So what to do

In my previous post I suggested that what has happened to the economy is that we have discovered that we have been victimized by a massive Ponzi scheme. The fact that we victimized ourselves doesn't make it any better. The fact is assets we thought we had don't exist. So now what do we do?

Replace those assets! Let's assume that a total of about $3 trillion has been lost—or never really existed. What if we essentially printed that money and spread it evenly among the citizens of the US.

Here's one way to do that. Three trillion divided among 300 million people is about $10,000 apiece. Let's distribute it over a period of 7 (biblical) years. If I did it right, at 5% interest the present value of $200/month for a year followed by $150/month for 3 more years followed by $100/month for 4 more years (making a total of 7 fat years) is a bit less than $10,000. (This is what I put into my XL spreadsheet (=PV(0.05/12, 12, 50) + PV(0.05/12, 48, 50) + PV(0.05/12, 84, 100)).

Since this makes spending decisions bottom-up it is the purest market based approach to stimulating the economy. Money is not aggregated and then allocated top-down; it is spent bottom-up. Spending decisions are made at the lowest possible level by individual agents.

Each person would make his or her own decision about what to do with the money. People could spend it or save it. They could vote to increase taxes to pay for public works. Or they could let the infrastructure crumble. All the decisions are made by "the crowd."

One must hope that the citizens of the country (who form "the crowd") have learned enough from this experience to make wise decisions. And certainly it would be a good idea for public minded citizens and politicians to take this opportunity to attempt to teach the crowd whatever lessons we think should be learned. But ultimately, we have to trust the citizens to make wise decisions, or the country will always be dependent on rulers rather than its citizens.

The US Ponzi scheme

In his Stop Being Stupid column Bob Herbert makes the point that we have been a victim of our own ponzi scheme.

The mind-boggling stupidity that we’ve indulged in was hammered home by a comment almost casually delivered by, of all people, Bernie Madoff, the mild-mannered creator of what appears to have been a nuclear-powered Ponzi scheme. Madoff summed up his activities with devastating simplicity. He is said to have told the F.B.I. that he “paid investors with money that wasn’t there.”

Somehow, over the past few decades, that has become the American way: to pay for things — from wars to Wall Street bonuses to flat-screen TVs to video games — with money that wasn’t there.

Something for nothing became the order of the day. You want to invade Iraq? Convince yourself that oil revenues out of Baghdad will pay for it. (Meanwhile, carve out another deficit channel in the federal budget.) You want to pump up profits in the financial sector? End the oversight and let the lunatics in the asylum run wild.

For those who wanted a bigger house in a nicer neighborhood, there were mortgages with absurdly easy terms. Credit-card offers came in the mail like confetti, and we used them like there was no tomorrow. For students stunned by the skyrocketing cost of tuition, there were college loans that could last a lifetime.

Money that wasn’t there.

Perhaps this can give us some idea of what's happening in the economy. If you had the bulk of your savings invested with Madoff, how would you change you behavior when you discovered that your investments were gone? Would you cut back on your spending? Even if your income was unchanged? Would you want to save more to make up for the lost investments? Would you be more cautious with your savings, not taking a chance on investment opportunities that you might once have tried? Would you at least initially attempt to ensure that whatever savings you had elsewhere was safe, perhaps removing it from it current investment and putting it somewhere that you knew absolutely was safe?

Might you also reach out to others who had lost money the same way you did and attempt to form a support community? Perhaps you could provide some comfort (and perhaps more importantly in economic terms financial security) to each other even if you could no longer be sure that you could provide your own security. But would you also be more suspicious of anyone who looked like they might be trying to take advantage of you?

I suspect that many of these things are happening at the national and global scale. Those who have more time to think about it than I should work through these impulses and see what they imply for the economy and the national spirit. Some of them, like increased frugality, will reduce economic activity further. There is little we can (and little we probably should) do about it. People rightfully have become economically more conservative. That's appropriate and wise.

But I suspect that people will be more open to community activities, mechanisms whereby we can support each other, now that we all are more in need of support. But at the same time, we will be especially suspicious of anyone who seems to be taking unfair advantage of these community support systems.

