Archive for the ‘Economics’ Category

Piketty, Inequality, Envy, and Fairness

August 16, 2015

Unknown-1The rich-hating left went orgasmic over Thomas Piketty’s book Capital in the Twenty-First Century. I previously discussed the controversy. Now I’ve read the book.

Not the thunderbolt of lefty wet dreams, it’s mainly dry economic history and analysis. Much I found interesting and informative. But it’s one of the most poorly organized books I’ve ever read, meandering repetitively to and fro.

Piketty’s big “revealed truth” is r>g – that is, return on capital (r) exceeds economic growth (g), which leads to capital accumulation, and thus rising inequality. His data does show r>g through most of history. Well, not data exactly, but mostly assumptions and estimates. UnknownBut never mind. A bigger problem is that for the last century, 1913-2012, g>r! Piketty says this was due to the 1914-45 “shocks” (wiping out many fortunes) but that past norms are returning. So the future will more resemble the 19th century than the 20th? However, taxes were negligible before the 20th century. Thus in order to project future after-tax r>g, Piketty makes the heroic assumption that taxes on capital and its return will fall to zero! Even while he advocates greater taxation.*

imagesThat r exceeded g through most of history is hardly news because g (economic growth) was practically zero, while capital would nevertheless earn some return, typically farm produce or by lending money at interest. Now we have significant growth that, for the past century at least, has exceeded return on capital. But why let facts spoil a pretty theory?

Inequality may also rise from pay gaps. Piketty focuses on corporate “supermanagers,” whose pay he doubts is justified by merit or productivity. Unknown-2I agree – it’s due to incestuous boards of directors. But even if “supermanager” pay were drastically cut, would that money then flow toward the bottom of the income distribution? Surely not. It would go to shareholders; the rich would still get richer.

Much inequality talk casts the rich as squeezing the share of productivity begrudged to employees. That’s not how the economy works. By and large jobs pay what the market dictates, in order for businesses to attract and keep the needed workforce. They can’t just arbitrarily pay less; but nor can they pay more; if they want to stay competitive and employ anyone at all. Worker pay is not what’s left after the rich have “taken” their “share” (or more than their share).

Piketty’s constant use of the words “take” and “share” implies a zero sum game where one person’s larger share makes others smaller. Similarly, the language of “distribution” implies a pot of pre-existing wealth to be divided up, as though some god ladles out portions. But that’s not how an economy works either. In the main wealth is not “taken” but gained from other people handing it over willingly – in exchange for something (a product or service) they value even more. No zero sum game, that makes everyone richer. The pot grows.

Unknown-3In today’s world, not just “supermanagers” but top performers in any field earn much more than the nearly-as-good. Take LeBron James. It might seem absurd to earn so much for something so meaningless as getting a ball through a hoop. But millions enjoy watching it, and willingly pay, in various ways. So LeBron gets rich. Is that social injustice?

We can debate who deserves what income, and I’d agree with Piketty that much high pay is undeserved. But should it be forcibly confiscated (as Piketty urges) in conformance to those debatable opinions? By what right may I (or anyone) dictate what’s fair for others to earn? I eschew such arrogant presumption.

Meantime Piketty acknowledges that bare mathematical inequality tells us little. In the past a small minority lived well (to the extent technology allowed), while most lived wretchedly. Today the whole picture has shifted dramatically to a higher level of overall societal wealth: the rich are even richer (hence mathematically more unequal), but the rest are much richer too. Indeed, their living standard is actually comparable to that of the past’s wealthiest (if not better, considering health and longevity).** That today’s inequality might mathematically equal 1800’s says nothing.

Yet Piketty writes as though modern inequality exactly parallels that of centuries past. Relative living standards are no part of his analysis. images-2Piketty’s focus is entirely upon the wealthy, analyzing their situation in depth; the non-wealthy are present only as shadows, with no discussion of their situation and its changes. A Martian reading this book would have no idea how much ordinary lives have improved.***

The book indeed omits any analysis of economic inequality’s goodness or badness. The answer might seem self-evident. But clearly, perfect equality of wealth and income would not be just but unjust because different people earn/deserve differing outcomes; not to mention the matter of incentives for people to be productive (hardly theoretical in the experience of communist societies). The real question is what kind of inequality is acceptable. Some writers have attempted to grapple with this, but not Piketty. All he does is to project rising mathematical inequality – which he himself cautions tells us little.

Yet he’s terrified that the 1% will monopolize all wealth, with the 99% having nothing. The absurdity of such dystopian fantasies is simply this: who will buy all the goods and services whose sale undergirds the 1%’s wealth?

Unknown-4Their wealth is not a problem, nor is high inequality, so long as most people can live decent lives; and helping those who can’t does not require knocking down the rich. They don’t get their wealth at the expense of the rest. Steve Jobs impoverished no one but got rich through products that benefited millions. Had he not, all that wealth would not have been “distributed” to others. It would never have existed. Indeed, we would all have been poorer.

This book, obsessed with the rich and oblivious to the lives of others, would be better titled Envy. unknown1 Resentment at others’ success (especially when seemingly undeserved) is a powerful human emotion, often underlying egalitarian politics. Life is unfair, and we must work for fairness – but by building people up, not tearing others down. Envy and fairness don’t mix well.

