On Policy Uncertainty…

Paul Krugman says that the notion that the weak economy is due to policy uncertainty has been thoroughly debunked. The Stanford/Chicago uncertainty index has considerably fallen:

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Without any considerable boost to job growth:

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While policy uncertainty is concerned with policy in general, and not executive policy in particular, Krugman’s analysis is that “policy uncertainty” is a thinly-veiled attempt to blame Obama for the sluggishness of the recovery:

One of the remarkable things about the ongoing economic crisis is the endless search for explanations of something that’s actually quite simple — the sluggish pace of recovery. You have a large overhang of private debt; you have a still-depressed housing sector; and you have contractionary fiscal policy. Add to this the well-established fact that recovery tends to be slow after recessions caused not by tight money but by private-sector overreach, and there’s just no mystery that needs explaining.

Yet we’ve seen an endless series of analyses declaring that there is indeed a deep mystery, and it must be Obama’s Fault. Probably the most influential of these analyses was the claim that Obama was creating “uncertainty”, and this was holding everything back.

This crude notion of policy uncertainty is often attached to the notion of the Confidence Fairy; the idea that by running large deficits, government is crowding out private investment due to fears of future tax increases. The corollary of the Confidence Fairy view is that the only way to bring back private investment is to have large-scale austerity, to solidify expectations of lower future taxes. This view has been the basis for David Cameron’s economic policy in the UK, which can only be soberly judged as a large-scale failure.

Krugman is right to trash the Confidence Fairy — austerity at this point in the business cycle is a catastrophic error, because it sucks money out of the real economy. And he’s also right to trash those who view the sluggishness of the recovery as solely Obama’s fault. But he’s wrong, I think, to throw policy uncertainty out of the window entirely as a proximate cause of some of the problem’s we’re now facing.

Broadly, policy uncertainty goes both ways. That is simply because not all entrepreneurs in the private sector are looking for or worrying about tax cuts. People are heterogeneous. While there are some entrepreneurs worried about the future trajectory of taxes, many other entrepreneurs may be hoping for fiscal stimulus either because they would expect to receive orders from the government (for example, construction firms, defence contractors, universities, energy companies) or because they would be hoping that with stimulus, more people would have money in their pockets and they would be spending it.

While this, of course, cannot explain the crisis itself, nor the long and slow deleveraging since, having a deadlocked Congress erring on the side of austerity could be a major headache for many private enterprises. The fact that the more severe austerity experienced in Europe and Britain has actually led to bigger budget deficits there could result in even deeper and greater uncertainty for businesses. Put more simply, many businessmen could be reading Paul Krugman and others like him, agreeing with their interpretations, and worrying about the confused and deadlocked approach that the Federal government has taken to the post-2007 economy, and the dangers of austerity. This could contribute to the uptick in policy uncertainty measured by the Stanford/Chicago Index experienced since 2007 just as much as Wall Street Journal-reading Republicans worrying about the Confidence Fairy and taxes.

Taleb on Overstabilisation

It’s nice to know that Taleb is preaching more or less the same gospel that I am.

Via the NYT:

Stabilization, of course, has long been the economic playbook of the United States government; it has kept interest rates low, shored up banks, purchased bad debts and printed money. But the effect is akin to treating metastatic cancer with painkillers. It has not only let deeper problems fester, but also aggravated inequality. Bankers have continued to get rich using taxpayer dollars as both fuel and backstop. And printing money tends to disproportionately benefit a certain class. The rise in asset prices made the superrich even richer, while the median family income has dropped.

Overstabilization also corrects problems that ought not to be corrected and renders the economy more fragile; and in a fragile economy, even small errors can lead to crises and plunge the entire system into chaos. That’s what happened in 2008. More than four years after that financial crisis began, nothing has been done to address its root causes.

Our goal instead should be an antifragile system — one in which mistakes don’t ricochet throughout the economy, but can instead be used to fuel growth. The key elements to such a system are decentralization of decision making and ensuring that all economic and political actors have some “skin in the game.”

