06.05.10
Posted in Energy - NonRenewable, Politics at 9:37 pm by steve
Who’s Bad?
From all the press about Obama and the oil well, you’d think that the President himself descended a mile beneath the Gulf and chewed through the steel pipeline with his own teeth. Had he actually done this, then I think one could argue that the oil spill in the Gulf was at least partly his own fault. But he didn’t. And it isn’t.
So why are political opponents trying to tar and feather Obama for the Gulf Coast oil spill? Let’s look at some possible reasons:
1) It happened on his watch. In 1883 Krakatoa erupted, sending 21 cubic kilometers of earth into the atmosphere. Chester Arthur was President of the US at the time. Despite this disaster, historians judge Arthur on his achievement in passing the Civil Service Reform Act. Lots of things happen on a President’s watch that are not his fault. Katrina itself was not Dubya’s fault. The disaster itself was not the problem. The lack of response was not even the problem. The problem was a rather wretched and deep denial that there was a problem. It was Dubya’s insistence that everything was under control when, in fact, almost nothing was being done. It was denial of a problem when there was a very real problem and denial of services by a federal agency whose reason for existence was to provide those services.
There is no such agency for oil spills. And there was no denial of the problem.
2) Obama advocated for offshore drilling. According to a book review in a recent issue of the Economist, a recent executive of Royal Dutch Shell argues that the reason for the spill is that US policy has forbidden drilling in easy places offshore; therefore oil companies must drill in difficult places. Had oil drilling along the eastern seaboard been allowed - as Obama advocated days before the disaster - BP would not have been drilling where it did in the Gulf. It’s a self-serving argument. It’s not clear that the depth of the well contributed at all to the problem. In fact, it is possible that a deeper well might have made control of the high pressure gas a little easier. So while agreeing with this executive would help our argument, we find it difficult to agree.
Still, it is one thing to advocate for offshore drilling in a responsible way. It is another to chant “Drill, baby, drill” like some mantra by a crazed sex addict. One is an act of reason; the other an act of mischievous passion.
Curiously, it is the people who yelled loudest “Drill, baby, Drill” who are most shrill in their criticism of Obama on this issue. So if we were to give them credit for possessing a shred of sanity, it is impossible that they would be arguing “We ought to drill offshore, but Obama is insane for advocating it.”
3) Katrina and Oil are both disasters to hit the Louisiana coast. Bush got blamed for Katrina; therefore Obama must get blamed for Oil.
In other words, it’s a habit of the mind. Habits of the mind are frequently quite illogical; and they frequently produce ideas that are completely false. But their effects can be quite persistent. So we need to look at this a little more closely.
Katrina is not Deepwater
What do these two events have in common.
1) They affected the Gulf Coast.
2) People were hurt.
3) The effect was big.
4) Someone was president at the time.
5) Both stories got a lot of attention from a bored press.
What is different about these two events:
1) Katrina was a natural disaster. The oil leak is a man-made one.
2) There were several days’ warning in advance of Katrina, none for the oil disaster. So the federal agency charged with preparing for natural disasters, FEMA, could have been doing something to make sure that it was ready to help if help were needed. No such agency exists for oil spills. Even if we were to assume it might be a good idea to cobble together such an agency (and it’s not) it would take years of political wrangling to get it operational.
3) The problem in New Orleans was the failure of a safety system for which the federal government had direct responsibility. The problem with the oil well was the failure of a company to adhere to the highest standard of safety processes. A Wall Street Journal investigation discussed in The Week clearly establishes nearly half a dozen distinct points at which BP departed from industry best practices, sometimes with stark criticism from their contractors. Even procedures required by the US government permit may have been ignored.
4) It is reasonable to make governmental entities responsible in helping to minimize damage during hurricanes and other natural disasters, it is reasonable to expect the government to be responsive when natural disasters strike. Agencies are charged with the task and their work is funded. It is not reasonable, however, to make governmental entities responsible for minimizing damage caused by man-made disasters, especially when those disasters are caused by profit-maximizing activities of companies that externalize the cost of failures. To do so tempts the most egregious abuses. Both the mortgage system bubble and the blown well in the Gulf are examples. Governments ought to step in not to save the institutions themselves, but to save American taxpayers from ruinous results. Sometimes, as in the case of TARP the one has required the other.
5) Bush attempted to use the Katrina disaster for grandstanding purposes; Obama has attempted to use the oil disaster as an opportunity to tighten up what little control the federal government has over the permitting process.
6) Bush supporters have, since Reagan uttered the incantation “Government is the Problem”, argued that less government oversight is unconditionally better. Such reasoning increased the probability of damage from events such as Katrina. Such reasoning increased the probability of an oil spill disaster such as the one in the Gulf. Such reasoning led to the deregulation of the banking industry that led to the need for the TARP program.
In short, it was the idea that “government is the problem” that underlay the real problem in both cases. That Obama opponents don’t immediately see this and capitulate on this dangerous mythology is testimony to the idea that hubris and deception too often trump reason and interest in the common good in US politics.
7) Katrina and events like it are inevitable. They are conditions of nature that arise regardless of how we behave. The question is in how to deal with them. The Bush Administration dealt with them by not showing up for a while. While we would like to believe that spills from offshore oil wells are avoidable - this is the first one in about forty years - they are likely to occur so long those who drill wells are not held to the highest standards and held accountable when they fail to adhere to those standards. In this respect, Obama has been showing up.
What ought to be baffling to most sane people is the idea that government has no place in regulating the behavior of oil companies; but that it is fully responsible for cleaning up their messes. What kind of a world does that create? A little more care in drilling probably would have averted this particular disaster. And that extra care might have cost a few millions of dollars. But instead, we have a spill that could cost billions in lost product and tens of billions to clean up. Limits on liability externalize that cost, shifting it to taxpayers. If oil companies had to pay more, they would have less incentive to cut corners, and the cost of oil production for them and for us could be a little lower, once the cost of big disasters is properly accounted for as a cost of production.
Oil Must Flow
Americans are totally dependent on oil. It is a dangerous addiction. And it is an addiction impossible to cure before the oil runs out. Until that time, even if we could spill enough oil into the oceans to kill every kind of marine life found there, we will be drilling for oil in the oceans. There is no other choice. To do otherwise means giving up most of the conveniences that we enjoy: things like food and water, good jobs, internet connectivity, and so on. Cheap energy got us all this stuff. And when cheap energy is gone, so will be the stuff. My grandparents lived without the aid of fossil fuel and theirs was a hard life filled with privation. I am not prepared to live it. Neither, I think, is the greenest of the radical greens.
So the oil must flow. What responsibility does Obama have? He has the responsibility to use the event to fix problems inside the federal government’s permitting office. He has a responsibility to use this event to frame America’s oil dependency as a problem. He has the responsibility to push for laws that hold oil companies liable for larger fines when they have some measure of culpability in oil spills.
Moral Hazard
Obama, however, has absolutely no responsibility to protect anyone from the fallout. While it is reasonable to see the government play a role in responses to natural disasters, it is less reasonable that the government should play a role in cleaning up disasters caused by failures of large corporations. TARP, for instance, was not about saving bankers from the consequences of their own bad decisions, it was about saving the American public from those consequences. The American government does not have the expertise to clean up oil spills. Nor is there any reason it should. If oil spills are to be a regular part of American life, then oil companies must be responsible for doing it themselves, or for funding third party efforts to do it.
It might be tempting to say that because no single entity has as many resources to clean up disasters as the federal government, that it ought to be the responsible party. In the case of natural disasters, it makes sense. But in the case of disasters caused by institutions that are acting irresponsibly in order to increase profits as is the case for banks and for oil companies, this line of thinking invites the very kind of excesses that cause disasters.
This is one slippery slope we cannot afford to slide down.
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02.21.10
Posted in Policy, Book Reviews - Non-Fiction at 6:23 pm by steve
The idea of comparing the asset bubble and the recent contraction against eight hundred years of financial information and anecdote is a powerful one. Human nature is pretty much the same as it has always been; and investment trends are driven in part by search for value and in part by departures from these involving greed and fear. So the same kinds of things happen over and over. The specific financial vehicles that zoom about and crash into hard walls change from generation to generation; but the motivations that drive them remain the same. So it seems reasonable to have high hopes for “This Time is Different: Eight Hundred Years of Financial Folly.”
The authors mine a rich vein of financial data, crunching numbers from a number of large and sometimes difficult to access databases. They evaluate this data carefully, employing good statistical tools; and they build a robust and persuasive model for credit-worthiness of soveriegn entities.
The book starts with a careful definition of terms. It defines inflation. It defines default. It produces solid working definitions for the concepts the authors wish to develop. Before long it is easy to see that its primary focus is on the failure of sovereign nations to meet debt obligations, although there is also a chapter dedicated to banking crises.
Early on, the authors divide nations into three groups:
- Underdeveloped nations into which invested money virtually disappears forever, producing no evident beneficial results and a constant stream of default.
- Developing nations in which invested money sometimes yields good returns and sometimes creates default situations.
- Developed nations in which defaults are rare.
They dismiss the nations in the first category as being hopeless in terms of debt. They claim little interest in the third group of nations because, they claim, these nations take access to capital markets seriously. And they behave accordingly. Defaults sometimes occur. But they are rare. And they are almost never serial. By comparison, nations in group 2 default more frequently and serial default is not uncommon. When they do default, the losses are frequently larger. They are interested in producing a model to predict which group 2 nations are actually good credit risks and which are poor ones.
They go on to suggest that group 2 nations - when they become sufficiently stable - tend to “graduate” and become group 3 nations. In light of the recent debt crisis in Greece, it is interesting to note that Greece is among the half dozen or so of the group 2 nations they suggest worthy of graduating to group 3 status.