A Highly Evolved Propensity for Deceit

Would you trust this chimp?

From an article by Natalie Angier in the NYTimes.com.

Frans B. M. de Waal, a professor at the Yerkes National Primate Research Center and Emory University, said chimpanzees or orangutans in captivity sometimes tried to lure human strangers over to their enclosure by holding out a piece of straw while putting on their friendliest face.

“People think, Oh, he likes me, and they approach,” Dr. de Waal said. “And before you know it, the ape has grabbed their ankle and is closing in for the bite. It’s a very dangerous situation.”

Apes wouldn’t try this on their own kind. “They know each other too well to get away with it,” Dr. de Waal said. “Holding out a straw with a sweet face is such a cheap trick, only a naïve human would fall for it.”

Apes do try to deceive one another. Chimpanzees grin when they’re nervous, and when rival adult males approach each other, they sometimes take a moment to turn away and close their grins with their hands. Similarly, should a young male be courting a female and spot the alpha male nearby, the subordinate chimpanzee will instantly try to cloak his amorous intentions by dropping his hands over his erection.

Rhesus monkeys are also artful dodgers. “There’s a long set of studies showing that the monkeys are very good at stealing from us,” said Laurie R. Santos, an associate professor of psychology at Yale University.

Reporting recently in Animal Behavior, Dr. Santos and her colleagues also showed that, after watching food being placed in two different boxes, one with merrily jingling bells on the lid and the other with bells from which the clappers had been removed, rhesus monkeys preferentially stole from the box with the silenced bells. “We’ve been hard-pressed to come up with an explanation that’s not mentalistic,” Dr. Santos said. “The monkeys have to make a generalization — I can hear these things, so they, the humans, can, too.”

One safe generalization seems to be that humans are real suckers. After dolphin trainers at the Institute for Marine Mammals Studies in Mississippi had taught the dolphins to clean the pools of trash by rewarding the mammals with a fish for every haul they brought in, one female dolphin figured out how to hide trash under a rock at the bottom of the pool and bring it up to the trainers one small piece at a time.

I guess it's too much to hope for that this sort of thing will stop when Obama takes office

"Cheney says Congress failed struggling automakers"

(WASHINGTON) Vice President Dick Cheney blamed Congress for failing to bail out the auto industry, saying the White House was forced to step in to save U.S. car companies.

In an interview broadcast Sunday, Cheney said the economy is in such bad shape that the car companies might not have survived without the $17.4 billion in emergency loans that President George W. Bush approved on Friday.

'The president decided specifically that he wanted to try to deal with it and not preside over the collapse of the automobile industry just as he goes out of office,' Cheney said in an interview broadcast on 'Fox News Sunday.'

Lawmakers 'had ample opportunity to deal with this issue and they failed,' Cheney said. 'The president had no choice but to step in.'

Cheney may believe that what Bush did was the right thing to do. If so, that's what he should have discussed. Why was it right—and how this case is different from most other situations in which the normal Republican position would be to keep the government out of the economy. Does Cheney have a standard that helps him determine when government intervention is appropriate?

If he discussed these issues, that would be an interesting and useful interview. It's not useful for him to say that Bush rescued the auto companies because congress failed to act. The point is not to spend all your time blaming someone else. Just talk about what went into your own decision. Perhaps Obama will be more constructive in this regard.

The Big Picture - Boston.com

Great series of photos from the Boston Globe: part 1, part 2, and part 3.

