27 February 2010

Excerpt from a Future History Book, or "whatever happened to shopping?"

The popularity of shopping depended on the ancient urge for the modern, that old wish for something new.

No one had considered the possibility that this urge for the new might actually be turned on shopping itself, or that fashion might go out of fashion.

Yet people gradually decided that they had too much stuff and clutter and turned away from the malls. Consumption never again drove the economy like it had throughout the 20th century.

For generations, economic goods had implied economic goods to have. Early in the 21st century, communities realized that people were ready to focus more on economic goods to do. The stuff of life was replaced by experience, and having became less important than doing. As communities adjusted, it was not just philosophers who saw this as positive. Even economists eventually realized that this was progress.

25 February 2010

The (Un)Health(y We Don't) Care Summit: Or, What's Really Wrong with Washington

I watched about ten minutes of today's bipartisan health care summit, catching some of Lamar Alexander and Nancy Pelosi. Two things struck me as terribly wrong about the summit and convinced me that nothing useful would come from it.

One, they need a facilitator who is truly non-denominational, who can cut them off when they talk too long, and keep moving towards something actionable. The biggest problem with this, of course, is that the folks in Washington seem convinced that there is no one worthy of such a task because they've got the monopoly on wisdom.

Two, they need to move from talking to modeling their assumptions. If a congressperson wants to plan lunch, he talks. If he wants to plan a campaign trip for next month, he talks. If he wants to change health care for the biggest economy in the world, he talks. Compare communication with transportation. If that same congressperson wants to go to lunch, he walks. If he wants to go to a function across town, he drives. If he wants to go back to his district, he flies. He uses different technologies for travel but not for communication and planning. It's no wonder that Congress doesn't get anywhere - it is still doing the planning equivalent of walking everywhere.

Imagine a session in which a facilitator (or two) captures the assumptions that these politicians are making. "You are saying that liability insurance drives doctors out of rural areas. Okay, what is the causation and what is weighting? Liability of more than what triggers an exodus from rural areas?" And bit by bit, the model could be constructed. Then, the causation could be tested. Data that exists could be used. Data could be collected. Assumptions could be tested and collected into a network of causality and then simulated. Technologies exist for this. As the group works on this, a few things would happen. Leverage points would emerge. It may well be that the objectives of covering everyone and holding down costs could be met with a far less comprehensive plan. And the group would gradually be brought together over a model that is grounded in data.

Finally, such an approach might just do something to disarm the ideological who resist practical solutions because of principles. And on that note, an excerpt from Dietrich Dorner's wonderful book, The Logic of Failure: Recognizing and Avoiding Error in Complex Situations, in which he's talking about the success people have with systems simulations.

“The good and bad participants did not differ … in the frequency with which they developed hypotheses about the interrelation of variables in Greenvale. [That is - we all develop our theories about how the world works.] Both the good and bad participants proposed with the same frequency hypotheses on what effects higher taxes, say, or an advertising campaign to promote tourism in Greenvale would have. The good participants differed from the bad ones, however, in how often they tested their hypotheses. The bad participants failed to do this. For them, to propose a hypothesis was to understand reality; testing that hypothesis was unnecessary. Instead of generating hypotheses, they generated ‘truths.’”

24 February 2010

What if Debt were Driven by Productivity Gains?

I've never seen anyone suggest that growth in productivity might be the fuel for a growth in debt. The rate of productivity growth has been remarkable in the last couple of decades. So has the growth in debt. Maybe the one causes the other. And maybe debt is the result of a good thing (productivity growth) and not a bad thing (a sudden lapse in morality).

Try this thought experiment.

100 people all farm to eat. Then one day, one guy makes a machine that allows him to feed 100 people all by himself. Now, we've created 99 unemployed people who can only beg or borrow in order to eat.

One of two things happens next. Either no one else comes up with new products or services that generate income and the the starving 99 are unable to pay back the inventor, and the whole "economy" collapses back to some uneasy situation with 99 parasites and one productive inventor. Or two, inventors and entrepreneurs emerge from within the 99 to create new goods and services that allow them to eventually pay back the loan for food and create more jobs.