Among the truly enlightening models they produce is a graph of cumulative percent chance of default for a sovereign nation as a function of its debt service obligations as a portion of its tax revenues. Predictably, as an increasing portion of tax revenue is consumed by debt service, the probability of default increases. This is a graph that every policymaker who votes on a budget should be able to draw from memory; because it tends to make clear that the risks get big quickly. The same graph serves to prove that a nation whose people and institutions hold more debt is more likely to default for the same level of national debt than one where private debt is small. The lesson: debt destabilizes.
Interesting, too, is the fact that short term debt tends to be more destabilizing because it is so cheap; being cheap tempts overleverage. But the real problem is that it has to be rolled over so frequently. A loss of confidence among creditors means that the debt cannot be refinanced. And default is the only option. A loss of confidence that lasts two years could cause a nation that uses only short term instruments to default on a very large portion of its debt, creating a financial trainwreck.
Financial trainwrecks happen from time to time, and few are so potentially devastating as a broad, sytematic bank failure of the sort that prevailed during the Great Depression, otherwise renamed implicitly by this book as the First Contraction. The greatest part of its harm came from widespread bank failures. Similarly, the greatest threat of the banking crisis of 2009 or Second Contraction was the possible effects of widespread bank failure.
In light of the fact that bank failures wreak much more havoc on western economies than sovereign defaults, it is a bit of a mystery why a single chapter of seventeen is dedicated to bank failures. This chapter is primarily dedicated to convincing us that bank failures are relatively common, even in nations that have good credit sense - the type 3 or developed nations. Furthermore, there is not much the authors have to say about their causes or about how to manage them. It is almost as if the authors take the events as givens and the consequences as unavoidable. After all, bank failures are caused by the fluctuation in value of the assets banks hold as collateral for their debts.
The authors miss the opportunity to quote JP Morgan who - when asked what the stock market will do answered presciently “It will fluctuate.” This means one thing to a person or an enterprise with no leverage, especially when there is a quick recovery. In this case, a downturn in asset prices is nothing but a buying opportunity. But fluctuation means something else entirely to people and business entities that are highly leveraged. The authors make the case that it is the business of banks to deal in leverage. The more leverage a bank uses, the more lucrative its business is in good times. Therefore, inevitable fluctuations must inevitably lead to bank failures. And bank failures wreck economies.
Banks tend to amplify the effects of productivity gains by making it easy for saved surplusses to be reinvested to cause further productivity gains. At least that is so when banks invest in enterprises that expand the pool of real wealth. But, the authors point out, the amplification effect of banks works the same way during business contractions, amplifying the pain of the contraction. This is especially true when banks fail. Assets are frozen or lost. Consumers and businesses fail to pay their bills. Institutions are forced to downsize or to reorganize or to go out of business entirely. And even the ones that do not cannot borrow to expand their successful businesses because credit is fozen. The leverage that banks use, then, amplifies the pain of the inevitable economic contraction.
The book was published during the banking crisis of 2009, and its title is suggestive of the thinking that drove the economy into a ditch: “This time is different.” There was, in the early and mid 2000’s a broad consensus among the financial actors that the things that caused asset fluctuations no longer existed. And that, therefore, house prices would go up at a certain minimum rate each year. Therefore, the best way to make money was to borrow and buy derivatives tied to real estatedasset values. That this happened with a decade of the “dotcom” bust - in which precisely the same arguments were being made for businesses the likes of Cisco Systems whose market capitalization was so big and growing so fast that if it kept doing so for another decade or two would surpass the whole GNP of the US - suggests that the level of sheer stupidity within the walls of the financial community can only be exceeded by a kind of blind testosterone-driven hubris.
The title implies that this book will help us understand why someone might have thought that the dotcom and real estate bubbles of the Greenspan/Bernanke era must be different. But it doesn’t. It implies that it will help us understand why exactly these bubbles were the same as other bubbles. But because its primary focus is on the size of debt and its manageability it fails completely to explain the formation and bursting of asset bubbles.
When it comes to helping describe the conditions that set the stage for the Second Contraction, or the 2009 banking crisis, the authors make the compelling case that:
1) the banking regulations that were in place from WWII until 1970 stabilized the global banking system to the point that bank failures were quite rare.
2) deregulation of banking in the 1970s through the 1990s created an environment in which bank failures increased worldwide.
Then, after firmly establishing that banks inevitably fail, that in failing they crash the economies of whole nations and sometimes the whole world, and that the trend of liberalization has led to a trend of increasing instability in the banking system - a mathematically necessary consequence of increasing leverage and lower barriers - they do something very odd. They suggest that re-regulation should not be used to solve the problem of banking failures. But they give no alternative solutions.
How is one to interpret this line of reasoning?
One interpretation is that the authors view the the banking system as an institution whose purpose is to serve the financial needs of bankers. In this light, the whole of the book makes sense. Most of the book is dedicated, then, to helping bankers correctly assess risk in dealing with sovereign entities. Bank failure is simply an inevitable consequence of asset fluctuation and is to be managed by arranging for sovereigns to dump money into the banking system to keep it liquid during downturns. This maximizes the returns of bank because they risk nothing by being overleveraged. The book is of, by, and for bankers. And the way that the title and subtitle appeal to non-bankers is accidental. The book might better be titled “A banker’s guide to minimizing risk in lending to sovereign nations.”
Similarly, the schema of complete deregulation and saving banks during downturns by handing them money is an excellent way to maximize the amount of capital bankers siphon away from more productive activities in the economy; but it may not be such a good way of assuring that they are very good at serving their social function as reliable intermediaries or of assuring that those rich, group 3 nations continue to be good credit risks.
The authors struggle to explain why, precisely, developed nations tend to be good credit risks. In the end, they fail to produce any convincing argument - even one they themselves find compelling. What we come away with is the especially unsatisfying is the argument that it can’t happen because it hasn’t yet. Or not for a long time. That seems to be the argument for why developed nations will not default on debt. Ever.
If we persist in believing it cannot happen because it has not, it’s only a short time before we will find ourselves hearing “This Time is Different.”
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05.15.09
Posted in Social, Policy at 6:21 pm by steve
There was a terrific graph in the Wall Street Journal yesterday (pC1). It showed pay in the financial sector normalized against pay in all other non-farm endeavors over the last century. A hundred years ago the ratio was around 1.5. For every dollar people in other non-farm jobs earned, people in the financial sector earned a dollar and a half. This ratio climbed until the early 1930’s. Then it levelled off around 1.6. In 1940 it fell precipitously to 1.2. It continued to drift downward until 1980 when it was almost at parity. Since 1980 it has risen steeply. In 1998 it exceeded 1.6. And recently it has exceeded 1.7 - the highest level in at least a century. The financial industry has been seeing outsized pay for almost the last three decades.
What is one to think of this? On the one hand, we note that with the expansion of America’s middle classes, with their growing ability to save and invest, has come a dramatic increase in the amount of capital seeking good management. Even in the ninteen fifties and sixties, investment in the capital markets was seen as an endeavor of rich people. But by the end of the 1980’s everyone with a good job was salting money away in the capital markets. Assuming some modest returns to scale and inprovements in productivity due to improving IT systems, it seems reasonable to assume that pay in the sector would increase. It would be in everyone’s best interest for it to do so, so long as the financial system grew more efficient at allocating a growing pool of resources.
A second factor in assessing the rise in financial sector pay is the argument that the financial sector works by allocating resources to the most efficient means of production. A healthy financial sector does this better than an ailing one. And it is definitely worth a lot of money to get this allocation system working efficiently. This is a reasonable and supportable argument. And to the extent that rising pay in the finiancial sector has led to more efficient means of production - in excess of the premiums to pay within financial sector itself - we are all better off for it.
We are not prepared to argue whether these conditions are strictly satisfied. The market is not always completely efficient. That, however, is the topic of another discussion.
Moving beyond that issue we see two monumental problems that attach to the situation of stratospheric pay levels within the financial industry: Transparency and Opportunity Cost.
There is a lot of talk about transparency. Not coincidentally, the same WSJ page features and article about regulations pertaining to derivatives and other esoteric financial instruments.
There ought to be discussions about this, because when wealth is transferrred to the financial system in excess of the value added by that system, we all become impoverished. Lack of transparency is the magic that makes such a transfer possible. Madoff’s whole scheme worked because of lack of transparency. He claimed to have magical powers. And people believed him.
Lack of transparency leads to chicanery: It is what makes that transfer seem desirable when it is actually not so. There are a thousand highly paid political operatives working on resoring transparency. And if capitalism is to function correctly, they damn well better take a good crack at it. In light of this work ther is a glimmer of hope that it will be fixed by good legislation. ( In Journal-Talk, Regulation)
When all the processes in the financial market are open, frank, truthful, unbiased, unpuffed, unwrapped, and in plain view of all interested parties, there is some small hope that the market can approach efficiency. The size of the distortions tends to be limited, at least. When it is otherwise - when the distortions become a huge part of the system, the financial industry will swallow up great gobs of capital, pay it to its operatives, and weath-making enterprises - companies that manufacture and distribute goods and services that add real value to peoples’ lives - will quickly starve for lack of capital. That is the fast-track to serfdom.
The second problem with stratospheric pay in finance is opportunity cost. Every economic activity requires an input of talent. When all talent flees any activity it is usually not long before the activity stands on shaky ground. It is not long before it begins to crumble. When I was leaving college, for instance, steel producing companies were losing money on US operations. There were lots of reasons. Part of it was that factory floor pay in the US was an order of magnitude higher than it was in the far east. And unskilled labor in the far east was more productive. So it made sense to invest there rather than here. In any case, steel companies, when they offered jobs to degreed engineering graduates, paid the worst. So on average, they probably also got the worst. This drove them into a kind of inevitable downward spiral. There still exist a few specialty steel makers. But most of the industry is located offshore.
