (eg utility companies) while others are not (cable television companies, for the most part).

• Oligopoly and price-fixing.  When there is no monopoly, there is often an oligopoly – a handful of firms, who then find it easy to shelter themselves from competition by setting prices, if not directly and illegally, which I suspect happens often enough, then through “price signaling” in which oligopolistic companies, without any explicit agreement or collusion, feel their way toward mutually beneficial noncompetitive arrangements.  (This kind of unspoken, tacitly negotiated cooperation is often observed in game theory; although individuals’ short-term interests may lie in cheating, even anonymous players in repeated rounds of a game often grope their way toward mutually beneficial arrangements.)  Oligopolies are handy because they kind of look like competition, thereby keeping customers from suspecting that they are being ripped off.

• Tradition.  Often competitors find refuge from competition through tradition, where customers are conditioned not to look for or expect competition or cheap prices in a certain area.  An example of this is drinks in restaurants, which continue to get away with charging $2.50 or more for 4.5 cents worth of sugar-water (ie soda) and similiarly inflated prices for other beverages, including often even water.

• Consumer confusion.  A common refuge from competition is to overwhelm customers with choices and confuse them.  Just set up price structures or other aspects of a product in ways that are so complicated that the company can steal some profits from that portion of the population that cannot analyze their options well enough to figure out their own self-interest.  The long-distance telephone companies, stuck selling what was basically a commodity, were notorious for doing this.

• Time swamping.  A variant of the “consumer confusion” strategy is to eke out profits, not from those who can’t sort out where their self-interest lies, but from those who simply do not have the time to do so.  By overtaxing the time customers have available for sorting through the complexities of competing offers, companies can extract profits from those who simply give up.

• Regulation.  Businesses routinely fight regulation, but in some circumstances they embrace it – for example when a prominent company with a positive brand is being undercut by competition from bottom-feeders willing to engage in practices that customers are likely to find offensive in some way, the leading company will often seek regulation to ban the strategies employed by its competition.  This happened in the meatpacking industry during the muckracking era, and many times since.

• Unions.  In the 1930s, for example, the U.S. automakers (eventually) accepted unionization partly because it standardized wages across the industry and therefore freed them from competing on the basis of wages (ie who would pay their workers the least) so they could compete based on quality fo product.  This is an example of a socially beneficial competition-dodge; if we had stronger unions we would no doubt see the concept extended to health insurance in short order.  Just like companies, workers also seek refuge from the relentless erosion of capitalist competition & efficiency and rationalization, through regulatory protections from competition.  Of course, thanks in part to popular buy-in of the myths of competition, too few workers today are demanding such protections.

All in all, competition is a much more rare and fleeting phenomenon than people usually recognize.

I am not a participant in the academic economic conversation, but I am sure it is collectively well aware of these “exceptions” to marketplace competition.  Only my point is, they are not in fact exceptions and should not be thought of that way.  It is the free market that is the exceptional circumstance, and instead of conceptualizing competition as the background condition and building the entire field of economics around it, we need to realize that *lack* of competition is actually the far more prevalent condition.  That is, these ideas are no doubt all circulating within the economic conversation already, but someone needs to step up and translate them into a macro-level reconception of that conversation itself – recasting economics from something primarily concerned with “competition and how it works,” into something that explains “how do companies avoid competition and under what circumstances does it break out?"

Of course this raises what may be part of the problem here and why this hasn’t happened:  such a reconceptualization could lead economics away from the realm where behavior can be explained with mathematics, and into the complex thickets of history and culture and politics.  But, it might also bring economics closer to the complex thickets of reality.

But someone needs to make the figure-ground gestault switch.  And if academic economists can tell us someone is already doing this, then I’d say the broader field and ultimately the broader culture needs to assimilate this point. Because this figure-ground confusion has huge, negative political implications.  Granted, there are many reasons for the fetishization of markets in the United States right now, including the moneyed interests that find competition convenient to talk about if not to actually engage in, but the thinkers among us need to stop aiding and abbetting in that enterprise.

Colossal errors

It's always fun when entire bodies of supposed expert knowledge, fundamentals that are accepted by nearly everyone, are revealed to be wrong and/or unfounded.  My attention has been drawn to three strong examples of this phenomenon:

• Low-fat diet
• Shoes
• Economics

Once you internalize the fact that even mighty establishments, possessing the finest acronymed professional societies and mahogany-and-brass lobbies, all of whose members get plenty of respect at their local country clubs, can be totally full of shit, it is both liberating and, in a way, paralyzing.   I posted yesterday about how the Internet is having both of these effects in the medical arena.  And there are plenty of comical examples to be found of how this has been true in the past, with even the most highly and widely respected "experts" (doctors, scientists, philosophers, economists, etc).  Yet it's a lot harder when you are ensconced in *today's* discourses and claims of expertise and received wisdom.  It's like being trapped in amber -- it's a lot harder to assess the quality of the piece than when you're on the outside.