Nuriel Roubini, aka Dr. Doom

From Power 2009: Economist Nuriel Roubini, aka Dr. Doom | Newsweek The Global Elite | Newsweek.com

Roubini says he takes no pleasure from the current economic hardship. Still, he's not saying he'd prefer to have been wrong. 'You're glad in the sense that, if you're intellectually honest, you're found out to be right, [even if] you don't go around and gloat,' he says. Despite his prescience, he's suffered just like the rest of us: he's remained fully invested in stock index funds through the market downturn, causing his portfolio to plummet. And he has no expectation of a quick turnaround. He thinks the recession will last until the end of 2009, with the economy contracting a severe 4 or 5 percent, and unemployment peaking at above 9 percent in 2010. Stocks have further to fall, he says, suggesting the Dow could bottom out around 7,000. He's encouraged by the incoming Obama administration's talk of a big stimulus package, though, and expresses confidence that Summers and Geithner will prove aggressive recession fighters. And though critics may dismiss Roubini as permanently dour, he says that's not necessarily so. 'Eventually, when we get out of this crisis, I'll be the first one to call the recovery,' he says. 'Then maybe I'll be called Dr. Boom.' In his view, alas, that name change could be a long time coming.

Why do you suppose he did that?

MoveOn.org: member priorities

On December 17th, MoveOn members began 2 days of voting to decide our top goals for 2009. Each member was able to vote for 3 goals. Here are the final results, with the percentage of members who included each goal in their top 3. The graph below shows how many votes each goal received, as a share of the total.

Goal

  1. Universal health care 64.9%
  2. Economic recovery and job creation 62.1%
  3. Build a green economy, stop climate change 49.6%
  4. End the war in Iraq 48.3%
  5. Improve public schools 21.6%
  6. Restore civil liberties 16.8%
  7. Hold the Bush Administration accountable 15.2%
  8. Gay rights/LGBT equality 8.6%
  9. Increase access to higher education 7.6%
10. Reform campaigns and elections 5.7%

I'm impressed with this ordering. The list itself came from MoveOn. I had put Reform campaigns and elections and Improve public schools higher on my list. But I can't argue with health care, economic recovery, and environmental issues. One of the questions I considered was whether MoveOn could make a difference. It's not that civil rights isn't important. But I think Obama will do all right there without MoveOn. Also, even though ending the war in Iraq is important, I suspect that will happen at its own pace. I'm glad to see that the spirit of vengeance was way down on the list. The Bush administration should be held accountable. But that's not the most important thing to do. Let the historians worry about that. With Gay rights, I think that's important, but it's much narrower and more parochial than the other issues.

Organizations to Support

A number of us have decided to contribute to various organizations this year in lieu of presents. Here is my list.

Charity Navigator



Charity Navigator



Charity Navigator


Charity Navigator




Charity Navigator



Charity Navigator



Charity Navigator


Charity Navigator

"Who Could Have Known?"

Arianna Huffington has a piece criticizing the "Who could have know" era. She says, for example, that Iraq, Fannie Mae, Citigroup, and Bernie Madoff were each

entirely predictable. And, indeed, [each] was predicted. But those who rang the alarm bells were aggressively ignored, which is why it's important that we not let those responsible get away with the "Who Could Have Known?" excuse.

Here is the comment I posted in reply.

It would be nice if it were that easy. Just be sensitive to all the risks. But it's not. Certainly there are some things that people should have been aware of. Bush and co. were particularly skilled at ignoring information they didn't like.

But we are all now aware of the black swan effect, the possibility that something unexpected will occur that will cause a disaster. One simply cannot be aware of all the possible black swans. That's true by definition. A black swan is something one has never before seen and therefore is something for which one cannot prepare explicitly and cannot be on the lookout for. The only way to prepare for black swans is to remain strong and healthy in a generic sense. That's the best one can do. If one is sufficiently strong, healthy, resilient, and creative in times of stress, one has a good change of being able to deal with black swans when the appear even though one cannot anticipate them all.

Reader, Beware

In today's NT Times Chris Suellentrop notes (without apparent judgment)

a long essay in The New Atlantis [by] Christine Rosen [who] laments the replacement of print literacy with “screen literacy.” She concludes: “Literacy, the most empowering achievement of our civilization, is to be replaced by a vague and ill-defined screen savvy. The paper book, the tool that built modernity, is to be phased out in favor of fractured, unfixed information. All in the name of progress.” …

Rosen approvingly cites David A. Bell, a Johns Hopkins historian, who wrote in The New Republic in 2005 of the dangers of screen reading: “Bell cautions, ‘You are the master, not some dead author. And that is precisely where the greatest dangers lie, because when reading, you should not be the master’; you should be the student. ‘Surrendering to the organizing logic of a book is, after all, the way one learns,’ he observes.”