Every manufacturing industry in the US competes for talent with the financial industry. It does so for engineering, business, and finance professionals. If the financial industry is paying more than any manufacturing industry, where will people with the best talent go?
There is absolutely no question that finance needs good people to allocate resources among businesses. But what if all businesses are handicapped by their inability to hire the best talent? The process of efficient allocation no longer produces the best economic result. I am told by my wife who graduated from Columbia Business School in the late 1980’s that almost all the best people specialized in finance. They planned to work on Wall Street because that’s where they could make the most money. At that point in time the ratio between finance and other non-farm pay was 1.2. In other words, that level of pay proved no hinderence to the financial system in terms of attracting talent. The additional fifty cents on the dollar amounts to excess profit drained from the capital pool that could be used to rebuild manufacturing in the US or rebuild a crumbling infrastructure.
The readers of WSJ tend to be more closely connected with the financial system than readers of any othe publication, so it is not unexpected that WSJ should advocate for their interests. The readers of the WSJ will likely be people who view with suspicion and animosity any regulation that threatens to derail the gravy train. Maybe, though, that is precisely what needs to happen.
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04.16.09
Posted in Policy, Snark and Snarkier, Politics at 2:20 pm by steve
I just bought these great glasses. I put them on and everyone says “My, you look thinner.” Now, when I go into banks tellers smile at me. When I go into restaurants, waitresses smile at me. When I go into gymnasiums people nod approvingly. I walked into my doctor’s office wearing them. They took my weight and blood pressure. The doctor looked at the numbers and said “Well, I wouldn’t really worry about these numbers because obviously they are irrellevant to you. I can see that you aren’t fat.” These are really great glasses. And, in fact, they are so good that they make me want to get out more. Who knows maybe I will eventually come to resemble the new me everyone sees. Or perhaps not.
The magic glasses parable came to me as I was contemplating the article at the Economist (link above) advocating more transparency and less regulation. At first I saw it differently; but I think it is useful to consider the possiblity that our society is simultaneously embracing more government involvement and less transparency in the world of finance. That, in fact, if banks get to magically make risk go away by using less conservative and more abstract valuation models they may be donning the kind of magic glasses we talked about; that may make them look better in the short term. But in the longer term it is bound to make them less stable when downturns occur.
I will be the first to advocate for temporary government involvement because it is better than collapse - which seems the only other alternative. But long term governmental direct participation industry, commerce, and allocation of resources always tempts corruption. Lack of transparency aids in hiding corruption. The only answer is free markets and sound, well enforced regulation. The question for government is not whether it ought to govern (as the whole of the Republican party apparatus appeared to advocate for some time) but how?
The answer is “well.” And the means to that is by discussing policy openly. While I just happen to agree with most of Obama’s policies, it is not his policies that I find so deliciously refreshing as it is his style of governance. He welcomes discussion and is open to dissent. He proposes key principles upon which we can agree and he lets us focus on working out the details in open discussion. This kind of discussion is illuminated by transparency. Transparency - the free and open flow of all information crucial to making a decision - is of vital importance to the proper function of markets and democratic governments. Systematic behaviors that stifle transparency or promote bad judgement in light of good information ought to be considered corrosive to the very liberal principles upon which these institutions are built.
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04.11.09
Posted in Policy, Culture at 9:10 pm by steve
It’s broken. Not just a little. The media in America is fundamentally broken. The most essential social purpose of media is open public policy discourse. Open public discourse is vital to a democratic way of life. Yet the US has repeatedly failed to attain and maintain a high level of public discourse in most of its media. A few magazines prove an excption. And there are some minor bright spots in TV and radio. What started out being not particularly good has lurched from mediochre to insipid and then veered toward destructive. It is not uniformly so, but to a remarkable extent main stream media is a wasteland. Too many of its offerings actively gnaw at the fragile fabric that holds society together.
The Shallowness Problem
In 1832 Alexis de Tocqueville noted that American newspapers were principally commercial rags. He noted that Continental newspapers were full of thoughtful commentary, political analysis, and generally good writing but that American newspapers had only stripped down stories about trivial events, and ads. He did note that, at least east of the Hudson, people tended to live in vital communities that assembled regularly and engaged in political discourse orally. He admired the vitality and inclusiveness of such a system, even if he imagined the level of discourse to lack sophistication. In some ways, we might suppose it worked just a little like the internet of today, except that common interests tended to be geographically shared then, whereas today they are based more on interests, competencies, and political inclinations.
Much has not changed in America. In all but the most specialized media, trivia trumps thoughtful analysis, commerce trumps all. There is one nationwide newspaper that gets delivered free to a lot of hotel rooms whose level of discourse is so shallow I have never been able to make it through the first paragraph of any story. But I am not a patient reader; maybe the good stuff starts in paragraph 13. We must imagine that this free newspaper meets the needs of its advertizers, else the paper would fail. Yet does’t a newpaper by virtue of its mode of circulation have some obligation to inform?
Quid Pro Quo
It seems to me there is a quid pro quo here. America is a democratic republic. The only way that it can hope to be governed well is if its citizens - the ones who choose the political leaders - make good choices. They do not choose once and then stop. They keep on choosing. This choosing process offers a chance of sweeping corruption, bad behavior, and bad policy out of office. The process only works to the extent that most of the people are both effectively educated and well informed. Montesquieu would point out that they must also be truly virtuous - knowing what is good for society and striving to get that. It’s a crucial point, but part of another discussion. In order for Americans to be well informed, the press is policed almost not at all by the government. This is both good and necessary. But it implies a return obligation. It requires that media operate in a way that does not sabotage good public discourse. It is not a very odious requirement. But it is a strict one.
Substitute Products for Good Discourse
It is a categorical mistake to imagine that the sole purpose of media is to inform the political process. In fact, this may rightly be just the tiniest bit of what it does. But in the grand scheme of things, one can judge all media content the basis of whether it is particularly helpful to a society, innocuous, or harmful. And a society that fails to make this judgment risks self destruction.
There are several sorts of media content that stand in the way of good discourse. One is pablum. It is soporific to good sense and sensibility. Its mode of operation is to lull people to sleep. It is not a physical sleep, but a moral one. It is a kind of secular “opiate of the masses.” In a society full of the pains of inequality and injustice, a modest consumption of such opiates may be a necessary part of the cost of living in a socially cohesive society. I Love Lucy was mindless; but it was fun. But it has the same side effect as an opiate. It makes us want more of the same stuff. And it draws us away from doing harder but more necessary thinking.
In small doses pablum is pretty innocuos. One person’s drivel is another person’s fun, sometimes. There is a scene in a recent indy film that illustrates the point. The main character has a crazy brother whom we find mischievous, bright, fun. He is very quirky, and very lovable. In the middle of the film he commits suicide while watching “Everybody Loves Raymond” because he cannot figure out why anybody would. I understand his quandry. The observation both helps us understand a bit about what pablum is and what it is not. If I am not mistaken, the television show ran for a number of seasons and was considered a commercial success. It may still be running. And judging from the twenty eight seconds I endured of one episode long ago, it seemed about as harmless as it was vacuous. There is no reason to place any sort of sanction on this stuff. We imagine that good editors and program managers know it when they see it. And we must hope that they prevent their particular media channel from being completely overcome by it.
Another form of media product is shill fill. Shill fill is content that masquerades as news or information but whose purpose is primarily commercial. The purest and most open example is the infomercial. But at least the infomercial has the decency to inform us of the provenance of the material, so we may judge it accordingly. There are more subtle forms. If one picked up a newspaper in the mid 1980s and for five years running could find a new story about how high cholesterol was a ticking time bomb and a silent killer, one might reasonably ask whether the story had any connecton to a new family of patented pharmaceuticals designed to lower blood cholesterol. I remember the cholesterol scare of the mid 1980’s. I still have a cookbook or two written by then prominent nutrition writers at prominent newspapers advocating low cholesterol or low fat diets. One writer fumes at how the egg industry stood in the way of progress. Today we find informed writers telling us to eat eggs to lower cholesterol.
There is no question that commercial interests sponsor media that support political points of view most consonant with their interests. Consider rags like “National Review” and “Weekly Standard.” It’s hard to go a week without seeing a number of new articles in each advocating for making our military “Bigger” or “Harder.” I get emails about the same thing every day. But I would not mistake them for good journalism. And these “papers” are very generously supported by a passel of military contractors.
Shill fill can actually serve a public good. But for it to do so properly, it must be written in a way that informs the reader of the special point of view of the writer. And it must be edited with more than a modicum of skepticism. Cholesterol-lowering drugs proved a success in lowering cholesterol. There is more question about whether they saved lives or cured heart disease. The hype generated to make room for the drugs shifted us from eating meat to eating fried potatoes and corn meal. This made us fat. It may or may not have changed our risk of heart disease on account of cholesterol, but it raised the risk of heart disease and on account of obesity and triglyceride levels. The drugs that started this conversation were a raging commercial success. But society has paid a high cost for it.
I can read a prominent city newspaper and find what appear to be shill fill articles several times a year. I may not pick up that paper as often as two days a week. I rarely read more than the front page of two or three sections. I wonder how many articles really are shill fill. Especially if we expand the definition to cover private interests of government officials.
A third category of media product that gets in the way of good public discourse is trash talk. This is typically a radio or television format designed to lampoon “people who are not like us.” It tends to have a more rural audience, although one could argue that at times SNL has wondered into this territory. Rush Limbaugh may be the early prototype. But Rush, at least in his early days, did try to be funny. And while the general thrust of his work I believe is mistaken, some of his points are worth considering. But what started out as lampooning morphed into attacks. And what once were subtle attacks now occasionally turn into open calls or incitations to do violence.