The shattering of received wisdom is liberating because it teaches you to question what other "common sense" might be way off track, and to grasp the contingency of our world -- just how broad the scope of possibilities are.  It could be true that our current understanding of economics is pretty good -- it could also be true that it's totally bogus, and we'd be better off with all kinds of radical changes (I strongly suspect the latter).  It frees you up to be practical and pragmatic, since you are no longer wedded to various notions of Truth, you can just more directly seek practical solutions for what's good policy.

On the other hand, the busting open of possibilities can be paralyzing. The more things in life that are open to question, the harder it can be to know what to do. 

Let's look a little closer at my three examples.

Low-fat diet

For a few decades it has been accepted medical wisdom that a high-fat diet is bad for you.  But the whole low-carb movement started by Atkins has challenged that wisdom, and pointed out that in fact, there really isn't actually any solid evidence that that is true.  They point out that shortly after you eat a bowl full of pasta, your body turns it into what is more or less the equivalent of a Snickers bar.  Even whole grains go through the same process, just a little more slowly.  And if you're not getting your calories from carbs (sugar, more or less), you basically gotta get them from fat.  As I mentioned in a recent post, it may be that it is not true that a calorie is a calorie, because fat calories make you feel fuller, while sugar calories do wacky things to your insulin system and can actually make you feel more hungry.  I notice this myself -- it is after a big pasta meal that I crave dessert the most.

To get a better explanation of this, and a fuller sense for just how wrong the conventional wisdom seems to be, read this excellent summation that ran a few years ago in the New York Times Magazine.

I was intellectually persuaded of the merit of these arguments by this and other pieces.  But (as the author of the piece himself alludes to) it is still hard to eat a high-fat diet without feeling that you are hurting yourself, while you don't feel that way at all eating pasta still.  This shows the power that these kinds of social understandings have over us and our tastes.

Shoes

It's all a big lie, man.  Just like gloves, safety goggles, and helmets, shoes are a useful piece of protective gear in some circumstances -- snow drifts, steel mills, and the like.  But overall, they just aren't that necessary, as a few brave pioneers willing to flout social convention have discovered, and I have confirmed for myself.  If I can run 15 miles on asphalt roads with my soles intact, then just when is it exactly that I need shoes?  As I have gone into, they are more of an irrational cultural holdover from  medievalistic, tribal, hierarchical, aristocratic, status-obsessed European historical cultures than a necessity of life.

Yet our society is pretty twisted when it comes to bare feet.  As barefooters.org points out,

consider a business near a beach. This business has barefooted customers all day long. Not only has nobody ever contracted any sort of illness from somebody else's bare feet, but nobody thinks anything of bare feet because it's "OK" to be barefoot near a beach. Now, transport this same business a few miles inland. Suddenly, without any change to the inside of the business, bare feet are an alleged health risk. Does this make sense?

(By the way, no state has any law prohibiting bare feet in any restaurant or other establishment. Or while driving.)  As the site points out, people don't usually mind flip-flops and sandals where the top of the foot is entirely visible -- it's the fact that someone lacks material on the bottom of their foot that bothers people. Again, what sense does that make?

It would be one thing if this was just a social custom that flouted hard evidence -- hardly an unknown.  But even the experts, as represented by foot doctors quoted in most articles about barefooting, appears to recoil at the idea of going barefoot.  I never see them address the substantial body of evidence that barefooting is far better for your feet.  Granted, it would be a hard sell for most doctors to instruct their patients to go barefoot full time, and a lot of patients would demand other remedies, and go to another doctor if they could not get them from their first.  But the best doctors think like scientists, in the full, rich sense of that term -- rational and evidence-guided, but also imaginative, intuitive, and brave enough to follow that evidence where it may lead.  They're not supposed to be petty-bourgeois shopkeepers, concerned about their customers and their market and their competition.  And they're not supposed to swallow holdover Elizabethan cultural biases and just pass them down to each new generation of doctors.  Even if patients resist the evidence, doctors could advise them to at least go barefoot as much as possible, and some do, but the profession does not seem to do this in general; instead they are actively steering people away from barefooting and toward baroque (if profitable) foot inserts and the like.  I wonder how many doctors have even investigated all the literature that is out there, and weighed it scientifically.