Screen reading is fundamentally different from print reading, Rosen argues. “Instead of a reader, you become a user; instead of submitting to an author, you become the master,

I agree that there is a difference between being "the master" and "surrendering to the organizing logic of the book." When I read a book, I want to be the master. I don't want to wait until the author is ready to tell me what he has to say. I want the message immediately, and I want to be able to use the book to find out about the message and to see how the author supports his claims. I'm not willing to sit back and wait for the author to build his argument or trot out his story. I want the information in my way.

Is this different from how people read books in the past? I suspect that I always read books that way—at least when I was reading for information. There are, of course, times when I want to surrender to the author. When I'm reading fiction, I give the author the opportunity to build the narration. I can't do that. Part of the point of fiction is that the author is in charge of the story. But that's completely different from reading for information.

When I have a book that I read for information, the most important part for me is the index. I want to be able to look up a term and find out where the author talks about it. So yes, I want to be the master. I also suspect that being the master results in better comprehension than sitting back and letting the information flow over you. It's called active learning, which is the best way to learn.

Vatican Issues Instruction on Bioethics

From NYTimes.com.

The Vatican issued its most authoritative and sweeping document on bioethical issues in more than 20 years on Friday, taking into account recent developments in biomedical technology and reinforcing the church’s opposition to in vitro fertilization, human cloning, genetic testing on embryos before implantation and embryonic stem cell research.

Even though I disagree with it, let's take as given the Catholic position on souls. What I find interesting and uncertain is how that position justifies the positions in this document—at least as reported in the Times.

The most obvious issue is in vitro fertilization. Why is that banned? The article quotes Josephine Johnston, a research scholar at the Hastings Center, an independent bioethics research institute in Garrison, N.Y. as follows.

“For a married couple who go to get in vitro fertilization, the Vatican’s idea that it’s not done with a serious amount of love and commitment is very bizarre to me, because it’s such a deliberate act, done in the cold light of day, with enormous amounts of thought and intention attached to it,” she said. “The idea that it’s not done within the spirit of marital love, I find very strange.”

I wonder what the Catholic response to that is.

Although according to the Times the Vatican opposes human cloning and embryonic stem cell research it does not oppose "research on stem cells derived from adults; blood from umbilical cords; or fetuses “who have died of natural causes.” Why not? What's the difference (in soul terms) between a stem cell derived in an acceptable way and one derived in an unacceptable way? Probably more difficult is the distinction between a stem cell and a clone. As I understand it, stem cells can be programmed to become any type of cell but they cannot be programmed to become full-fledged human beings. I wonder how absolute that limit is. Will we ever be able to turn a stem cell into a human being? And if we learn how to do that will the Vatican object to research on stem cells that they now accept?

The closer we get to being able to construct a human being "from scratch" the more difficult it is likely to become for the Catholic church. What if we are able to take a bunch of chemicals, mix them up to create a cell and then nurture that cell until it is a baby. Which step in the process is the line that the Catholic church will say is the line that shouldn't be crossed?

I agree that this possibility raises some very serious ethical issues. But I don't think the answer is to be found by asking when during that process the proto-baby becomes endowed with a soul on theological grounds.

Car company costs

David Leonhardt has a great article in the NY Times about the car company costs. First of all, if you don't count the costs of retirees—which current workers obviously don't get as part of their pay package—labor costs for the big three are not that different from labor costs for Japanese automakers in the US. But even more striking, if you reduced the big three labor costs to Japanese levels, that would cut only $800 from the cost of each car. And that's because labor costs are only 10% of the cost of an automobile. That's amazing. Where does the rest of it go?

Being Good for Goodness' Sake?

The Pew Forum discusses a 2007 survey.