* Rising inequality is often blamed on tax cuts, the top mid-century U.S. income tax rate having exceeded 90%. But never discussed is what rich people actually paid. Piketty himself notes they can legally avoid having taxable income, allowing returns to accumulate untaxed instead. So in practice nobody ever paid anything like 90%. Yet Piketty forgets this in claiming that lower taxes have raised inequality. (Rich people still pay far the lion’s share of income taxes.)

** This actually applies even to the poorest in advanced societies; especially taking into account government benefits. Today’s U.S. “poverty” line equates to a middle class living standard of just a few decades ago. Poverty ain’t what it used to be. And even in developing countries, the almost universal abject deprivation of the past is inexorably going away, afflicting now only a small minority of world population.

Photo by Walker Evans

Photo by Walker Evans

*** Nor would many Earthlings, romanticizing the “good old days.” But read, for example, Evans and Agee on the extreme poverty of rural 1930s Alabama. The work was grinding; the food disgusting; clothes made from used burlap sacks; copulation the only recreation. And those were white folks.

The $15 Minimum Wage – Money From Heaven

July 29, 2015

UnknownDo you favor a $15 minimum wage? Nobody asks where the money comes from. Heaven, I guess.

We’re told that if you give low wage workers more cash they’ll spend it, great for the economy. As though it’s free money.

Unknown-2

 

Or else the money is imagined to come out of business profits. When pigs fly. It will actually come from higher prices. And since low wage industries (like fast food) often serve poorer people, the extra money earned by low wage workers will ultimately come from . . . low wage workers.

Economics 101 says that when prices rise, demand falls. Raise the price of low skilled labor, and businesses will buy less of it. They’ll seek ways to automate instead (more self-service checkout machines if cashiers become too expensive, for example), which is already happening. imagesHigher minimum wages can only accelerate that – bad news for low skilled workers – who, once unemployed, often stay unemployed.

People imagine businesses can just pay more because they have profits to spare. In reality, profit margins tend to be pretty thin – like around 3% of sales for supermarkets. There’s no room for fat because in a globalized economy every business competes with every other. McDonald’s doesn’t compete just against Burger King and Wendy’s, but every other food option including home cooking – and indeed against every other conceivable product people could decide to buy in lieu of big macs. So prices must be kept as low as possible. Force prices up, due to higher minimum wages, and a business may become non-competitive. Bye bye jobs.

Yet defying this economic logic, advocates of higher minimum wages claim studies show they don’t actually kill jobs. Maybe so – in the short term at least – and if the rise is small, staying under 50% of median wages. But $15 would double the minimum wage, to 77% of the median. The long term impact on low-skill jobs is frightening.

Unknown-3We’re also told government is in effect subsidizing businesses like McDonald’s, that don’t pay a living wage, with food stamps and so forth filling the gap. That’s twisted logic. After all, plenty of people who get food stamps earn nothing. So you could equally say McDonald’s payrolls actually reduce what government must provide. Anyway, we give food stamps, and other welfare, because we as a society deem it the right thing to do. We shouldn’t expect (or force) private companies to do that for us.

In fact, higher minimum wages are an ineffective way to combat poverty. The Congressional Budget Office estimates that only 20% of the income benefits would go to those below the poverty line. (Most minimum wage workers are not primary family breadwinners.) So programs like food stamps, and the Earned Income Tax Credit, are much better targeted for helping the poor – without pricing low skill workers out of the market.

But New York State is currently in a paroxysm of political pandering on this issue. Governor Cuomo set up a board to assess fast food minimum wages. Legions of workers duly came and testified that $15 would be peachy. The outcome was pre-ordained. Our local Times-Union has denounced it – because the $15 wage will be phased in, not immediate!

Never mind the absurdity of singling out one category of jobs (and, unfairly, only in chain restaurants). Or how “fast food” can actually be defined. Unknown-4Or that New York, due to high taxes, already high unionized wage costs and other costs of all kinds, and the most burdensome bureaucratic regulation, is just about the least economically competitive state in the union, making large swathes of upstate into job deserts.

Politicians in this free-money fantasyland will never have to answer for the economic consequences. Voters won’t connect the $15 minimum wage with unemployment higher than it would otherwise have been. Just as public officials don’t answer for all the other ways they’ve run the state’s economy into a ditch. Indeed, the resulting tough economic conditions just encourage more populist politics, preening “compassion” and doubling down with yet more of the economic follies that got us here.*

I too have compassion for fast food workers, and wish they could earn more. It’s a hard life, and I’m lucky to be spared it. (Though I did work one very crummy job in my teens.) But the answer is not to wave a magic wand and expect Heaven to cough up the cash. Instead it’s to stop making it harder and costlier for businesses to operate. images-1And to make sure more people get the education they need for decent jobs – at least finish high school (too many don’t). A key reason fast food jobs pay so little is because there’s a vast oversupply of poorly educated people to fill them.

* Like rent control — more effective than bombing for destroying affordable housing.

What Is a Business For? Is Profit a Dirty Word?