If we stop short at the debt of the 99 hungry hopefuls, we'll be stuck. The way through this is not to take on less debt but, rather, take on more.

This odd little thought experiment suggests that debt - whether of the newly unemployed who want to eat or of the new and would-be inventors and entrepreneurs - follows from productivity gains. And the debt may be really ugly. For instance, in this example, the unemployed food eaters are borrowing money to eat. And the "wealth" the inventor feeding 100 people has is in the form of IOUs from the hungry hopeful. And further, if the successful inventor backs a new inventor, he is actually loaning him money that is just promissory notes and not real cash. And yet if all these loans are not made, the system collapses.

Following this logic, it could be that debt follows from productivity gains. The point then is to stimulate more innovation - even if that means incurring more debt - in order to create the next venture that will provide jobs to the newly unemployed.

So, what is the solution to our current levels of unemployment and increased debt? It is not to worry about debt. It is to worry about creating the next new thing - from building infrastructure to creating new businesses.

I will maintain my contention that our problem is not a problem of too much debt or even of financial institutions that create too much wealth - real or bubbled. Our problem is that we aren't doing enough to translate our excess labor and capital resources into new ventures. This is not a failure of labor or capital markets. It is a failure of entrepreneurship. We need to do more to create entrepreneurship within organizations (what Gifford Pinchot calls intraprenuership) and without. The solution is that simple and that complicated. Focusing on debt right now is a distraction. We need to innovate our way out of this.

Which means, essentially, we're in the same situation we've been in for centuries, only more so.

21 February 2010

"No!"

Anything you are not free to say "no" to, you are unable to say "yes" to.

You can't really choose what you are not free to reject.

This is worth remembering if you really are intent on moving away from parental and managerial or even educational models that don't depend on some form of tyranny.

Is it any wonder that one of the first phrases that toddlers learn is "No!"? This is the beginning of taking control over defining self rather than capitulating to others who would gladly define you.

20 February 2010

A Nation in Denial

Here's a curious little fact.

In Obama's 2010 budget, he's showing mandatory expenses at $2.184 trillion. (Mandatory includes things like social security, medicare, and interest on the national debt.) He's projecting revenues of $2.381 trillion. So, $197 billion is left for all discretionary spending. Unless, of course, we want a 1.2 trillion deficit.

Let's say that we balance the budget without adding taxes. We'd have to cut all discretionary spending by more than 85%. This would mean, for instance, that defense spending would drop from $664 billion to $95 billion, a level we haven't been at since before World War 2. The National Science Foundation - the investment our $13 trillion economy makes into basic research - would be a mere $1 billion, or about what Exxon makes in an hour.

People like to talk about the good old days before the time of so many taxes. Of course, they forget that in those good old days life expectancy was about 47 years, income was a fraction of what it is now, and people had yellow teeth. Assuming they had teeth.

George Bush took us to war and gave us a tax cut. We bought it.

Barack Obama got elected by promising universal health care and a tax cut. We bought it.

We're the ones in denial here, not the politicians. They know that they have to give us our programs and tax cuts or we boot them out.

If a politician promised to raise taxes and cut programs by enough to balance the budget he or she would lose the election. (And anyone who thinks you could balance the budget with just raising taxes or cutting programs is obviously a beneficiary of the new medical marijuana laws.) It's that simple.

Obama has appointed a commission tasked with creating recommendations for moving towards a balanced budget. Elected officials can't talk honestly about what needs to be done, so the bitter truth is left for appointed officials to say. Because you can't stay in office and talk honestly about the deficit. Not if you want to be elected by a polity in denial.

19 February 2010

Quaint Victorian Notions About Capital in a Modern World

We Americans live in the richest, most economically driven country in the history of the planet. And still we’re ambivalent about money and debt. Our revulsion to debt is literally Victorian.

There was time in history when capital was scarce and hard to get or create. Social inventions that helped to overcome this limit made communities rich. Social inventions included new norms, like traditions of saving and investing, and new institutions, like modern banks, and bond and stock markets.

One of the social inventions that helped in the early days of capitalism was uneasiness about debt, something shared by British and Americans in the 1800s and early 1900s.