Two of the biggest policy mistakes of the past decade resulted from centralized decision making. First, the Iraq war, in addition to its tragic outcomes, cost between 40 and 100 times the original estimates. The second was the 2008 crisis, which I believe resulted from an all-too-powerful Federal Reserve providing cheap money to stifle economic volatility; this, in turn, led to the accumulation of hidden risks in the economic system, which cascaded into a major blowup.

Just as we didn’t forecast these two mistakes and their impact, we’ll miss the next ones unless we confront our error-prone system. Fortunately, the solution can be bipartisan, pleasing both those who decry a large federal government and those who distrust the market.

First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.

In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.

It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.

Consider the difference between Silicon Valley entrepreneurs, who are taught to “fail early and often,” and large corporations that leech off governments and demand bailouts when they’re in trouble on the pretext that they are too big to fail. Entrepreneurs don’t ask for bailouts, and their failures do not destabilize the economy as a whole.

Second, there must be skin in the game across the board, so that nobody can inflict harm on others without first harming himself. Bankers got rich — and are still rich — from transferring risk to taxpayers (and we still haven’t seen clawbacks of executive pay at companies that were bailed out). Likewise, Washington bureaucrats haven’t been exposed to punishment for their errors, whereas officials at the municipal level often have to face the wrath of voters (and neighbors) who are affected by their mistakes.

If we want our economy not to be merely resilient, but to flourish, we must strive for antifragility. It is the difference between something that breaks severely after a policy error, and something that thrives from such mistakes. Since we cannot stop making mistakes and prediction errors, let us make sure their impact is limited and localized, and can in the long term help ensure our prosperity and growth.

Deindustrialisation & Male Jobs

A whole lot of pundits are spending column inches trying to explain the cruel reality of the last forty years — stagnant wages for full-time male workers, and falling wages for men as a whole:

And there has been a huge outgrowth of men who aren’t in the labour force. In 1954, 96 percent of American men between the ages of 25 and 54 worked. Today, that number is down to 80 percent. That’s a humungous decrease.

The question is why.

Mainstream media pundits are suggesting that men are unsuited to the present economic landscape. The suggestion is that men have been bad at adapting to change, and that women have been good at adapting to change:

In The End of Men: And the Rise of Women, Hanna Rosin argues that changes in the world economy have dramatically shifted gender roles. Women have adapted more skillfully to the new socioeconomic landscape by doggedly pursuing self-improvement opportunities, rebranding as the economy requires it, and above all possessing the kind of 21st century work attributes — such as strong communication skills, collaborative leadership and flexibility — that are nudging out the brawny, stuck-in-amber guys. Rock steadiness, long a cherished masculine trait, turns out to be about as useful in our fleet-footed economy as a flint arrowhead. Life favors the adapters, and it turns out they’re more likely to be women.

Now two things have very clearly changed for women — access to birth control, and the end of the traditional social compact where women did housework, and men did wage work. In regard to the vast majority of expanding occupations today — teaching, medical services, bureaucracy — women no longer are at a material disadvantage due to their (on average) smaller size and lesser strength.

Overall, this has meant proportionally less jobs for men, and proportionally more for women.

But it’s not just that women have been advantaged. Men have been deeply disadvantaged. In sectors that due to physical characteristics men have traditionally been dominant in — manufacturing, agriculture, forestry, mining and heavy industry — there has been a vast decline in output-as-a-percentage-of-GDP, whereas in services — a sector in which men have not traditionally dominated — there has been a vast increase.

Yet it is not the case that there are less manufacturing jobs globally. As we mostly already know, this is a case of manufacturing and industry being exported overseas, most obviously to China. China manufactures, and America consumes. This is America’s trade balance with China:

This is reflected in China’s sectoral employment balance compared to Western nations, and the world at large:

So it’s not at all the case that the United States is cutting back on industrial jobs because industry is less in demand. The United States still has plenty of demand for industry. America has cut back on industrial jobs because it has the ability to run huge trade deficits, through the dollar’s role as global reserve currency, and shipped its manufacturing industry abroad. Other countries have required dollars for trade purposes, so have been more than happy to sell to the United States, making dollars and debt the United States’ greatest exports.