July 15, 2015

UnknownAt a recent social event, most guests sanctimoniously agreed it was somehow disgusting that anyone should make a profit providing health care. One woman said she had no problem with a store profiting from selling sweaters; but no one should profit from people’s hardship or suffering. I frankly thought that bizarre. Isn’t the relief of suffering a greater boon, more worthy of compensation, and incentivizing, than merely supplying sweaters? I sure as heck didn’t begrudge the profit of the dentist who cured my tooth ache; that’s what motivates people to go to dental school, invest in offices and equipment, hire staff, etc., to provide such service. Nor do I resent the profits of the pharmaceutical company producing the medicine that makes my wife’s life livable.

Unknown-1Calvin Coolidge said, “The business of America is business.” But what is a business for? There are two schools of thought. One says a business’s only purpose is to make money for shareholders (the owners) and anything detracting from that is indeed a dereliction of its primary duty. The other side says a business should serve the interests of all “stakeholders” affected by its doings – including employees, customers, and the broader public. They note that in olden times a business seeking a corporate charter from the state (allowing limited liability for shareholders) was required in exchange to have a public benefit purpose. But that model was dropped in the 19th century in Britain and America, allowing corporations to be chartered just to do business.

Thus critics of capitalism talk as though the first side won the argument and businesses do exist solely for profit – in disregard of any other consideration – and hence are ipso facto a menace. For example, Naomi Klein, whose recent book I reviewed, seemingly thinks profit is the sole reason energy companies extract fossil fuels – the fact that society uses, needs, fossil fuels doesn’t enter into it. As if, remove the profits, and no extraction would occur.

imagesThis tells us there’s something incomplete in the view of businesses as solely profit maximizing creatures. It leaves out the way they do that – by supplying something beneficial to customers*, creating value greater than what is paid (of course some predatory businesses do the opposite, but that’s cheating). The point is epitomized by Steve Jobs. He made tons of money, but that wasn’t his ultimate objective – rather, the profits were what enabled him to perfect products useful to purchasers. That was his true motivation.

People who bought his products valued them more than the money spent. That difference, or surplus value, created by Jobs, increased societal wealth. Had he never existed, all those people would have been worse off. His wealth would not have been somehow distributed among them; it would never have existed either. This is what the 99%-vs.-1% mentality misses.

Today it’s more true than ever that business is really all about customer value, with the internet leveling the competitive playing field, giving consumers far more choices and access to information. A business whose products aren’t great, that doesn’t satisfy customers, will not survive.

Anyhow, it’s too simplistic to say (legitimate) businesses are only concerned with profit. The real world isn’t like that. It’s certainly untrue to say they care only about shareholder returns. Shareholder ownership is merely notional; in reality a corporation owns itself, buying shares merely entitles one to certain rights, while management isn’t meaningfully beholden or accountable to shareholders, instead running the company for its own purposes. And while a firm’s profitability does benefit managers, mainly they care about profits because profits advance their other agendas (a la Steve Jobs).

Unknown-2Also, speaking of the real world, corporate denizens are human beings, and while money is surely a big motivator, nobody is exclusively mercenary. Another big motivator is how one appears to other people – and in the mirror. Most of us want to be seen as doing good, and even to actually do it. Back in the ‘70s I was a regulatory lawyer battling Con Edison over its rates. The company was in financial trouble; and I actually felt management was betraying shareholder interests to bend over backward for consumers.

images-2Corporate greed? It’s not so simple.

At the end of the day, the most successful and profitable businesses are those that are best at creating customer value – which of course means societal value. Adam Smith wrote of the market’s “invisible hand” thusly benefiting society. I heard a radio commentator say Smith might have been right in his simpler time (1700s) but not in today’s world rife with inequality. Really? In Smith’s day, the great mass of humanity everywhere lived in squalid poverty – whereas in the last century, worldwide average real dollar incomes quintupled. That colossal fact is not negated by the inequality of the few with great wealth. They haven’t stopped billions of people from seeing a quantum leap in living standards in modern times. And that vast enrichment is nothing other than the cumulation of customer value created by businesses seeking to profit thereby – i.e., free market capitalism. A stunning vindication of Adam Smith and his invisible hand.images-1

* To quote management guru Peter Drucker, “There is only one valid definition of a business purpose: to create a customer.”

Pope Francis: Is Consumerism Bad?

July 11, 2015

imagesPope Francis has denounced consumerism as a “poison” that threatens true happiness, and is an assault upon the poor. What does he say does bring true happiness? Faith in a nonexistent deity. The bit about the poor is equally fallacious.

I’m going to repeat here what turned out to be one of my most-visited blog posts ever, from December 2008, titled “Is Consumerism Bad?” —

Ellen Goodman, in her 12/15 column, is one of those rejoicing that materialist consumerism, at which they’ve always sneered, is falling victim to the recession, as people cut back spending. They applaud this as a simply wonderful retrenchment, a return to sanity and virtue.

But why are we in a recession? Because people are cutting back spending. None of the other factors would actually cause a recession if they weren’t causing spending cutbacks. When people buy less, businesses need to produce less, so they need fewer employees. So people lose their jobs; then they too will spend less; so then even more people lose their jobs. And Ellen Goodman thinks this is a good thing?