19th century preachers inveighed against debt, teaching that it mars and stains the soul. Protestant preachers liked to quote Paul, "owe no man anything but love." Debt was proof that one failed at self-denial. Charles Spurgeon, the best-known English preacher of the late 1800s, described the trinity of evil as "debt, dirt, and the devil."

And yet by the early 1900s, debt had become obviously essential to economic progress. This is still a point little appreciated, it seems, but it has to do with establishing new industries. You'll have to follow a few steps here, but I'll try to keep it simple.

1. Imagine a world where everyone has to farm to be fed.

2. Then, someone invents a machine (capital) that can do the work of 100 men. This means that 99 men are freed up to work on something else.

3. 99 men are unemployed. 1 man is incredibly rich. Or would be, if only the 99 hungry and unemployed men had money.

4. Inventors and entrepreneurs create new products and services – from the sublime to the silly. [Look at the end of this post for a list that comes from the years around 1900.]

5. These inventions and business ventures require financing. Debt even. Debt creates. Getting these new industries started is an act of faith. It requires capital investment for building factories and stores. It requires capital for making payroll to manufacturing and sales people. And it requires consumer credit so that people can begin buying this new thing. Once established, though, capital gets its return and there is a new source of sales and salaries. Debt can create new wealth. And yes, even consumer debt that isn't obviously directed at creating wealth can be instrumental to this.

6. These new ventures and inventions don’t just make life more interesting, richer, and confusing: they create jobs for the 99 people made redundant by productivity gains in the old industries.

All this to say that reluctance to take on debt can hobble progress. One of the worst things you can do in an economy is treat what is scarce as abundant and what is abundant as scarce. Victorian England - with its social stigma against debt - was actually creating the right culture for that stage of capitalism. Capital was scarce and people should have treated it carefully. The reality behind the billions made in venture capital, junk bonds, and credit cards today, though, is expressed in Michael Milken’s observation that, “In an industrial society, capital is a scarce resource, but in today’s information society, there’s plenty of capital.” Today, jobs are scarce and capital is abundant; an economy that goes into debt because it is mis-using its capital but creates jobs so as not to mis-use its labor has an edge over an economy that leaves a large percent of its work force under- or unemployed.

So, with all the worry about debt, what does this suggest? To me, this change suggests that we ought not to worry about wasting capital that is abundant. Rather, we should worry about wasting labor. Our economy will be made stronger by employing more people into productive ventures, not by avoiding debt. Once we’ve got employment back up and have created jobs, we can worry about debt. But not about eliminating it – just in shifting it into the creation of new industries and services.


--------
Some of the inventions from the decades around 1900:
central heating; the safety razor; stainless-steel implements; the striptease; the electric toaster; iron, oven; sewing machine; dishwasher; electric elevator; dial phone; portable typewriter; radium treatment for breast cancer; heart surgery; the psychiatric clinic; contact lenses; toothpaste in tubes; motion pictures; musical comedy; the gramophone; volleyball and basketball; the Ferris Wheel; the jukebox; breakfast cereals; milk delivered in bottles; packaged produce; Coca-Cola; margarine; the ice cream cone; the refrigerator; public libraries; the correspondence course; the full-range department store; the chain store; the shopping center; the coin telephone; the traveler’s check; fingerprinting; the automatic pistol; the electric chair; the automobile and the airplane; the underground city subway train; the pneumatic tire; color photography; rayon and other artificial textiles; chewing gum.

15 February 2010

Biden vs. Cheney - Due Process Loses

I love Joe Biden. Dick Cheney? Well, not so much. And yet Cheney has won the last little tussle with Joe, and this, like so much related to Cheney, infuriates me. He has won because he got Joe to agree with an implied premise in his argument.

Cheney is upset that the Nigerian crotch-bomber was read his Miranda rights. Joe counters that the same thing happened to the ped-bomber from England under Bush's administration. Cheney doesn't think that would-be terrorists deserve rights. Joe seems to (sort of) agree with this inane suggestion, which is why the two VPs upset me.

The executive branch has a duty to execute the laws. VPs, for instance, are sworn into office promising to uphold the constitution. This seems to me a vote of confidence in our laws. And note that our laws are such that having rights does NOT mean that one can't or won't be punished.