I spent perhaps a minute with Michelle Malkin once. Having stopped viewing television some years before, I had never seen her nor heard of her. I had no idea what I was in for. By forty five seconds I began feeling mounting nausea. By sixty my entire concentration was focussed on suppressing the impulse to put a chair through the televison. No idea what she said. And that’s the point.
It is one thing to lampoon the foibles of people. We all have them. And each group in a society will specialize in its own sort. Sometimes they need to be laughed at. This is probably both a desirable and necessary form of political discourse. Lampooning people simply to put down their behavior or qualities because “they are not like us,” however, has already stepped over the line. This is the stuff of racism and race baiting. And it is not the race part of it that makes it the problem. It is the way in which it destroys respect for ways of being that are different from “ours.”
Fundamentally it has nothing to do with race; it has rather to do with identity groups, tribes. Call it fundamentalism, provincialism, tribalism, ethnic intolerance, red-state wretchedness, wingnutism, whatever one calls it, the act is morally degrading. It degrades the person talking. It degrades the listener. It degrades the target of the trash talk. Each person or group in the equation turns out to be worse off as a result of it. Even the advertizers lose. Their markets are splintered in the process and their brands’ goodwill is defiled. The former raises the cost of advertizing by requiring more careful targeting. The latter simply tarnishes the luster of the brand with everyone. Being respectful breeds respect. Being disrespectful breed disrespect.
A good analyst might be able to produce seven, ten, or five hundred more categories descriptive of media practices that either actively or passively degrade the level of public discourse. But I am going to stop with three because I set out intending to talk about the third one.
Shredding the Fabric of Society
Bad media behavior has a number of insidious effects. First, there is the opportunity cost. Each time something meaningless fills pages, it diverts attention from real problems.
As interested as I am in good political discourse, I imagine my limit to be a few hours of it a week. I am fond of programming that gives me insights about society and my own humanity. I am tempted to reduce “good programming” to “BBC shows produced before commercial TV in Britain.” And good journalism to “the several Economist articles a year that are not obvious apologetics for completely unregulated lassez faire economics.” Sure, there is a lot of good information out there. But very little of it is soundly synthetic. When pieces are good at synthesizing lots of information, they too frequently ignore ideas and evidence that contradicts the point of view. It’s hard to get a really balanced view of an issue. Even most of the pieces in the Economist do a perfunctory job of presenting an opposing view.
But even such feeble pretenses passed out of media practice when the Reagan administration withdrew the “fairness doctrine” that required media outlets that used public airwaves to give multiple points of view on an issue. With the advent of FOX network, we get “all bias all the time.” It’s a network that actively promotes narrowmindedness, provincialism, bias, anger, bigotry, and hatred. And one of its products is trash talk. For example, characterizing people who have a differing point of view as Nazis. Or comparing moslems to fascists with the term “islamo-fascist.”
The real, monstrous cost of trash talk is that it destroys civil society. It tears down bridges that span gaps between groups in society and it builds walls between them. It fosters intolerance. It closes minds. It reinforces prejudices. It encourages ingorance and rewards closed-mindedness. It drives us to be as stupid, and intolerant as we feel naturally inclined to be. It nurtures fundamentalism. It cultivates ethnic hatred. This is the path we must follow if we wish our society to be reduced to the behavior of the Tutsis and Hutus of mid 1990’s Rwanda.
Ethnic hatred is seductive. Every group tends to think of itself as being superior. It is human nature. If there is any social or political area in which America has clearly outstripped the rest of the civilized world it is in its ability to amalgamate disparate cultures - suppressing the tendencies of groups to behave destructively and separately as political entities and economic entities, while encouraging ethnic groups to retain positive cultural practices and identities. It is not the primary reason for success, perhaps; but had America failed here, failure in other areas would have followed. Trash talk threatens failure. Hatred breeds repression. And repression strangles freedom. It’s not a many-stepped process to get from bad discourse to bad government. The latter sticks to the former like a shadow.
The moment we let this impulse toward fundamentalism, tribalism, parochialism be the singular impulse governing political discourse is the day we doom American history to follow the trajectory of the history of the Balkans. Or of Rwanda. In both of these cases ethnic hatred and tension is endemic. A recent book review in the Economist talks about the latest definitive history of Montenegro. It mentions how the book’s author, who was in the state in 1990 witnessed its occupants wantonly killing, pillaging and plundering with a kind of gusto that clearly communicated ” This is what we do. Our ancestors have done it forever; our descents will do it forever more. It is a time-honored and much loved tradition. It is our life; to kill and plunder” This is the end to which trash talk must lead us. Society splinters into tiny mobs whose reason for existence is killing the “other,” pillaging, plundering. It explains the perpetual strife in the Balkans going back 500 or 1000 years or more. And it explains “going Hutu.”
Trash talk will lead us to ends we can neither imagine nor endure. Democracy is not stable under a cascade of trash-talking media. It will come crashing down. And when it does, the government will put a whole new world of programming directors in charge. The irony will be that there is a good chance that they will lack imagination. Programming will become dull and utilitarian, but it may better serve the public interest to some extent than the programming of today that features the Limbaughs, the Colters, and the Malkins. Still, to those who view the media as a cash cow, such events would prove a catastrophic. Thus, it is in the media’s best long-term interest to act with at least a modicum concern for the public interest. If it fails to sustain democracy, it will lose its own franchise in the process. For society at large, the blow promises to be every bit as severe.
Rampant political and economic opression will probably be part of the mix. The nightmare scenario is that the rich upper class might manage to get the miserable lower class to hack the middle class right out of existence, either literally by “going Hutu” or figuratively by voting for disastrous public policies. Perhaps it could not happen today. But the trash talk we now hear has edged perilously close to driving precisely this scenario. What one is left with in this scenario is a banana republic like the worst Latin American countries of long ago where unstable governments swing perpetually between opressive Fascism and opressive Communism. There has been a thirty year economic trend in the US in this direction. And it has been driven by media chants of and ritual offerings to the greedy gods of laissez-affaire economics. Under Dubya the chants and drumming have grown louder. And the offerings of blood and treasure more costly.
This is all speculative. But the recent trend is worrysome. If things go in the same direction and at the same rate for thirty more years as they have done for the last thirty, democracy as we experience it is doomed. We may not have that long. There is no reason to believe that the trend must continue. If we are really lucky, long before that America will experience a series of shocks that will begin a process in which we re-examine the assumptions that set us on a destructive path. And we will begin to make course corrections. Iraq may be the first of them. It may also be the least. So some of the correction is likely to come about without media help.
Recourse
Still, the media plays a vital role in shaping political discourse in America. And if it does not owe a duty to the democratic system to which it owes its very existence or to the people who make up its audience and buy its advertisers products, at least it owes a duty to its shareholders to preserve long-term equity. For one reason or another, the media must act responsibly. If it loses its soul completely, permanently, irrevokably its franchise must follow close behind.
For some years the people who staffed and oversaw the FCC viewed broadcasting as a use of a public resource - the electromagnetic spectrum - which required in return some augmentation of the public good. In this view of the world free speech reigned, but there was a civic obligation a broadcaster had to fulfil. A television or radio station would have to provide a certain amount of programming that met certain public needs to satisfy licensing provisions. This did not require much. It did not guarantee much. But it did require something. It amounted to much more than nothing.
Over the last decade or two, and especially under the Dubya administration, the view expressed publically by the FCC has changed. Today it more closely resmbles the notion that the broadcast system is a public resource to be exploited to maximize profit - like a vein of copper ore. And that any provision that the FCC imposes on broadcaster ought to be exclusively to that end. The result is higher media concentration, less programming variety, more homogenaity, and less local content. And a brand of political discourse that is clearly biased and destructive. Almost all of this may rightly be seen as harmful. Homogenaity, assuming innocuous programming, could actually serve to reverse forces of Balkanization. But most of the rest of the trends sacrifice public social goods for private ones. This defies the purpose of good governance.
The most insidious problem is media concentration. It creates a world in which a single entity or a small group of people controls all of public discourse. Under the best of conditions this is undesirable. Even the best and brightest people are either good and bright only in one tiny area of expertise, or they are less good and bright about lots of things. It takes a lot of experts and a lot of conversation to Most people are mostly wrong. To make matters worse, power corrupts. So if one starts out as a well meaning media mogul, the likelyhood of remaining one for a long time is infinitessimally small.
But the really big problem is that public discourse is made of a huge number of views. Our tendency in America is to think dualistically, giving to each question two possible answers. Our whole dualistic mindset is badly adapted to all political discourse. Real world issues never pose such questions. The hard part of getting hold of and mastering an issue is creating meaningful categories and relationships, then formulating questions based on these categories and relationships. A concentrated media is just barely able to do lip service to the second side of a dualistic problem. It has no hope of framing good questions in a many dimensional concept space.
The more parties there are working on a problem the more hope there is of getting real and effective answers to real social problems - not just faux answers that suit the needs of special interests. A highly concentrated media has no hope whatsoever of doing this well, even if they set out to do so. Especially not in a land where political discourse is already a characterized by tradition of dualistic, shallow and simplistic thought.
So the first part of the solution is to change the political philosophy of the FCC board so that it represents public interests over private ones. Once the FCC is properly constituted to represent public interests over private ones, it might be better at reconning the costs of media concentration and at requiring broadcasters to air programs that encourage broad ranging and vitally varied ideas and formats that either serve the public interest or do not blatantly undermine it.