“Materialist consumerism” is people buying stuff that other people think they shouldn’t. But a free society has to mean people pursuing happiness by doing things–like spending their own money as they choose–that others disapprove. Some social critics just hate this. They’d prefer it if right-thinking moralists like them got to tell everyone else how to live.

Such people, like Goodman, do believe that an economy based on consumerism is somehow an offense against virtue. But what else, actually, could any economy be based on? The “economy” means you produce goods and services that I buy, and I produce stuff that you buy; which makes us both better off. That production of things people want is the source of all wealth and income, our entire standard of living. It doesn’t come from heaven, or “society,” or government. You may sneer at consumerism, but you don’t want consumers to stop buying what you yourself are employed to produce; you’d be out of a job. And if all consumerism stopped, we’d all be out of jobs.

Greece At The Rubicon

July 7, 2015

UnknownWhen the Euro was set up, they knew it was a fraught proposition, binding themselves to each other financially. The Germans in particular, fearful about giving up the strong Deutschemark, insisted on strict penalties for any country whose deficit breached 3% of GDP. Of course it was Germany itself, and France, that soon violated this, but the matter was fudged. Not a good precedent.

Meantime, there were also stringent fiscal criteria for admission to the Euro. So how did Greece get in?Unknown-1 It cooked its books, and lied.

Greece’s economy has long been weighed down by clientelistic politics producing an over-bloated state sector, with lots of well-paid unneeded government jobs, fat pensions and benefits, while tax avoidance became endemic, and red tape (giving all those government workers something to do) strangled business. Thus Greece could not pay its bills, borrowing heavily to close the gap. This is what was covered up. But about five years ago the retsina hit the fan when the hole became too deep, requiring a bail-out.

Reasonably enough, the Europeans (mainly Germany) insisted that Greece clean up its act as a condition for the bail-out – the “austerity” we hear so much about. In hindsight, they may have overdone it. You’d want to wean the country away from profligacy, but not crush its economy, because economic growth is the only hope for ever paying Greece’s debts. Greece did accept some reforms, but did suffer a pretty severe economic contraction, with 25% unemployment, which didn’t help matters.

Unknown-2Part of the problem is that lefty Greeks just don’t get it that, to support the lavish government salaries and other spending, you need an economy that actually produces something that earns money. Of course, that’s dirty capitalism. Feh. So Greece’s reforms did little to improve economic productiveness.

And the reforms in question, the so-called “austerity,” merely moved Greece from extreme profligacy to moderate profligacy. This shows just how deep the hole is, and suggests the Europeans probably also erred in failing to bite the bullet of just writing off a major part of Greece’s debt.

Unknown-3Through all this, Greeks have cast the Germans as villains, seeing no reason why they shouldn’t go back to the old ways of living high on the hog on borrowed money they can’t pay back. The Germans see no reason why, having themselves undergone, a decade ago, the same sort of painful reforms now asked of the Greeks, they should have to work to age 65 and pay taxes so the Greeks can retire at 57 with fat pensions and avoid taxes. A classic grasshopper-and-ant story.

Then in January the Greeks elected the Syriza party, a bunch of irresponsible leftists with a platform of rejecting “austerity” and restoring the days of wine and roses. images-1They danced in the streets exulting in this triumph of wishful thinking. The new government, led by Alexis Tspiras, proceeded to make a hash of further bail-out negotiations and to shred any vestige of trust by Europeans. And then, just as it seemed possible that a deal might nevertheless be struck, Tsipras kicked over the table by calling a snap referendum on whether to accept the bail-out terms.

He urged Greeks to vote No, saying they could have their cake and eat it too – twice over – that they could reject Europe’s terms yet stay in the Euro – and, indeed, could reject the deal and see off austerity, returning to their old cushy clientelistic habits. With what money? Who knows.

This insane fantasy Tsipras cast as a matter of national pride – standing up against European (mainly German) blackmail!

Unknown-5Two things happened in the week before the vote. First, Greece defaulted on a scheduled debt payment; a first for a “developed” country. And Greece’s banks all but closed (for lack of money), allowing only small ATM withdrawals, throwing much of the economy and many people’s lives for a loop.

You might think this foretaste of what could lay in store would give the Greeks pause in the referendum vote. You’d be wrong. This vote was a matter of pride, remember. The Greeks are a proud people – proud enough to borrow billions and tell the lenders “Fuck You.” Unknown-4And so they did – a resounding 61% voted No. And again the grasshoppers danced in the streets to celebrate their courage.

What happens now? Tsipras justified the referendum “No” as strengthening his hand to get a better deal from the ants who, of course, lacking backbones, might just cave. But the Europeans had said they’d construe a “No” as a vote to exit the Euro. Greeks have indeed made a courageous bet, and if it comes wrong, those who thought “austerity” was rough ain’t seen nothin’ yet.

It’s not really clear how a country can be kicked out of the Euro. But perhaps it would be as simple as the European Central Bank supplying no fresh Euros; after a time Greece would effectively be forced into a different currency.