So, when Cheney expresses his anger that someone may have hinted that the crotch-bomber (which, by the way, could make for an attention-getting chat name (as opposed to CB handle)) had rights, I have to ask this: if Cheney doesn't trust our laws or due process, why on earth did he waste 8 years of his life as the second-highest ranking member of the branch of government sworn to uphold those laws?

Biden was right to call out Cheney yesterday. He could have gone further and simply said that his faith in our legal system is so great that if an accused terrorist is found innocent he'd accept that verdict as more trust-worthy than trial by media.

I know that it is fashionable not to trust in government. It would be nice, though, if the people heading it up showed a little faith in it.

11 February 2010

Time to Copyright Investigative Journalism

When our founding fathers wanted to encourage more innovation to make a better world, they gave us patents. Patents reward an inventor with a monopoly for a time, making the payoff for sacrifice and applied creativity greater. The result is more of a good thing.

Investigative reporting is also a good thing. With facts and a better understanding of what's going on, a community can make better choices. The crooks in high places are more careful. Yet even as we get more media coverage, we seem to get less investigative reporting. Maybe its time for something like a patent or copyright for news uncovered.

Imagine that you learn a story behind how the number of deaths attributed to medical malpractice are generated. Right now, you do the work to generate this story and the instant you publish it, it becomes news. Talk shows, columnists, and other reporters can use your startling insight to opine and make their point about why malpractice insurance or litigation should be changed. You do all the work and they get the buzz.

But what if every time they cited your study, you'd get a little kickback, like royalty paid for use of a patent? Think about how much money could be made by infusing the news with ... well, with news. Right now, all the money is in generating opinions and the republic is no better for it. What if it were an investigative reporter who made the big bucks for unveiling a link between DEA officials and Mexican drug cartels, or showing how earmarks have made political donors rich? Think how much more energy would go into revealing what is really going on if that were the case.

A community simply hasn't got a chance to be well governed without a good media. Maybe it is time to less passively wish for good reporting and put in place some laws that actually reward it. It worked with invention.

10 February 2010

Like Freddy Krueger


Apparently a real billboard expressing a genuine sentiment. I mean sentimental.

08 February 2010

Sacred Cow Sausage

Hopefully we won't take our deficit problem too seriously this year but once the recession is clearly behind us, it will be important to address. Very important.

Right now, the problem seems intractable. When a problem can't be solved, it is time to look in new places for solutions.

Currently, there are three places that are considered sacred for budget cuts, three places we don't even consider as sources for potential savings.

1. Defense. We still spend money as if preparing for a large-scale conventional war. We fund weapon systems long past their "not feasible" expiration date. We don't know the difference between war and occupation. But if you want to lose an election, simply mention the possibility that we might want to decrease - rather than increase - defense spending. We will not get to a balanced budget without changing the assumption that defense spending is sacred. We don't have to spend more on defense than the rest of the world combined and it makes up about a trillion of our three trillion budget. I don't know how you ignore this if you are serious about balancing a budget that is off by about a trillion.

2. Social security. Technically off-budget and its own category, but still leaves a large carbon, I mean fiscal, footprint. When it was introduced, social security kicked in around the time that the average person died: life expectancy and retirement age weren't so very different. Today? Very different. This is simple. For my generation, we have got to raise retirement age by 1 to 5 years. This will make a huge difference in the money collected by and paid out from social security. We can't pretend that the rules for when people retire remain unchanged as life expectancies increase.

3. Medicare and all health care. People are bankrupt by medical costs and this is wrong. Millions are not covered and this, too, is wrong. What else is wrong? Covering expenses that are, say, under $1,000 or even $2,500. This creates overhead for billing, adding costs to health care. It makes us less price sensitive (imagine that filling up your gas tank had a set co-pay of $5 whether you were buying it at $2.50 a gallon or $5.20 a gallon) for services whose price would be lower if subject to price competition. And it makes us feel entitled rather than careful about casually using health care. If we did not cover services under some threshold, we could greatly reduce the cost of administration and coverage. Health care - like defense and security - should be a right. That ought not to be construed to mean that every piddling service we need is something we should pay for through the roundabout means of taxation and government reimbursement.