Yet the present paradigm has severely damaged the prospects of young men, for whom a generation ago jobs in industry and manufacturing were once plentiful. Quantitative easing led to a jobs boom — in China, for Chinese industrial workers. That doesn’t help the growing chunk of the male population in the United States who have been shut out of the job market by the rise of America’s Chinese addiction.

And it seems unlikely that the industrial jobs are coming back any time soon. Although there are reasons why America may soon import less from China — rising energy and transport costs, rising Asian wage costs, and questions of the dollar’s sole reserve currency status — there are plenty of places in Latin America with cheap and plentiful labour for America’s corporate elite to set up factories. Even the manufacturing jobs that remain in America will be under threat from increased automation and robotics.

This implies that barring a miracle, joblessness and stagnant or falling real wages will continue to be a significant and worsening challenge for young Americans, and particularly men, in the coming years.

Assange or Corzine?

Priorities are a bitch.

The United States won’t prosecute Corzine for raiding segregated customer accounts, but will happily convene a Grand Jury in preparation for prosecuting Julian Assange for exposing the truth about war crimes.

From the New York Times:

A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives. After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case.

Corzine is considering opening a new hedge fund, though the notion that anyone — even a slack-jawed muppet happy to buy whatever Goldman ‘s prop traders want to sell — would seed Corzine money so he can trade or steal it away seems absurd — rather like putting a child molester in charge of a day-care.

But nobody knows how much dirt Corzine has on other Wall Street crooks. Not only may Corzine get away with corzining MF Global’s clients’ funds, he may well end up with a whole raft of seed money to play with from those former colleagues and associates who might prefer he remain silent regarding other indiscretions he may be aware of.

But the issue at hand is the sense that we have entered a phase of exponential criminality and corruption. A slavering crook like Corzine who stole $200 million of clients’ funds can walk free. Meanwhile, a man who exposed evidence of serious war crimes is for that act so keenly wanted by US authorities that Britain has threatened to throw hundreds of years of diplomatic protocol and treaties into the trash and raid the embassy of another sovereign state to deliver him to a power that seems intent not only to criminalise him, but perhaps even to summarily execute him. The Obama administration, of course, has made a habit of summary extrajudicial executions of those that it suspects of terrorism, and the detention and prosecution of whistleblowers. And the ooze of large-scale financial corruption, rate-rigging, theft and fraud goes on unpunished.

The Beauty of America

Eric X. Li writes the most controversial piece of the year thus far, in which he concludes that democracy is a problem for the West:

Many have characterized the competition between [America and China] as a clash between democracy and authoritarianism. But this is false. America and China view their political systems in fundamentally different ways: whereas America sees democratic government as an end in itself, China sees its current form of government, or any political system for that matter, merely as a means to achieving larger national ends.

In the history of human governance, spanning thousands of years, there have been two major experiments in democracy. The first was Athens, which lasted a century and a half; the second is the modern West. If one defines democracy as one citizen one vote, American democracy is only 92 years old. In practice it is only 47 years old, if one begins counting after the Voting Rights Act of 1965 — far more ephemeral than all but a handful of China’s dynasties.

Why, then, do so many boldly claim they have discovered the ideal political system for all mankind and that its success is forever assured?

The answer lies in the source of the current democratic experiment. It began with the European Enlightenment. Two fundamental ideas were at its core: the individual is rational, and the individual is endowed with inalienable rights. These two beliefs formed the basis of a secular faith in modernity, of which the ultimate political manifestation is democracy.

In its early days, democratic ideas in political governance facilitated the industrial revolution and ushered in a period of unprecedented economic prosperity and military power in the Western world. Yet at the very beginning, some of those who led this drive were aware of the fatal flaw embedded in this experiment and sought to contain it.