The Economist believes Europe should think twice before such a drastic step into uncharted territory. It could pull a thread that unravels the whole fabric. And you wouldn’t want a failed state in the continent, with all the potential tsuris that could entail. Furthermore, Greece could be thrown into the arms of Putin, with whom Tsipras has been playing footsie. But The Economist also thinks that if Greece stays in the Euro, the kinds of crises we’ve seen will keep repeating basically forever.images

My view, FWIW, is that Europe should cut off this gangrenous limb once and for all. A Greece-free Euro zone should ultimately be stronger and more stable. And there’s the issue of moral hazard; Greekish behavior should be seen to have consequences, lest others (like Spain) be tempted to follow it.

But Europe should also ready humanitarian aid packages for Greece. We’ll see if the Greeks spit in their faces then.

Fighting the Secret Plot to Make the World Richer*

May 24, 2015

President Obama is battling for “fast track” authority, to negotiate the Trans-Pacific Partnership (TPP, a trade deal among 11 big countries) without having it subject to Congressional amending. It’s the only way such a deal could conceivably happen.

Warren

Warren

Most Democrats, led by Elizabeth Warren, oppose this. They say the trade negotiations are being conducted in secret, shaped behind the scenes by corporate interests. (We all know Obama shills for fatcats, right?) As columnist Ruth Marcus points out, this Warren argument is simply bogus. It’s not as though legislators will have to vote on the deal without our knowing what’s in it. In fact, the proposed legislation requires the terms to be made public 60 days before signing – an unprecedented proviso.

Unknown-2But, as Marcus notes, the secrecy argument is a mere excuse, and Warren et al would still oppose this deal if the negotiations were broadcast live on C-SPAN. They paint it as selling out American workers by helping foreigners to compete unfairly against them. This reprises the 1990s NAFTA debate, when Ross Perot warned of a “giant sucking sound” of U.S. jobs going to Mexico. Warren says he was right. But in truth that sound was at most a whisper, with direct U.S. job losses minimal.

Well, free trade does threaten some jobs by exposing them to tougher foreign competition. But this perspective is like viewing the universe through a straw, blind to the bigger picture. Part of that picture is that freer trade lowers prices for consumers. This is huge; the U.S. Chamber of Commerce estimates that imports add $10,000 annually to the average American family’s purchasing power. That enables them to spend more, stimulating the economy and generating more jobs – probably way more jobs than the few lost to foreign competition.

Unknown-1By harping on those latter lost jobs while ignoring the benefits to consumers and the economy as a whole, Warrenite Democrats are literally favoring the interests of the few (very few) over the interests of the many. Some populists.

Unknown-4Interestingly, for most of its history, throughout the 19th and early 20th centuries, the Democratic party understood perfectly well that freer trade was good for the many while protectionism cosseted the few at their expense. Not a good deal for “everyday Americans.” This was in fact a headline issue for Democrats. But then (perhaps too heavily invested with union interests) Democrats lost their way on the trade issue.

Meantime, even the focus just on America’s economy is too narrow and misses the larger reality. If NAFTA’s impact on U.S. jobs is debatable, its impact on Mexican ones was unarguably huge, making Mexico much more prosperous than it would otherwise have been. And surely a richer neighbor is something in America’s national interest.

imagesIndeed, whatever its effect on any particular job, or industry, or country, freer trade makes the world as a whole richer.** Any serious economist will tell you so. It does this by enabling capital investment to be put to the most economically efficient uses, unhindered by artificial barriers and constraints, which results in production of more goods with fewer inputs of resources and labor. That’s an enlargement of the global economic pie, so more people can get bigger slices. Since WWII, this – an increasingly globalized world, with more and freer trade – has been the prime driver which has raised billions of people out of poverty.

Surely that is something in America’s national interest. A richer world is a less troubled world; and can buy more that U.S. workers produce.

Warrenites cloak themselves as tribunes for those “everyday Americans,” believing that if Democrats sound this trumpet loudly enough they’ll win. Thus they are trying to move the party, and Hillary Clinton, to the left of President Obama – who in fact was just barely not too far left to win – barely. The British Labour party made the same mistake in their recent election, believing the country would embrace pet left-wing themes. It did not; Labour was crushed.

imagesOur next election, with a Democratic candidate tacking left and having big trustworthiness issues besides, will be the Republicans’ to lose. If only they can control their own self-defeating instincts and offer a halfway sensible nominee.

* I cribbed this title from a recent article in The Economist.

** Potentially $220 billion richer annually, from the TPP alone, it’s estimated.

Presidential Politics

April 24, 2015
"Season 2"

“Season 2”

After two decades of Clinton wars, Bush wars, and Obama wars, will we really elect Hillary Clinton and extend this baneful syndrome of half the country hysterically hating the president? We may get it in any case, but wouldn’t this be just asking for it?

She herself once spoke of a “vast right-wing conspiracy” against the Clintons. Sure, there was opposition; but that was exactly the kind of hyperbolic language feeding the syndrome.

Emailgate does too, going to the heart of why so many people distrust Hillary. She says the e-mails not made public were personal, but we have only her word for that, with no independent review.

"I did not have inappropriate email with that server."