Right now, we can't seem to reduce the deficit, much less balance the budget. When your current set of assumptions preclude your goal, it is time to challenge the assumptions.

Oh, and one other thing. Even challenging spending on these sacred cows will not be enough. We will have to raise taxes. We may as well make the slaughter wholesale.

07 February 2010

A Little Reminder on the Limits of Prediction

Hank Paulson and Alan Greenspan were on Face the Nation today. The former Treasury Secretary and Fed Chairman may well represent as much as we know about economics.

After offering their opinion about what projected deficits will mean for the economy over the next decade, they both very sagely predicted that the Colts would win today's Super Bowl. This was, of course, a brilliant little reminder of the limits of prediction.

Of course, everyone knows that an economy over a ten year period, and the influence of the deficit over economic activity for good, bad, or indifference, is a much simpler thing to predict than a mere game. Because a game, of course, involves the actions of independent agents, the unexpected, herculean efforts, unpredictable strategies, and chance. By contrast, an economy of 300 million people in a world of 6.5 billion, in a time when there has never been more opportunity for innovation in technology or social institutions, has none of that.

02 February 2010

The Difference Between Experts and Expectorate

"McCain was in communication with Bernanke and Paulson, too, but to less useful effect. In one exchange with the Fed chairman, McCain compared the causes of the crisis to some recent management troubles at Home Depot. It's kind of like that, isn't it? he asked Bernanke. No, it's not, a flabbergasted Bernanke replied.
[p. 381 of Game Change by Heilemann and Haperin]


When even the man who came close to becoming president doesn't understand the difference between macro and microeconomics*, I suppose I ought not to be so dismayed by what we see among the talking heads and the general public. Of course there is nothing unique about the dismissal of economic experts. The public has rejected the claims of experts from domains as varied as astronomy (well, now that we have pictures we accept the notion that we're hurtling through space at high speeds in spite of the fact that our hair is not blowing back every time we stand outside), climate change, evolution and medicine.

Perhaps in the future, we'll have a series of questions one has to answer about what best we know. It seems probable that we'll know more and better in the future and some of that will refute what best we know now. But I have little respect for people who reject the claims of experts until they can first explain those claims. If you understand current science and theories on these topics and THEN choose to reject them, good enough. Your rejection I can accept. If the only thing you know about what the experts assert is that they are wrong, whatever you're expressing doesn't really even qualify as an opinion: it might just be gas or, well, expectorate.

So, what about a new phase of democracy? We make people take a driver's test before they can get a license and yet bad policy is more dangerous than bad driving. Perhaps we ought to give out different levels of voting license to our representatives in Congress. On some things, anyone can vote. On other issues, one needs a special license. And again, you don't even have to agree with the conventional wisdom - you just have to understand it.

The making of policy is wonderfully public. This is good. Or can be, if the public and their politicians knew when they didn't know. Sadly, too many take Palin's approach.
"Palin was waging a persistent internal crusade to reverse one of the [McCain] campaign's major strategic decisions. ... When her traveling chief of staff, Andrew Smith, pointed out to her that McCain, Schmidt, and Davis had reached their conclusion on the basis of complex calculations involving the polls and the budget, Palin simply shrugged and uttered one of her signature phrases: 'I know what I know what I know.'"
[p. 409 of Game Change by Heilemann and Haperin]

One of my favorite thinkers, W. Edwards Deming, said you could trust a man who knows his limitations. It seems that we could say the same thing about a polity and its media and representatives.

* The difference between macroeconomics and microeconomics is this simple: when Keynes helped to define macroeconomics he essentially said that the whole (the macro) economy has characteristics different from its parts (the microeconomy). Implied in this is the use of fiscal and monetary policy to stimulate or dampen demand but chronic deficits are no more essential to Keynesian economics than atomic bombs are to Einstein's theory of relativity. Keynesian economics does, however, suggest that regional, national, and even global economic policy will need to depend on something other than a laissez faire approach to economics or simply relying on agents within the economy to do what seems best from their perspective.