This holiday season, the American Humanist Association has launched a campaign featuring ads on Washington, D.C., buses that proclaim, 'Why believe in a god? Just be good for goodness' sake.' But a 2007 survey by the Pew Research Center's Global Attitudes Project found that a majority of Americans say it is necessary to believe in God in order to be moral and have good values. People in Canada and many Western European countries are much less likely to hold this view, while throughout much of Africa, Asia and the Middle East there is widespread agreement that belief in God is a prerequisite for morality. For the complete 46-country comparison, see the full report at pewglobal.org.

More good ways to spend the stimulus money

We all know about infrastructure. And we certainly need it. But we also need imaginative ways to spend the stimulus money we will be spending. Thomas Friedman had one suggestion. Are there others? I'm sure there are. Usually when the government spends money it invites proposals. Why not do the same thing this time. Divide the money into a number of categories such as infrastructure, labor intensive, and far out. Let people submit proposals. Start a DARPA-like stimulus agency which is given the job of finding imaginative and productive—but possibly experimental—ways to spend money that will have a positive effect on the future of the economy. I'm sure there will be lots of good ideas.

One criterion should be that the programs are primarily labor intensive. We don't want to spend money buying gold, for example. So a program gets points for doing things that require people. It shouldn't use people when technology can be used instead. But there are things only people can do, e.g., medicine, education, counseling, policing, research, software development, etc.

There are programs that deserve experimental trials, such as solar energy farms in the desert What can we learn about building solar energy farms that would be useful to know in the future? Here's our chance to find out.

Give some of the money to successful venture capitalists, not for them to spend but for them to invest as part of their portfolio as if the government is another investor.

There must be lots of good ideas out there. Let's not just spend the money on traditional government make-work programs. Let's be creative, imaginative, and productive about it.

While Detroit Slept

Thomas Friedman has a better way to spend stimulus money.

The Better Place electric car charging system involves generating electrons from as much renewable energy — such as wind and solar — as possible and then feeding those clean electrons into a national electric car charging infrastructure. This consists of electricity charging spots with plug-in outlets — the first pilots were opened in Israel this week — plus battery-exchange stations all over the respective country. The whole system is then coordinated by a service control center that integrates and does the billing.

Under the Better Place model, consumers can either buy or lease an electric car from the French automaker Renault or Japanese companies like Nissan (General Motors snubbed Agassi) and then buy miles on their electric car batteries from Better Place the way you now buy an Apple cellphone and the minutes from AT&T. That way Better Place, or any car company that partners with it, benefits from each mile you drive. G.M. sells cars. Better Place is selling mobility miles.

The first Renault and Nissan electric cars are scheduled to hit Denmark and Israel in 2011, when the whole system should be up and running. On Tuesday, Japan’s Ministry of Environment invited Better Place to join the first government-led electric car project along with Honda, Mitsubishi and Subaru. Better Place was the only foreign company invited to participate, working with Japan’s leading auto companies, to build a battery swap station for electric cars in Yokohama, the Detroit of Japan.

Pass a Pardons Disclosure Act

From American Freedom Campaign

Tell Congress to pass a Pardons Disclosure Act to prevent President Bush from issuing secretive, blanket pardons to members of his administration

For eight years, we have been forced to sit by helplessly as President George W. Bush and top members of his administration eviscerated the Constitution, broke federal laws, and defied the will of Congress.

Now, President Bush is poised to give each and every one of his accomplices -- from Dick Cheney to Karl Rove to Alberto Gonzales -- a full pardon, ensuring that they will never receive the punishments they deserve for their activities. Worse, Bush may issue a preemptive “blanket” pardon, covering all officials within his administration without disclosing either the names of the officials involved or the crimes for which they are being absolved.

Congress can, however, stop this most objectionable action before it occurs. The American Freedom Campaign has proposed a Pardons Disclosure Act, which would force the president to specifically name any political appointees for whom pardons are granted along with the crime or crimes for which they are being pardoned.

Please tell your representatives in Congress to support a Pardons Disclosure Act, by filling out your information below and clicking on “Send My Message!”