The American Federalists made it clear they were establishing a republic, not a democracy, and designed myriad means to constrain the popular will. But as in any religion, faith would prove stronger than rules.

The West’s current competition with China is therefore not a face-off between democracy and authoritarianism, but rather the clash of two fundamentally different political outlooks. The modern West sees democracy and human rights as the pinnacle of human development. It is a belief premised on an absolute faith.

China is on a different path. Its leaders are prepared to allow greater popular participation in political decisions if and when it is conducive to economic development and favorable to the country’s national interests, as they have done in the past 10 years.

However, China’s leaders would not hesitate to curtail those freedoms if the conditions and the needs of the nation changed.

The fundamental difference between Washington’s view and Beijing’s is whether political rights are considered God-given and therefore absolute or whether they should be seen as privileges to be negotiated based on the needs and conditions of the nation.

Li has made a staggering error: he has conflated individual rights with democracy. These are actually two separate ideas. In fact, the two notions can sometimes be opposed: in a pure democracy, 51% of the population could successfully vote to cook and eat the other 49%. That is where the notion of individual liberty and creator-endowed rights come in: while some democracy is tenable, the actions of a democracy that would be damaging to an individual’s liberty are deemed to be unconstitutional. This was the shape of America’s constitution after the revolution.

So Li is correct — America was not at its birth a democracy. America was set up as a constitutional republic. Its constitution was designed to protect individual liberty (even if it has not always been entirely successful at doing so). The Constitution is written very simply and beautifully. Here’s the First Amendment:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Simple, specific, categorical. No ifs, no buts. Other nations have paid lip-service to fundamental human freedoms, but they always wrapped themselves up in fineries. Here’s Europe’s attempt:

Everyone has the right of freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without inference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises.

The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.

In Europe, you have a right to free expression at the discretion of the democratically-elected authorities. And that’s not really a right at all. It’s a semi-right; a right with a whole lot of strings. You have the right to life — so long as the other 51% don’t vote to cook and eat you. 

But America’s constitutional republic is a long-gone ideal. America’s Congress pumps out a wealth of legislation not specifically authorised by the Constitution. The first breaches were done with the best of intentions: the Fourteenth Amendment applied the Bill of Rights to the states, albeit shredding the Ninth and Tenth Amendments. The Civil Rights Act gave racial minorities equal accessto public and private facilities, thereby ending the right of property owners to discriminate against whomever they chose. I am broadly supportive of those measures. But later breaches have been much more dangerous.

Corporations are now routinely bailed out, destroying the market mechanism and creating an aristocracy of “systemically important” corporations with access to Uncle Sam’s chequebook. The power to coin money has been delegated from the Treasury to a private cartel known as the Federal Reserve, allowing the private bankers to create massive and dangerous credit bubbles. The PATRIOT Act, and the NDAA of 2011 shredded the Fourth Amendment and ended the ancient right to Habeas Corpus. Presidents since the Second World War have routinely gone to war without an express declaration authorised by Congress. Obamacare has created a healthcare mandate, compelling American citizens to buy a commercial product — health insurance. Even the First Amendment has been turned upside down — corporations (who are not people) can spend limitless money on political campaigns, while political protestors (who are definitely people) are now confined to caged “free speech zones”. And that’s just from the top of my head.

So it is important to remember that criticisms of America today are criticisms of the present politics of America, and not of the ideals of constitutionalism, or of individual liberty.

It is certain that America today is in dire straits: deeply indebted to the rest of the world, heightened unemployment, the world’s largest prison population, a broken and zombified financial system stripped of the market mechanism, a huge swathe of citizens without access to medical treatment, tent cities.

And it is also certain that America’s welfarism has contributed to its debt. But that is more the fault of large corporations, farmers, and the military industrial complex who suck up subsidies and then call it “profit”, than it is the poor who without subsidies probably could not eat. But certainly all the subsidies have come out of America’s newfound democratic status. Give people the ability to vote for more free stuff (and lobbyists the ability to lobby for more free stuff) and more often than not they’ll take that chance. After all, who doesn’t love a free lunch?