The second part of the solution, and probably the most important, is for the media to view its mandate to deliver discourse on political subjects that is broad, deep, far ranging, multifaceted, thoughtful, penetrating, well informed, and concensus-building. It must do this because of its perpetual debt it has to a free and stable open society. And to its stockholders. It is a huge responsibilit. There are only a handful of publications that come close to meeting this high standard. And only a few programming channels who have, from time to time done so with certain programs.
Finally, government needs to do someting about trash talk. It is a touchy issue. There are a number of cases in which trash talk is clearly political and by virtue of that is presumed unconditionally protected. My guess is that Limbaugh, though he is mostly mean, his facts are frequently wrong, and he does encourage tribalism, does at least some good in making us aware of questions that are useful to contemplate. For the most part he is subtly divisive; not openly so. I neither like him nor agree with him; but what little I know of his work suggest that he is generally not over the line. There are others who would not agree. And they might be right.
But there are a number of cases in which trash talk is clearly incendiary: it openly provokes violent behavior or attitudes. Spocko’s Brain had a collection of such cases until a large media conglomerate shut down his site with a cease and desist order. Michelle Malkin and Ann Coulter come to mind; but I may be confusing my own reaction with that of other people. My guess is that if I watched enough, I could find places where they clearly cross the line; but it is a prejudice, not an informed judgment. If there is no case in which Malkin or Coulter’s language is simply incendiary, herding people into tribes or provoking them to plunder, then there certainly are cases with other radio or television talk shows. And they need to be stopped.
Bad words offend. But they do no lasting damage to the fabric of society. The government has chosen to ban them on air. And this is a supportable position. I find the ban convenient to my own tastes but I am not sure I agree with it. Hate speech, trash talk, language that tribalizes America, however, needs to be banned because it shreds the fabric of society. A free society cannot endure it for long. And once it is shredded, only one thing can put it back together: a terrible, repressive regime. We might have learned this from the disintegration of Yugoslavia. But we didn’t. We might have learned it from the disintegration of Iraq. But it seems we haven’t yet. Let us hope we can learn it before their fates have become ours.
Permalink
06.06.08
Posted in Policy, Politics at 11:14 pm by steve
I was in the middle of my first order of salsa from Amazon.com when I got the message “Http/1/1 Service Unavailable.” That was at roughly 11:45. As I write this at 3:14, the service is still down. By some measure, Amazon.com is the world’s largest retailer. Not in sales volume, but in terms of reach. No retailer offers more SKUs. Now, the fact that Amazon.com is down for three hours is not the end of the world. In fact, I may be the only person to notice it. If anyone else did, they would probably do what I am doing, feel a little put out and try again later. But what the service outage does suggest is that the internet, for all it does achieve, is built on technologies not immune to Murphy’s law. This particular failure is not a failure of the internet, but it is a failure of one of the world’s most prominent internet-only businesses.
It reminded me that big things fail. It reminded me of a perpetual worry I entertain, which is that we are not smart enough to manage the technological society we have created. It is not an opinion I have always had; but it is one that has gradually crept up on me. More and more, it seems to me, the world is becoming cheaper, more tawdry, and more prone to great breakdowns.
Before Chernobyl I had the sense that society in all its technological compexity might be sustainable. Sure, almost every important facet of production and distribution - if it was to be understood with any depth - required graduate study in some specialized field. But the educational system was pretty good at promoting competent people, and the number of highly skilled positions need not necessarily extend beyond the pool of qualified people.
Chernobyl marked the start of a change in my attitude that was reinforced by a move from Texas to New Jersey. When I considered the great accident at Chernobyl I understood that anyone who took an undergraduate heat transfer course and who knew what film boiling was would be smart enough to avoid the act that caused Chernobyl to blow up. In the US that would translate to tens of thousands of engineering students per year. When I studied heat transfer as a graduate student, I learned that most of the analytical solutions to difficult heat transfer problems were done by Russian workers. So to the extent that the development of analytical techniques to solve problems develops more robust understanding of the problems, the Russians were arguably in a better technical position. They arguably had a more qualified pool of people to choose from. And Chernobyl was one of Russia’s most expensive pieces of technological equipment. So they would put good people there. So how would one explain the accident? The accident was not caused so much by lack of personal talent as it was caused by lack of institutional wisdom.
One might argue that the meltdown at Chernobyl was caused by two big factors. One was that the Russians were not as obsessed with safety as are people in the West. Solzhenitzyn noted this obsession and thought it made westerners do silly things. We will, one day, argue that the West’s obsession with controlling everything to the point of denying death has hidden costs and that those costs we may one day not be able to afford. The argument is especially useful in considering health care costs. But this tendency to believe that everyone can cheat death does have its payoffs; one is that all nuclear reactors in the West have robust containment buildings that assume the kind of scenario that occurred at Chernobyl.
Another factor might be hubris. It may be something about the way people self-select for occupations. In the West, the engineer tends to be a cautious type of person. In the Soviet Union, technical people were better rewarded and tended to reach star status more regularly. So, perhaps, technical fields attracted a different kind of person. And the institutional pressures were more focussed on producing high-visibility success than they were on avoiding costly failures.
In any case, Chernobyl demonstrated Murphy’s Law, “If anything can go wrong it will.” And ever since that time I have had the creepy feeling that we are not smart enough to manage the technical world we have created. By smart enough I may not necessarily mean as individuals, I mean as a society. Individually, the Russian engineers were smarter than American ones. But somehow the incentives got rigged in a way that made smart people do stupid things. As Deming, the creator of modern day quality control put it “A broken system will defeat a really intelligent person every time.”
The examples of failures are many. And as a technical person, I find some of them astonishing.
At one point in time our household had DSL service through one of the free-world’s largest telecom companies. Each evening at roughly 6:00 the service would simply crash. You could not ping the name server. Multiple visits by tech support people took place. Everyone denied that what was happening could happen. Then they would see it happen. There were phone calls to vice presidents and high-powered tech support people. After some period of time it became clear that the problem had to do with the details of the way the database of IP adresses was updated at the company. Perhaps a hundred man-hours were expended in trying to resolve the problem. In the end everyone gave up. We switched to cable-modem service. It works despite the fact that even though contractors are paid to bury the wires twelve inches in the ground they can frequently be observed lying just beneath the mulch in the garden beds.
And then there is electrical service. Consider that moment a few years ago when the entire northeast went without power for a few days because of a computer switching glitch in a station outside Cleveland, OH. I was spared that outage; but for the previous six summers a bad transformer in my neighborhood took down power service during the dog days of summer for four to eight hours at a time. I would tell my wife “this never happened when I lived in Zambia. If I am going to live in a third world country, I want the cost of living to be lower than it is in New Jersey.”
What quality was it that made electrical service in a third-world nation more reliable than it is in New Jersey? Part of the answer might be that it actually wasn’t; my experiences in the two places may not be representative. But part of the answer is due to a shift in attitude. In the middle of the twentieth century the public assumption about utilities was that they be completely, 100% reliable. It was an attitude that the west projected even into third world nations. Reliable service was just part of doing business in the regulated utility era. Unreliable systems made rate increases impossible; and at the same time, guaranteed rates meant that some amount of redundancy could be built into the system. It certainly did increase the cost of generating and distributing electricity; but it did prove highly reliable.
In the post-Reagan era, by contrast, the reliability issue is not seen as a fixed constraint but as a simple business issue. If a utility outage causes a billion dollars in damages and takes the lives of two hundred people, but the companies involved can escape responsibility for the losses, then there is simply no financial reason to invest in upgrades to power distribution systems that improve or maintain any given level of reliability. Things break down at whatever frequency maximizes profit. Take the argument very far, and before long electrical service becomes something with rolling outages built into the design. One just starts hoping that one will have power for the few hours of the day one needs it most. But the issue of economics ensures that the power will always fail just after noon on all of the hottest days of summer and not be restored until midnight. It produces a nightmarish kind of existence; but it’s the kind that perfectly unconstrained free markets would deliver when they are free of any kind of responsibility to deliver service in a reliable way.
Fortunately, electrical power companies assume liability for some kinds of losses due to power outages; but not all kinds. When I worked in the solar power industry in Michigan, the process equipment that we used would go out of kilter if power went down for even half a second. It took several hours to set up again. We would lose half a day of production, minimum, with each outage. And every thunderstorm in summer had its associated outage. But the power company flatly denied that a power outage existed if the power was out for less than some period of time - ten minutes or an hour.
How many other things break down? Almost everything. I was in a hospital emergency room for a few hours not long ago. At the first station there were six beds and one head nurse. And in the ninety minutes between arriving and being transferred to another station when this one closed, the nurse got three material facts wrong relating to patients in her care. That’s a rate of about one fact in thirty minutes. Or about 4000 mistakes per working year. In this case it turns out that one mistake she corrected. Another mistake was corrected for her at the insistence of a patient. A third mistake had no bearing on the case at hand. But it is just a matter of time before this nurse makes a mistake that costs a life.
Most people in the medical field, fortunately, are somewhat less prone to mistakes; yet collectively, people make mistakes all the time in the medical profession. Medical mistakes are the single leading cause of death. If misdiagnosis is included as a kind of medical mistake, then medical mistakes are responsible for at least three deaths in eight in the US. It’s not because everyone is incompetent as the nurse in question. It is because the systems are not designed with the question of outcomes in mind. Dead patients still pay their medical bills.
With Amazon.com, the whole of the business depends on a reliable internet presence; so one can be assured that the company will do what it can to prevent the kinds of problems that cause the site to go down for three hours at a time. But incentives in other areas of activity are not so clear. The goal of good government policy is to rig the incentives so that businesses actually act in the best interests of their customers; for profit does not always motivate this kind of behavior. It certainly does not in health care. It does not necessarily do so in the case of utilities. It frequently does not in the case of monopolies and businesses with little competition. And as one learns in the second week of introductory microeconomics, in the case of oil and food, profit is maximized when there is not enough to go around. Sometimes things get broken by accident. Sometimes they are broken purposefully for business reasons.