“I did not have inappropriate email with that server.”

What could she be hiding? Plenty — like conflicts of interest between her public duties and contributions to her foundation, some from influence peddlers and sleazy foreign governments. This spits in her detractors’ faces. Gad, what would her presidency be like?

Better than Obama’s at least. There’s hope of ameliorating the calamitous global unraveling for which he can partly be blamed. I’d rather have Hillary in the White House when Putin makes his move on the Baltics. One might also dream that a pragmatic Clinton, loath to leave a legacy of economic disaster, might force her own party to face fiscal reality.

Which brings me to Chris Christie’s recent call to raise eligibility ages for Social Security and Medicare (and cut off Social Security for high earners like me). “Through its unwillingness to address our biggest challenges in an honest way,” Christie said, “the Obama administration has put us on a perilous course for both our short-term and our long-term futures.” He added that politicians “don’t believe that the American people have the appetite for hard truths. Once again, they underestimate the people that they serve. Americans not only deserve fairness, they deserve the honesty of their leaders.”

Unknown-1Christie must have read some of my past blog posts. He’s being incredibly gutsy. We know the kind of attacks Democrats will lob (remember the ads showing Paul Ryan dumping granny over a cliff). Let voters choose between such demagogy and a forthright reality-based set of proposals like Christie’s.

There’s also much to like in Marco Rubio’s candidacy.

Rubio

Rubio

Republicans too often needlessly invite the granny-over-the-cliff trope, appearing as though uncaring toward less affluent citizens. Rubio does not, and is a poster boy for how sensible conservative policies can benefit the whole country, including the disadvantaged. One line in his 2012 convention speech really impressed me: calling out the fallacy that every dollar in a rich person’s wallet is taken from a poor one’s, a notion which underlies much economic quackery. Rubio’s insightfulness is refreshing.

Don’t Believe Everything You Think

April 20, 2015

UnknownDaniel Kahneman’s book, Thinking Fast and Slow says there are two distinct systems operating inside your skull. “System 1” gives quick, intuitive answers to questions confronting us, utilizing thought algorithms rooted deeply in our evolutionary past. “System 2” is slower and more analytical, used when we actually (have to) think, as opposed to just reacting.

imagesBecause you utilize System 2 consciously, whereas System 1 works unconsciously, you tend to see yourself embodied in System 2. We do like to believe we do our own thinking, rather than having some black box, to which we have no access, just handing us answers. But the latter is closer to the truth, most of the time. In fact, as Kahneman stresses, System 2 is lazy, hence often glad to just accept System 1’s answers, not even realizing it.

This comports with Jonathan Haidt’s metaphor in The Righteous Mind: System 2 is a rider on the back of an elephant that is System 1. images-1We imagine the rider is in charge. But mostly the rider is really working for the elephant, rationalizing the elephant’s choices.

All this would be fine if System 1 were totally rational, but of course it’s not, and books like Kahneman’s have been taken as debunking the very idea of our being rational creatures. Unknown-1Kahneman uses the term “Econs” (perhaps short for homo economicus) for the hypothetical people who behave as economic theory says. As opposed to – well – “humans,” who do not.

One key example of how System 1’s decisional algorithms are irrationally biased is undue loss aversion, weighting potential losses more heavily than equal potential gains. Unknown-2If offered a coin flip bet paying $10 for heads but costing $6 for tails, most people will refuse; the 50% chance of winning $10 is not enough to compensate for the fear of the pain of losing $6! Lab experiments consistently confirm many permutations of this irrational bias.

We don’t often encounter coin flip bets, but this bias infects many aspects of human behavior – like investment decisions – as well as public policy. Case in point: GM food. Europeans in particular are so averse to potential risks (an extreme “precautionary principle”) that the truly small (indeed, mostly imaginary) risks of GM foods blind them to the truly large benefits.

Meanwhile, the idea that humans aren’t rational has entered political debate, as an argument against market economics, which supposedly is premised on rational economic behavior (homo economicus again).

Here’s what I (System 2) think. Obviously, we don’t behave with perfect rationality. But rationality isn’t either/or, it’s a spectrum, and on the continuum between perfect rationality and perfect irrationality, we’re far toward the rational end. Our entire civilization, with all its complex institutions and arrangements, is a supreme monument to rationality. Unknown-3And as individuals we behave rationally most of the time – overwhelmingly. If you want toast, you put bread in the toaster. That’s rational – as distinguished from, say, praying to a toast god. (And we’re getting ever better about this.) Furthermore, your preference for toast over cereal is a rational choice, based on your long experience of what is most likely to please you. You even know how toasted you like it.

And even when we default to System 1, that is not irrational. Let’s not forget that System 1 evolved over many eons not to lead us astray but, instead, to help us cope with life’s challenges (thus to survive and reproduce; for instance, a loss aversion bias made a lot of sense in an environment where “loss” could well translate as death). So – for all its biases and quirks, extensively explicated by Kahneman – System 1 also has a lot of virtues. In fact we simply could not function without it. If we had only System 2, forcing us to stop and consciously analyze every little thing in daily life, we’d be paralyzed. Thus, utilizing our System 1 – faults and all – is highly rational.