But it is totally foolish to blame these problems on “too much liberty”.

In fact, right now it is China that seems more libertarian — at least in purely economic terms. As I wrote last month, China’s economy consists of just 20% of federal government spending, whereas America’s consists of 37%. China is more of a market economy, while America is more statist. So while China’s leaders might have taken a more “flexible” approach to individual liberties, at least when it comes to economic liberty, they are practically way ahead of America. And maybe that’s why China is doing so well economically — the freedom to do business, to create, to produce.

When it comes to social and cultural freedom, America is way ahead of China — and unsurprisingly, America is still the world’s cultural powerhouse.

What if this little thing known as liberty — and these little things known as unalienable rights are far more important than Li recognises? What if they are the driving energy that underpins innovation, that underpins economic prosperity, that underpins a robust economic system?

America was once the richest and most productive nation on the planet (and by certain measures she still is). This was a direct product of a system of cultural and economic freedom. People were free to think differently, to act differently, to create new businesses, new products, new techniques and this ultimately led to the greatest sustained period of wealth creation in history. They didn’t have to ask the permission of a feudal lord or monarch or commissar. They didn’t have to kowtow to an aristocracy. Only now — since America has adopted statism and bureaucracy — has America begun to fall behind.

So Li’s conclusion is right, but only in a twisted and roundabout way:

The West seems incapable of becoming less democratic even when its survival may depend on such a shift. In this sense, America today is similar to the old Soviet Union, which also viewed its political system as the ultimate end.

History does not bode well for the American way. Indeed, faith-based ideological hubris may soon drive democracy over the cliff.

Yes — ideological and faith-based hubris may soon drive America off a cliff. But that ideological and faith-based hubris that we find today in American government and in the American intellectual elite is not for America’s constitution, nor for individual liberty. Instead it is for statism, for big government, for surveillance, for authoritarianism, for central planning, for endless war and imperialism. The zeal that will drive America off a cliff is exactly what Li advocates more of.

Job Creation 101

How would you spend $50 billion?

Last week I talked about how Warren Buffett got both the American credit rating, and the utility of gold very wrong.

This week, Warren Buffett has made a similarly provocative statement, but one I am more sympathetic to. From the New York Times:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

While I agree that this is a fundamentally absurd situation, and that so-called “progressive” American taxation is now regressive, alas, the economics of the situation are nothing like as simple as Buffett makes out. Namely, if the system is rigged to favour the rich, then the system is rigged to favour the rich. Stating that fact doesn’t change the 20% youth unemployment rate, the record numbers of Americans claiming food stamps, and the simple reality that not enough jobs are being created to fill the supply of people graduating from school, college and being laid off. Tax reform will not directly address any of America’s problems with malfunctioning infrastructure, its dependence on Chinese imports, or its citizens’ addiction to debt: raising taxes on the rich might help pay down the deficit, but so too would cutting spending on wars and the military industrial complex. But while tax reform cannot directly solve these problems, Warren Buffett and his “progressive oligarch” friends can. How?

Job creation.  Investment in infrastructure. Investment in young people. Look at the humungous of levels bank reserves. There is cash just sitting idly that could instead be channeled into real investment in jobs and infrastructure — the kind that Paul Krugman calls for, just without the government involvement (or the Alien invasion). No doubt government has its own role to play. But why run sheepishly into the arms of government when the private sector has the means and resources to solve many of the humanity’s challenges — and at a profit? So without further ado, here’s where I would invest my money ($50 billion), if I were Warren Buffet:

  1. Carbon-Scrubbing Trees:
    While we don’t know exactly what effects climate change will have on Earth, we do know that keeping Earth’s carbon dioxide level as close to the pre-industrial baseline as possible is undoubtedly a good insurance policy. And doing so could undoubtedly create a lot of jobs. Carbon scrubbing trees allow us to do that by removing carbon dioxide from the air and releasing oxygen using a carbon dioxide removal process called “humidity swing.”
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