Permalink
05.22.08
Posted in Policy at 11:07 pm by steve
Faulty Reasoning in Gardening and Banking
“I seem to fail with most of my dahlias.” I complained to a gardening friend.
“Not me,” replied Jason smugly.
“You probably read the instructions before planting them.”
“Yup.”
“You probably follow the instructions, too”
“Yup.”
“You can probably tell me to the last ounce how much horse manure to put on each different dahlia.”
“Yup.”
“Suppose I am planting border dahlias and I live in a place with rich, moist soil, how much horse manure do I use?”
“None.”
“Poor soil?”
“None.”
“Okay, so when do I use horse manure to fertilize dahlias?”
“I would say about a year before you plant them.”
I was asking the wrong question. Horse manure and dahlias have little to do with each other. I was in the wrong universe of discourse. And no matter how long I pondered the problem or how deeply I considered it, I was just wasting time. As I reflect on the conversation, I realize I was reasoning like this
1) Plants grow better with horse manure
2) Dahlias are plants
3) Therefore, dahlias grow better with horse manure.
So where did I go wrong? Certainly Dahlias are plants, so the problem must lie in the first proposition. What is actually true is that some plants grow better with horse manure. Some actually don’t. Stingy plants don’t - the kind that thrive on the punishing open plains and high desert. And a lot of young plants are burned by the excess nitrogen in horse manure.
There was something about this logic that reminded me of a completely different discussion. It was a discussion in which someone was arguing something like this
1) The Federal Reserve manages money supply.
2) The current banking crisis is due to burgeoning money supply.
3) Therefore the Federal Reserve is to blame for the current banking crisis.
Each premise is true; but, it seems to me that the conclusion is false. There is no question in my own mind that the second premise is correct. The problem may or may not be the fact of of glut of credit - it might be more related to the means employed to create that great tidal wave of easy money - but it is integrally linked to it. If the second premise is true we must look for the problem in the first.
Back in the days when banks could only lend money on the basis of deposits and when all credit was extended by chartered banks with very strict reserve requirements, essentially all money originated with banks, and shortfalls were borrowed from the Federal Reserve. At that time in history, the Federal Reserve played a powerful role in regulating money supply. And premise 1) was essentially true.
But when banking deregulation occurred, other sorts of institutions were empowered to lend money. And the requirements that restricted the transactions were materially relaxed. Companies like Bear Stearns that used mortgaged backed securities as collateral to lend more money were, in effect, printing money. And the amount they lent had no connection whatsoever with the Federal Reserve or with the interest rates charged by the Fed. Or, more correctly the connection it had was obscure, contorted, indirect, difficult to understand. And the result was that even if the Fed had increased interest rates, it is not clear that the move would have stemmed the flow of new money. One might argue that it would have simply driven more people to borrow from the institutions that were, in effect printing money rather than from banks. And that might have caused things to become unstable sooner.
It’s not clear that very many people understand intuitively how the deregulated system differed from the regulated system. But it clearly caused a burgeoning of one kind of money supply. And that drove up securities on Wall Street during the dotcom bubble. Then it drove up real estate. And now it drives up the price of oil, other commodities, and agricultural products. And all the while the supply of the kind of money that the Fed manages grew in a healthy relationship with the part of the economy it represented.
So it’s not that the Fed did the wrong thing. It’s that the instruments that caused the problem have nothing to do with the Federal Reserve system. Rather, they have to do with the investment world. Banking deregulation caused the problem. Any solution that does not strip financial institutions of the of the power to, in effect, print money, will assure that the same problem recurs, perhaps via some mechanism that appears at first to be different. The players will be different, the instruments will be different, but many of the effects will be the same.
Permalink
05.04.08
Posted in Policy, Politics at 2:10 pm by steve
Global warming, free trade, biofuels, water resource management, energy availability, and over-population. What do these factors have in common? They all affect the cost of grain around the world. Grain has been going up in price, more than doubling in price in one year.
The cause is a kind of perfect storm; a combination of many factors hitting the market at once. Unusually warm temperatures have caused significant drops in grain production in northern China, perhaps in other regions. Free trade has driven local farmers out of the market in many poor nations. It has also made two of the world’s most populous nations richer; and as a result the peoples of those nations wish to eat better. This generally involves eating foods that take more resources to produce. Biofuels efforts have drawn a huge amount of grain off the global market. Water resources - aquifers such as the Ogallala in the plains states - are being depleted. And oil prices are escalating. This raises the cost of mechanized production and it raises the cost of fertilizer made from petroleum ( i.e. most of the nitrogenous fertilizer used in agriculture. )
The Grain Shortage
The problem is so severe, so widespread that WaPo has run a whole series of articles on the issue.
The food price shock now roiling world markets is destabilizing governments, igniting street riots and threatening to send a new wave of hunger rippling through the world’s poorest nations. It is outpacing even the Soviet grain emergency of 1972-75, when world food prices rose 78 percent. By comparison, from the beginning of 2005 to early 2008, prices leapt 80 percent, according to the United Nations’ Food and Agriculture Organization. Much of the increase is being absorbed by middle men — distributors, processors, even governments — but consumers worldwide are still feeling the pinch.
The Economist dedicated a large portion of a recent issue to the crisis. Food crises are an almost perpetual souce of news. At any given point in time one can find a few parts of the world where food is scarce. The reasons usually have something to do with bad weather, war, or bad government policy. They almost always have something to do with poverty and overpopulation as well.
But this time it is different. It is a fundamental problem of there not being enough grain. We need to take it seriously. Changing distribution patterns will not solve the problem. In a kind of strict sense the free-marketeer is right. The free market left to its own devices will solve the problem. And if we simply do not care how many billions of people starve to death, and how much strife, death, and destruction this causes, then we may grant them this point. If, however, we care just a little, then we need to think about what can be done to alleviate the immediate problem and what can be done to move toward a durable solution.
To most Americans this is pretty much an abstraction because the cost of grain is such a small portion of our annual income that what grain costs, per se, doesn’t seem to have much impact on our standard of living. But the same is not true in almost any non-European nation.
Late last year, just as corn prices began to escalate there were protests in Mexico. The price of tortillas, a staple food in Mexico City had recently doubled. Since the tortilla is the cheapest source of calories in the Mexican diet, such a change hit hard. The government intervened to help stabilize prices, but many reasonable people worried that the action would, in fact, precipitate a more severe shortage.
Since then, much has happened. In Haiti, recently, the government collapsed under political pressure for its bad handling of food and agricultural policy. That hunger should hit Haiti early when food prices would rise is never a surprise because the nation is so densely populated that it perpetually lives at the very edge of disaster. (Jared Diamond in Collapse) But this fact does not make the human misery of starvation any less real.
The problems have hit many large nations. India and Egypt have banned the exportation of rice. South Korea, China, and Japan are bidding up food prices at an unprecedented pace. Violence has hit many nations (WaPo)
At least 14 countries have been racked by food-related violence. In Malaysia, Prime Minister Abdullah Ahmad Badawi is struggling for political survival after a March rebuke from voters furious over food prices. In Bangladesh, more than 20,000 factory workers protesting food prices rampaged through the streets two weeks ago, injuring at least 50 people.
and
The food price shock now roiling world markets is destabilizing governments, igniting street riots and threatening to send a new wave of hunger rippling through the world’s poorest nations. It is outpacing even the Soviet grain emergency of 1972-75, when world food prices rose 78 percent. By comparison, from the beginning of 2005 to early 2008, prices leapt 80 percent, according to the United Nations’ Food and Agriculture Organization. Much of the increase is being absorbed by middle men — distributors, processors, even governments — but consumers worldwide are still feeling the pinch.
This food crisis has a number of related causess. What is special about this crisis is that
- it is global.
- it is not a problem reasonably related to distribution.
- its causes are not special but general. Not temporary but enduring.
- the forces that caused the shortage are all going to get more severe, in the absence of serious intervention.
Global Warming
Global warming is arguably the smallest component of this particular instance of global food shortage. There have been some large areas in northern China where unseasonably warm weather has led to crop failures, but it would be hard to argue that a pattern of unusual climatological conditions caused crop failures on a kind of global scale. That said, gobal warming is likely to play an increasing role in agricultural problems. In a number of highly populated nations such as Vietnam, a very large portion of the arable land is within a foot or two of sea level. And if sea level rises by a foot in the next century - as it is likely to do - these fertile areas will be inundated. Huge swathes of fertile land that exist where major rivers such as the Mekong in Vietnam, the Mississippi in the USA, and the Yellow River in China will be inundated and rendered useless for the crops now grown there. Global warming did not cause this famine; but it might play a very big role in the future.
Biofuels
Recent changes in energy legislation have led to a significant amount of corn being used to create ethanol. Separate analyses by Patzek and Pimental suggest that it actually takes more petroleum to create a gallon equivalent of ethanol ( in terms of energy ) than is available in that ethanol. Other workers have suggested that there might be a slight gain; but whereas a viable primary source of energy at some point in the future mightl have a gain of ten to one or three to one, there is virtually no hope that ethanol from corn, under any scenario will reach two to one. Something like half is used up just separating the water from the ethanol. Something like a third is used up as nitrogenous fertilizer for to grow the corn. And we can quibble about the remaining sixth. But by any measure, it’s a bad idea to view ethanol production from corn as a primary source of fuel. It is not.