Important warnings for Obama from Frank Rich and Tom Friedman

Frank Rich writes:

As Barack Obama rolls out his cabinet, “the best and the brightest” has become the accolade du jour from Democrats (Senator Claire McCaskill of Missouri), Republicans (Senator John Warner of Virginia) and the press (George Stephanopoulos). Few seem to recall that the phrase, in its original coinage, was meant to strike a sardonic, not a flattering, note. &helliop;

[The] economic team that evokes trace memories of our dark best-and-brightest past. Lawrence Summers, the new top economic adviser, was the youngest tenured professor in Harvard’s history and is famous for never letting anyone forget his brilliance. It was his highhanded disregard for his own colleagues, not his impolitic remarks about gender and science, that forced him out of Harvard’s presidency in four years. Timothy Geithner, the nominee for Treasury secretary, is the boy wonder president of the Federal Reserve Bank of New York. He comes with none of Summers’s personal baggage, but his sparkling résumé is missing one crucial asset: experience outside academe and government, in the real world of business and finance. Postgraduate finishing school at Kissinger & Associates doesn’t count.

Summers and Geithner are both protégés of another master of the universe, Robert Rubin. His appearance in the photo op for Obama-transition economic advisers three days after the election was, to put it mildly, disconcerting. Ever since his acclaimed service as Treasury secretary in the Clinton administration, Rubin has labored as a senior adviser and director at Citigroup, now being bailed out by taxpayers to the potential tune of some $300 billion. Somehow the all-seeing Rubin didn’t notice the toxic mortgage-derivatives on Citi’s books until it was too late. The Citi may never sleep, but he snored.

And Tom Friedman says:

We not only need to bail out industries of the past but to build up industries of the future — to offer the kind of big thinking and risk-taking that transforms enormous challenges into world-changing opportunities. That is what made the Greatest Generation great. This money can’t just go to patch up our jalopies.

“Remember, this money will not be neutral,” said Andy Karsner, a former U.S. assistant secretary of energy. “We are talking about directing an unprecedented volume of cash at our housing, energy, transportation and infrastructure industries. This cash will either fortify the incumbent players and calcify the energy status quo, or it will facilitate the economic transformation we seek. The stimulus will either be white blood cells that will heal us or malignant cells that will continue to sap our strength.” …

Let us not mince words: The Obama presidency will be shaped in many ways by how it spends this stimulus. I am sure he will articulate the right goals. But if the means — the price signals, conditions and standards — that he imposes on his stimulus are not as creative, bold and tough as his goals, it will all be for naught.

In sum, our kids will remember the Obama stimulus as either the burden of their lifetime or the investment of their lifetime. Let’s hope it’s the latter. I like that book title much better.

Civilian employment population ratio

Paul Krugman posted this graph of the ratio of civilian employment to population. But this graph is a small part of another graph posted by the Federal reserve Bank of St. Louis.

So we are now back to the level of the recession of the early 1990s—which is far above anything seen before the mid 1980s.

GM's Failed Saturn Brand Goes On The Block

From CBS News
Richard Wagoner, chief executive of General Motors, Robert L. Nardelli, chief executive of Chrysler, Alan R. Mulally, chief executive of Ford, and Ron Gettelfinger, head of the United Automobile Workers, during the House Financial Services Committee hearing on the bailout of the Detroit automakers on Friday

When General Motors unveiled the Saturn in 1990, customers loved the brand's 'no haggle pricing' policy. But they're not buying anymore. Saturn has just 1 percent of the market and GM has slapped a 'for sale' sign on the brand, as CBS News Business Correspondent Anthony Mason reports.

'They have to sell Saturn. They also probably have to do something with Pontiac,' says Kevin Tynan, senior auto analyst at Argus Research.

Tynan says the problem is simple. General Motors has eight brands and 57 models. Toyota sells nearly as many cars and trucks with just three brands and 32 models.

So my question is: does GM (or the other auto-makers) have any brands that anyone is willing to buy? If so, then have them sell them. That will minimize the impact of bankruptcy on the economy. If not, then the only reason to prop the companies up is to keep its employees—and their suppliers—off unemployment. It's essentially unemployment benefits disguised as a job. But as long as the government is paying them to work, why not get something productive from their labors, like a bridge or other infrastructure.