A pretty good article just came out in New York Magazine that also does a decent job of summarizing what's wrong with our conventional wisdom regarding shoes:  "You Walk Wrong: It took 4 million years of evolution to perfect the human foot.  But we're wrecking it with every step we take"

Economics

Oh man, I really hate economics.  I could write a post a day for a year on this subject, if I only had the time.  I will leave most of this subject for future posts, but suffice it to say here that while the field produces many useful and interesting intellectual tools, they never add up to a coherent body of knowledge; the very notion of homo economicus on which the field is based is a total myth; the very idea that a social science can be based upon physics as a role model is a giant anti-historicist error; the history of the field shows little evidence that economics is getting closer to the truth; and the field has an inborn conservative political bias and cultural effect even when practiced by liberals.

As markets implode, venerable companies fall to their knees, vast neighborhoods are reduced to ghost towns, and the national (world?) economy teeters, this is increasingly not a difficult case to make.  Over and again throughout history, economists and the conventional wisdom they impart have been proven to be colossally in error.  Examples include:

• The mercantilists, who viewed the economic arena as a zero-sum battle for power among nation states, and wealth as more important than production
• The Physiocrats, who in the 18th century regarded agriculture as the only basis of wealth.  The industrial revolution kinda showed otherwise
• The Classical Economists, who advocated the hands-off approach that led to and was discredited by the Great Depression
• The Keynesians, who thought they'd figured everything out, until they were discredited by the (supposedly theoretically impossible) combination of high inflation, slow growth and high unemployment ("stagflation") in the early 1970s
• The post-Reagan free marketeers, the cock-sure ideologues of our own era, having explained away the Great Depression and much else, seek to move back towards pure Classical Economics (which never really existed).  While the intellectual descendants of the Keynesians have become more humble epistemologically, the Free Marketeers think they have the Answers, and their viewpoint dominates our culture.  We may be witnessing the wheels come off this latest economic blind alley at this very moment.

Who will be next? 

What these error-ridden subject areas have in common is that:

• They are irredeemably complex -- there are just too many variables to be susceptible to reductionist analysis
• They are heavily burdened by thick cultural baggage
• They result from stunning failures of epistemological humility. I remember asking proponents of Bush's Iraq War before he started it, "where are the nukes?" If Saddam has them, let's see them before we invade -- by which I meant, let's be sure they exist.   Why don't dietitians ask themselves, "where's the evidence a high-fat diet is bad?  Why don't foot doctors recognize just how little we know about sports medicine?  Why don't economists recognize the historical nature of their discipline?

Depression?

When it comes to the economy I’ve had the feeling for some time that a number of chickens may be simultaneously coming home to roost.  This piece by the excellent Steve Fraser articulates the scenario far better than I can.  When you add it all up, I get the following factors potentially coming together to mess us up:

• Housing crisis
• The dismantling of regulatory structures put in place to prevent abuses like Enron and the Savings and Loan scandal (for example, the Glass-Steagal Act mentioned by Fraser)
• A collapse in the consumption economy based on free credit to already overextended consumers
• Oil price increases (possibly extreme, if peak oil kicks in)
• The US budget deficit (remember that?  Nobody talks about it anymore; when Reagan and GHW Bush ran it up it is was a huge topic of conversation, but now we’ve seemingly become inured.  Perhaps that’s how decadence and decline take place happen -- the first time it's a transgression and the second time it's no big deal.  In any case, the effect of the big deficits is to eat up the budget with interest payments and greatly reduce policymakers' room to pursue a Keynesian recovery strategy.)
• Growing economic inequality. One interpretation of the Great Depression is that too much of the nation's money ended up too concentrated at the top, among people who did not need to spend it, reducing the velocity of its circulation throughout the economy.
• Eco-economic disruptions caused by accelerating global warming
• The weak dollar.  I have no idea if a weak dollar is bad or not -- and I suspect economists don't either despite all their theories -- but it does scream "instability"
• Remember there's always the possibility of another terrorist attack messing things up as well, or a disease pandemic or other apocalyptic scenarios

We haven't had anything called a "depression" since the 1930s, and that naturally leads people to think they are a thing of the past.  But like any good economic historian, Fraser has the perspective to be keenly aware just how often in history similar complacency has been shattered by a quick slap in the face.