Dispite this argument, the US government has granted huge subsidies to businesses who would ferment corn starch and distill the resulting fluid into ethanol. According to the GAO more than a fifth of corn production is now used to make ethanol. It’s a number that has been growing sharply over the last three to five years. And it almost certainly accounts for a large part of the price increases in corn that have rocked the world economy.
Peak Oil
There is hardly a major developed field on record today that is not well past peak production. Russia was thought to be awash in oil just a few years ago but there seems to be evidence that production there is falling. It is off sharply in the North Sea. And the productive Caribbean wells of Pemex are down in production. Wells in the continental US peaked in the early seventies. And there is some question about whether the Saudi fields have as much oil as claimed; their claimed reserves fail to be reduced by the production of oil.
New fields are being found and developed, but it has been some time since the discovery of new oil reserves matched the rate at which oil is depleted from existing ones. This is not a sustainable game. And we are on the downward sloping edge of the curve. Presidents at oil majors have argued “it’s not that there isn’t enough oil; it’ s that there isn’t enough oil where we can safely develop fields.” So there is a question whether this would change if the geopolitics of central Asia and Africa were materially different. But it is more of an academic question than it is a practical one. Oil that one cannot extract doesn’t count; not until you can extract it.
This peak in production comes at a precise moment in history when the level of wealth in China and India is beginning to allow a significant portion of people to buy cars. So a dwindling supply occurs precisely when there is burgeoning demand.
Because the chief variable costs associated with growing grain are energy costs, most especially the cost off nitrogenous fertilizer, and because nitrogenous fertilizer is derived from natural gas, the price of oil and gas will play a powerful role in the price of grain by strongly affecting the price of production. Furthermore, if one can cheaply convert food to motor fuel, then there is an implicit tension between eating and operating mechanical equipment - driving, flying, mowing the lawn. The lower limit on the price of grain is determined by its value as a fuel.
A shortage of oil drives up the cost of oil and gas alike. It therefore drives up the production cost of grain, the tranportation cost of grain, and the value of grain as a biofuel. In the absence of biofuel conversion, rising oil prices simply drive up the cost of grain production. But with efficient biofuel conversion, the price of oil also sets a lower limit on the value of grain as a feedstock for ethanol.
With subsidized and inefficient biofuel conversion, the picture is even bleaker. You burn more oil in making ethanol than you gain in energy from the ethanol. The process means that you simultaneously have less energy and less food. They are both more expensive. You spend more money for food and fuel.
If one were a cynic and if one believed that the Bush or Cheney family or any of their political backers had any interests in oil or oil service companies and that these interests were driven up in value by a the spiralling price of oil, then one might imagine that the reason the US is rushing headlong into the grain-to-ethanol business is to create a shortage of oil and to drive up prices.
(It seems bizarre to me to argue this because had I not run the I’d be an avid supporter of biofuels. I’d like to believe that biofuels might one day be a significant sustainable source of energy. And I know that you have to start with a solution that is less than optimal. So I would normally expect myself to be supporting ethanol production from biomass. But the current policy situation is difficult to explain in any rational manner, )
Water Shortages
A material amount of the world’s grain is grown with some irrigation. And a significant portion of that depends on water in non-renewable aquifers or in aquifers that are being drawn down much faster than they are being replenished. Today, while there is water we are suffering from grain shortages. In a matter of a few short years or decades, major aquifers in the US, India, and China will be empty. And the amount of grain we now produce will no longer be possible. The amount of energy and expense required to move water from where it exists to where it is needed will be overwhelming. This bodes ill for future grain supplies. If we have hopes of doing this, we need some really cheap and ever-enduring source of energy. But we don’t
A recent article in The Futurist suggested that only 15 percent of the grain grown in the US depends on irrigation water from the rapidly depleting Ogallala aquifer. But it suggests that India and China may be in a less favorable position.
It sounds quite rosy for the US. The US will have a excess capacity in food production so long as it has an ample and secure energy supply. Efficient manufacturing nations such as China will need to import a large amount of food from the US. And they will be able to trade many goods for food. It sounds pretty promising, but a lot depends on whether the US can maintain its manufacturing base, support its currency, create a reliable and sustainable primary energy supply. If so, then the amount of grain the US would likely send abroad would likely not cause hunger pangs stateside. But if China succeeds in cornering the world’s supply of raw materials and if most manufacturing is done in the Orient, then the US will risk becoming a kind of peaon state.
Whatever happens at a national level, at an international level, the poor will be starving. That’s happening today. But if one cut world grain production by fifteen percent and if eating habits of the more economically successful nations did not materially change, it would mean many tens of millions might not be able to afford to eat. It will no longer be a question of distribution. it will be a question of production. There will be no easy solutions.
Free Trade
Free trade, in the long term, is supposed to guarantee that no economic good ever experiences shortages; the theory is that the price will go up, more will be produced, and viola, we’re back where we started. Except it doesn’t work for goods that actually have a finite supply; fertile land, fresh water, oil, stuff like that. Therefore it does not work for grain whose production capacity is limited by the availability of each of these limited resources.
The Economist recently ran a series of articles on the global food shortage. The editors of that newspaper pretended that nothing but market forces are required to stay a food shortage; but it is hard to buy that idea. It assumes that the reason there have been few food shortages in Western Europe and the US over the last several centuries is because of the marketplace alone. But it is not. It is because an efficient marketplaced operated in a space in which there was ample capacity to produce food. At some point in time it is almost inevitable that global population will be limited by food production. And at that point in history, a fair portion of the human population will have less to eat than they need. It will not be a question of more efficient markets. The physical stuff required to produce grain - fertile land, fresh water, energy and fertilizer will not be in sufficient supply to grow the amount of grain necessary to feed the whole human population.
How long it will be before we get to that point is a matter of some question. It may be a decade. It may be five decades. If there is another great, massive revolution in crop genetics it might be eight decades. If humans learn, in the intervening time period to farm the oceans it might be twenty decades. But already humans consume something like twenty percent of the energy that plants turn into sugar. And a good portion of that energy is required to mainain soil fertility. So we might just be able to double the amount of food we produce on land - assuming we can find the water and energy sources to do so.
For some short period of time the high price of grain will have a beneficial effect on small farmers who are land owners in nations like Mexico. Two years ago they were not able to produce corn at a cost competitive with the corn imported from the US. So they quit. Today that is not the case. So they can grow corn again and make a living at it. This will increase corn production a bit in the short term. Similarly, there was an interesting piece in the Economist that suggested that a recent government initiative of subsidizing fertilizer and seed corn succeeded more by accident than by virtue of being good policy. But measured in terms of whether it produced a lot of corn, it was a raving success. If Africa were to be stabilized, its food production capabilities would, no doubt, add some to the equation for a while. So long as high fertility rates persist, it will always be less than two generations of developmental stasis, or less, from catastrophic starvation.
So the free market will adjust to high grain prices by committing more land to grain production. And more labor. Economic theory says that this land will be poorer than the land now in production. It might, therefore, become exhausted earlier. In any case, once this minor adjustment is made, there is not much wiggle room. There is talk of bringing more acreage in the US under cultivation.
It may not be a bad idea. But it is true that committing land to corn production takes a toll on soil fertility. One may trade short term gains for longer term losses. To understand the issue, one would need to have a robust model of soil fertility, one that specified how much energy is required to sustain the soil flora that sustain economically important plants.
The Malthusian Crunch
Most of the food shortages since the start of the twentieth century have had distribution as a fundamental component. Current (then) agricutural practices were sufficient to produce enough food for everyone in the world. The problem was to transport the food to where it was needed. And to pay for that transportation. Under such conditions it is easy to argue that food supply is simply a matter of supply and demand. If the price of food went high enough in places where it was in short supply, the free market system would move food to that location. Problem solved.
Except, not really. Because in most places where the supply of food was short, there also existed little or no manufacturing. So the people who were starving had little to trade for food. In the case where there actually is an ample supply of a good, the free market sometimes fails to deliver that good where it is needed. That is an interesting problem. It suggests that the free market is good at allocating resources in a particular way, but sometimes the consequences of that are not desirable by certain important measures. Still, problem is fundamentally different from the problem we face right now.
The current problem is not fundamentally about distribution it is fundamentally about production. The problem we face now is that food is scarce on a global scale.
Westerners have been able to dodge the Malthusian crunch for five centuries thanks to the rapidly expanding western frontier. It was not until the late ninteenth century that the Dakotas were settled by Europeans. And it was well into the twentieth century that distribution became completely effective in drawing its bounties to urban markets effectively.
Mechanization, chemical fertilization, and irrigation all increased the productivity of these vast but otherwise marginal agricultural areas. irrigation and chemical fertilization expanded their productivite capacity in mid-century; and genetic manipulation did so later on. But the frontiers physical and intellectual that have brought us to this point in history have been pushed about as far as they can go.
If one looks at the fundamental biochemistry governing the way plants turn sunlight into sugars, one discovers that humans exploit a rather large portion of the available energy already. If I remember correctly, E. O. Wilson (in Consilience) estimates it at about twenty percent. This means that tinkering with genetics can only bring marginal improvements. To get the kind of bounteous excess that we enjoyed in the mid twentieth century, scientists would have to re-invent photosynthesis to be two or three or ten times as efficient without sacrificing anything else. Or we would have to learn how to cultivate crops in the parts of the ocean now barren of life. Marginal changes will mean that most of humanity is reduced to living on the margins - as has been the case for most of human history.
This food crunch rightly ought to warn us that it is not axiomatic that free markets alone have been responsible for the excesses in food production in the western world. It is at least in part due to a really big accident of history. This experience can warn us that all limited resources run out. And that rising prices do not always succeed in producing enough of the item in question.
Actions
So what should we do?