The same answer refutes the critique of market economics. We are far more rational than not, in our marketplace choices and decisions concerning goods and services. Market actors are fundamentally engaged in serving their desires, needs, and preferences, in as rational a manner as could reasonably be expected, even if imperfect. (See my review of Tim Harford’s The Undercover Economist.) Allowing that to play out, as much as possible, is more likely to serve people’s true interests than overriding their choices in favor of some different (perforce more arbitrary) process.

Kahneman was informative about a topic of perennial interest – how people form and maintain beliefs.* Here again, while we fancy this is a System 2 function, System 1 is really calling the shots; and again is reactive rather than analytical. System 1 jumps to conclusions based on whatever limited information it has. Kahneman uses a clumsy acronym, WYSIATI – System 1 works as if “what you see is all there is” – i.e., there’s no additional information available – or needed. System 1 is “radically insensitive to both the quality and quantity of the information that gives rise to impressions and intuitions.”

Unknown-4What’s most important to System 1 is that the story it creates be coherent; it’s averse to the discomfort of cognitive dissonance, and hence hostile to any new information that doesn’t jibe with the story it has already created. Indeed, it is paradoxically easier to construct a coherent story the less you know – fewer pieces to fit into the puzzle. Experiments have shown that subjects exposed to only one-sided information – and who know that that’s so – nevertheless show greater confidence in their resulting judgments than do subjects getting both sides. We have a great ability to ignore our ignorance!

At the risk of sounding smug, I have always sort of recognized this and consciously try to avoid it, by adhering to what I call my ideology of reality. That is, I try to let my perceptions of reality dictate my beliefs, rather than letting my beliefs dictate my perceptions of reality. I am not a perfect “econ,” but I think I am one of the more econ-like humans around.

* An aside: humans are pre-programmed for belief. Is that a lion lurking? The believer loses nothing if he’s wrong. The skeptic, if he’s wrong, may be lunch. Thus belief is the preferred stance, and people readily believe in UFOs, homeopathy, and God.

Inequality and Family Culture – A Disagreement With My Wife

March 28, 2015

images-1I recently left my wife a newspaper clipping, writing “Read” on it. She returned the favor by writing “Total Rubbish!” on it.

It was a column by Ross Douthat (a Republican and Christian). He poses the question “whether the social crisis among America’s poor and working class – the collapse of the two-parent family, the weakening of communal ties – is best understood as a problem of economics or culture.” images-2It’s the latter, Douthat says, identifying post-sixties permissiveness as the key, which he faults upper classes for promoting, as acceptable for themselves, but ignoring its effects “on the less-savvy, the less protected, the kids who don’t have helicopter parents.”

My wife dissed the piece as racist and classist, and having no real answer for the problem Douthat fingers. That latter point is fair, the others not. Recognizing that lower class Americans suffer from cultural pathologies is not to blame them; indeed, Douthat again blames the better-off. And as David Brooks has argued, it’s not that lower classes lack the right values or aspirations but, rather, face obstacles living those values in their social environment.

UnknownI have discussed Charles Murray’s 2012 book, Coming Apart, seeing America increasingly divided by class; Douthat too references Murray, and also Our Kids, a newer book by sociologist Robert Putnam (of Bowling Alone fame), similarly describing a growing divide between better-educated and less-educated families.

That is the real root of the inequality we hear so much about. And, as Douthat contends (the reason I found him worth reading), money inequality is not itself the problem, that’s a symptom of the greater fact of cultural difference. It’s not that the rich hog wealth at the expense of the rest, or there’s insufficient redistribution – it’s that too many people are kept back, by cultural dysfunction, from rising out of disadvantage.

Unknown-1Two distinct American family models are at issue. In one, well-educated people marry each other and become the affluent helicopter parents Douthat mentions, raising kids to get similarly educated and replicate the model. Putnam says they give kids protective “air bags” that aren’t usually deployed in the other type of family, which tends to feature neither marriage nor higher education nor (in consequence) affluence. Unknown-2And that too is self-perpetuating. Sure, single moms often make heroic efforts; but the fact is that, on average, for a host of understandable reasons, kids tend to do much better in two-parent families. (Especially well-educated affluent ones.) Children from such families do better on the “marshmallow test” for impulse control, which has been found powerfully predictive for future life success. Stressed single mothers just cannot provide the quantity or quality of parenting that married couples can.

That, again, is America’s great cultural divide, it’s the big reason behind the economic divide – and it’s growing larger. The wage gap keeps widening between the college-educated and others. Unknown-3And while marriage rates remain quite high among well-educated people, for the rest the bottom has fallen out, with a majority of younger mothers now being unmarried.

You cannot argue that economic difficulties are driving this. Because, for all the whining about “these economic times,” in fact – as Douthat highlights – even lower-income citizens have more money, and more safety-net support, than in earlier generations. Yet, he says, those past generations “found a way to cultivate monogamy, fidelity, sobriety and thrift to an extent they have not in our richer, higher-spending present.” And Putnam shows many key ways in which affluent and non-affluent families differ much more now, in habits and culture (like how they talk to and socialize their kids*), than a few decades ago. This inhibits social mobility. Again, married versus unmarried life is key.

Consider this. During the Great Depression, did marriage rates collapse and single parenthood explode? No, they did not, despite far more unemployment, much lower incomes, and much less generous government support. Unknown-4Even black Americans – who suffered not only those Depression era economic challenges, but also far worse discrimination than now – maintained very high marriage rates, with two-parent families predominating. Today black single parenthood is at seventy-three percent.

This is not “the economy, stupid.” This is cultural. Again, economic disadvantage is more a consequence than a cause. Hence better jobs, higher minimum wages, more government benefits, “tax the rich,” etc., can’t fix this. What will? Like Douthat (and Putnam), I don’t have all the answers (though I’ve made some suggestions in my post on the marshmallow test, and here too). But anyhow, at least properly understanding the problem is a necessary starting point.

*At the upper end of the social spectrum, the ambition is kids getting into college. At the other end, it’s kids staying out of jail.

The Criminalization of American Business

March 19, 2015

When the future Gibbon chronicles America’s decline and fall, the war on business will feature prominently.

Unknown-2Some readers will gag. That’s precisely the problem. We demonize business, imagining it controls everything; fictional bad guys are invariably doing ill for profit; “corporate” is a four-letter word, with Wall Street blamed for economic troubles, and business misfeasance seemingly confirmed by repeated multi-billion dollar penalties extracted by government watchdogs.

The left harps on the imperfections of markets; about those of government, not so much. And while in many places businesses do suck, mainly this reflects not free markets at all, but the opposite — crony capitalism and cartelization suborned by the state. Denunciations of the “evils of capitalism” often fail to see that it’s really government behavior behind them.

And here’s the bigger picture. Modernity has made us very rich, compared to past millennia, with people able to live far better lives. (Fools romanticize “the good old days.”) In the last century, worldwide average real dollar incomes multiplied five-fold. Where do you think all this wealth came from? Government? Socialism?

It came from businesses seeking profit by supplying us with desired goods and services. That’s what generates all the wealth and income to buy them with. The capitalist, market system. Hate it all you like, but you cannot live without it.*

Yet it seems we’re trying to kill this goose that lays our golden eggs.

images-2A recent issue of The Economist looked critically at the mentioned parade of payments by companies to settle charges of wrongdoing, topped by Bank of America’s $17 billion in August. You might think if BofA agreed to that, it must have done something really naughty. Not necessarily. As The Economist stressed, these settlements typically don’t make public the details of the supposed misdeeds, which remain murky. But in one major example I’ve discussed, where the true story did emerge, the case against the bank clearly made no sense.**

Why then would they settle? Because to fight the government in such cases is suicidal even if you’re guiltless.*** Accounting firm Arthur Andersen did fight, and won vindication in the Supreme Court – a pyrrhic victory since by then the firm had been destroyed. This is why The Economist bluntly called all this an “extortion racket” – “the world’s most lucrative shakedown operation.”

I’ve always said that “unfettered capitalism” is a nonsense straw-man – just as individuals are subject to laws against harmful conduct, businesses should be too. UnknownBut as The Economist pointed out, the market does a very good job of punishing truly errant companies. Competitors will make sure misdeeds are publicized; customers and investors will flee; share prices will plummet. This penalty is far greater than any exacted by government.

Meantime, corporations face extortion not only by government predators, but also lawyers in the class action litigation racket. I’ve written about this epic scandal too.

China has no rule of law because enforcement is totally at government’s arbitrary whim. Lately it’s been on a rampage against foreign-owned businesses and their personnel, with selective prosecutions for various ill-defined “offenses.” But America isn’t far behind, with metastasizing business regulations carrying criminal penalties (estimated at 300,000 in 1991; apparently no one has tried to count them since). Result: no company can fail to be guilty of something. So that prosecution is necessarily selective, which inherently corrupts it. Former Deputy Attorney General Larry Thompson said in 2011, “No matter how gold-plated your corporate compliance efforts, no matter how upstanding your workforce, no matter how hard one tries, large corporations today are walking targets for criminal liability.”

images-3But at least large ones can manage the huge costs of trying to comply with the ever-deepening thicket of regulatory and paperwork requirements, and defending themselves. Small ones cannot – a big reason why their job creation – historically the most vibrant part of our economy – has been faltering. It’s increasingly hard to start and sustain a small business in today’s overbearing regulatory environment. (Click here for an outrageous example of small business screwed over by state government.)

The Economist concluded by saying “the recent flood of actions against companies has . . . done serious harm, to America’s legal system and the rule of law.” And of course it also seriously harms our economy.

* And, much though you may curse “the corporations,” if you actually stop to ponder, you are actually quite pleased about 99% of what you buy from them.

** The Economist noted that the very first federal criminal conviction of a corporation, in 1909, a railroad, was “for the bizarre offense of cutting prices.”

*** And the payments come from the pockets of shareholders – not the executives who agree to them. The Economist also observes that it’s wrong to suppose government enforcers act disinterestedly for the public good. They have their own agendas – puffing up their egos and careers.

 


Follow

Get every new post delivered to your Inbox.

Join 3,420 other followers