- Encourage wind and solar energy production in a durable, systemmatic way.
- Price water, oil, and coal at a level that more nearly reflects the value it creates for society, one that more nearly reflects its replacement price. Use the excess to encourage conservation and sustainables.
- Set up and fund free fertility control services around the world.
- If the political viability of such services is threatened by controversial issues, do what can be done first.
- Encourage every nation to create, fund, and sustain organizations that guarantee the welfare of its aged. There is almost a perfect corellation between this and low fertility rates.
- Create incentives to build desalinization plants for coastal California cities, Arizona cities, and Texas cities.
- Create business incentives and supports for businesses that turn America’s bountiful foodstuffs into high value-added food items.
- Provide minor incentives and/or supports to trading companies that trade high value added food and food derivatives overseas.
- Streamline the nuclear plant design and permitting process, creating a small family of related pre-approved designs as France has done.
- Build nuclear plants. The oil in Iraq has cost America between half a trillion and two trillion dollars. For that price we could have built enough nuclear power generation plants to generate the power extracted from oil we still do not have. And they would continue generating power long after the oil is used up.
- Reprocess the fuel
- Use waste heat from nuclear plants to distill ethanol from cellulosic biomass.
- Use cellulosic materials to make ethanol, do not use foodstocks
- Study soil fertility and understand how much food energy must be pumped back into the soil to sustain fertility. My guess is that it’s much more than we have assumed.
- Fund studies that demonstrate ways of nitrogenating soil effectively without the use of fertilizer derived from fuel
- Develop crops efficient at producing oils; vegetable oils need little refinement; and if waste heat from nuclar power is not to be used in alcohol distillation, this fact reduces the energy input of the fuel. It therefore substantially increases the gain by a huge margin. ( We note that if soybeans could be made efficient at producing both oil and soil nitrogen, they might be a very valuable crop… )
- Fund fusion research and development seriously.
- Fix healthcare so that it works better and uses less money. The current system is killing the US economy.
- Teach civics. People who are can think critically about the ethics of greed are less likely to be caught by its traps and to starve in them
If we do all of these things promptly, and if we do all of these things well, then there is some hope that we might stay ahead of the Malthusian limit for a few decades.
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04.12.08
Posted in Policy at 4:29 pm by steve
Reflections on “A Sober View of Progress in Iraq” , The Week, Apr. 18
So long as Bush or any President put in place by the same cabal is in office, the question will not be whether the US will leave Iraq: the question will ever be “What argument will be used to justify staying?” There exist two kinds of arguments for staying. One argument is “we are succeeding in the mission, therefore we need to stay.” The other argument is “we are not yet succeeding, but we could if we had more resources.” The only way to sustain the stay indefinitely is to switch between these arguments from time to time. If, for instance, one argues consistently that the mission is in danger of failure, then at some point only one choice is left - to give up and leave. It is the only rational choice given a mission that keeps failing regardless of what one does. If, on the other hand, one argues that the mission has succeeded, then the only reasonable choice is to leave.
If one were to assume that the goal, then, is to stay, one would grow to expect an endless stream of stories that would suggest progress and setbacks. For instance, before the “surge” a year back we heard that there were some elements that needed to be pacified and more troops were needed to do this. Hence the surge. What actually happened was a change in the way troops were deployed - how they were used on the ground. But that’s another story.
So we sense not the slightest twinge of surprise when General Petraeus says the “surge” had largely succeeded in defeating terrorists who self-identified as being members of a Wahibbist group al Qaida. But now there was a new group of insurgents backed by Iran. Nor are we particularly surprised by the idea that the reasons used to rationalize the occupation are blatantly self-contradictory.
The “reasons” have nothing whatsoever to do with the actual reasons for being there. The actual reasons have to do with:
1) Access to Oil
2) Expanding Military Spending
3) Bolstering the presumed security of Israel
Arguments for this point of view are important, but must be made in another piece.
While it is possible that there is some amount of truth to the news, it is probable that this has nothing to do with anything. It is possible that, in fact, imported Wahibbists were in Iraq and that they are being driven out. And it is possible that some elements in Iran - perhaps even elements belonging to the government - have connections with militant Shia in Iraq. In fact, these connections go back at least as far as the early 1990s when it was hoped that the Shia would overthrow Saddam.
But the purpose of the statement could also be to bolster arguments for an invasion and occupation of Iran. Neocons have always been open about their ambitions to have the US occupy Iran and Syria. And Petraeus’ suggestion that the real problem in Iraq now is Iran may be a kind of vital pivot point in shifting the focus from actual terrorist groups to states that sponsor terror. It couldn’t have been scripted better.
The Washington Post warns us of “the carnage that would invariably follow a precipitous withdrawal” and concludes that ongoing commitment is the only responsible option. Although in 2003 before “shock and awe began” I argued that the war was illegal, unwinnable - in the sense that it would lead to endless sectarian strife, and unnecessary I find myself sometimes agreeing that staying is the only reasonable option. But it is so only if American intentions are, in fact, noble.
If by staying America actually can put Humpty Dumpty together again - if it stays in order to build Iraq’s institutions and create a strong and independent state, then staying is in order. But American policy and practice appears to be designed to fail in making Iraq a successful state. And the motivation to stay may have much to do with keeping Iraq as a dependent vassal state in order to command illegitimate control of its oil reserves. If that is the case then we are all served badly by the occupation, Americans and Iraqis alike. The mission will continue to fail so long as the oil tempts us to behave in this way. And we will continue to hear endless stories of surges and setbacks until we are so bored of it that we stop paying attention entirely. The sooner that happens, the better.
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09.21.07
Posted in Policy at 7:15 pm by steve
Why is it that we do not use pieces of gravel as currency? It seems like an absurd question; but answering it will help us be sensible in sorting out other questions. Two fundamental issues underlie the idea of metal coinage as currency: trust and efficacy in trade.
Currency takes the form of metal coinage because the metal has an intrinsic value. Thus, if the intstitution minting the coin fails to behave responsibly and in a way that maintains the nominal value of the coinage, any holder can melt down the currency and recover most of the value. This fact makes it easy to establish trust in a currency. And up until the middle of the twentieth century dollars could be exchanged for gold boullion. This stabilized the dollar.
It actually pegged the dollar to a value higher than its worth; for at one point in time $35 would suffice for a foreigner to purchase a troy ounce of gold from the US treasury. And only a year later when the US went off the gold standard, free market price of gold was roughly $200. Within half a decade it spiked to over $800. So we know that at that point in time the dollar had already slid quite a bit from those golden days in the ninteen twenties when $35 might actually have been worth an ounce of gold.
Suppose one used gravel as currency, one would have to carry a lot of it. And it would take forever to count out. That would be time wasted. For example, how long would it take to count out $200 worth of gravel? Even the finest white crushed quartz would require an afternoon of rather intense counting to get to $200 worth. So anyone whose afternoon was worth $200 would lose the full value of the transaction simply in the transfer of currency. Not a good deal. It is for this reason that currency is composed of valuable materials and represents concentrated value: counting can never represent a major portion of a transaction cost.
During the great Peso collapse of the late 1980’s there was a story about a minister in the Mexican treasury department who bought a freight train full of small denomination coins, shipped them to a smelter, had them melted down and sold. The metal was worth more than the nominal value of the coin. Back in the days when currency was guaranteed by precious metal, this is precisely the mechanism that one would use to stabilize a currency. By destroying currency and increasing the supply of metal, one might theoretically restore value to the currency. But when currencies float free this no longer works. In such cases, nations who defile their currencies end up in a situation where no amount of melting down of coinage changes the fundamental value of the currency, for its value lies elsewhere. And when this happens, the people who melt currency for a profit are deemed criminals by a government who has robbed its citizens of the value of their currency by creating more than the economy can bear.
In other words, when a nation reaches a point at which it makes sense to behave as this particular treasury official, it has been in the business of defiling its currency for some time. And its citizens are poorer than they reckon.
I was reminded of this by P.J O’Rourke’s piece about the two cent penny. What two-cent penny, you may ask. The one you got for change this morning when you bought your latte at Starbucks. Either because the cost of zinc is going up in real terms, or because the value of the dollar is dropping in real terms, or some combination of both, zinc costs a lot. Pennies today are made of zinc. And it takes two pennies’ worth of zinc to make a penny. So the logical thing to do is to use dollars to buy pennies, melt them down, and sell the zinc. Except that it is illegal. The pennies themselves belong to the mint. It is only the value they represent that belongs to us.
It’s been a long time since the penny was anything. In the mid 1980’s I moved. I took all the currency I had accumulated over a small number of years of adult life - a gallon or two of currency. And I wrapped it in those nifty paper coin sleeves. It turned out to be a great idea. I ended up with several hundred dollars that I otherwise would not have had, sort of. But I learned an odd fact. I could not make minimum wage stuffing pennies into those paper sleeves. This was at a time when minimum wage was not a third of what it is today. What that meant was that every time a penny was tranferred from one party to the next, the time spent counting it was worth more than the penny itself. In other words, if time has any value at all, the penny represents negative value in any transaction in which it is handled.
The arguments we would use to get rid of the penny are so old and so worn that they are almost appropriate for getting rid of the nickel. Minimum wage approaches five times what it was twenty years ago. And while it is true that one can take coins to banks to have them counted, in my own experience, the counters always do it in a back room unobserved, and emerge with a credit slip that seems to take 20% off the top for using their counting machines. In the case of pennies, that’s not unfair at all. Perhaps not in the case of nickels either. But in the case of dimes and quarters it is quite costly.
Tell me again why we have the penny? Now explain to me why it is categorically different than using huge mounds of crushed quartz gravel as currency. On second thought, forget it. My time is too valueble.
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