Letter in different form

Posted in Economics on February 8, 2009 by dmargolin

Dear Dr. Krugman,

I write to encourage you to use the following argument in your arsenal. It is a simple argument that abides neo-classical principles but shows that sometimes the government is a better investor than individuals. If this argument is valid, then there is no justification for “tax cuts” as part of any stimulus package. The package should be purely spending (to keep us alive) and targeted government investment (to set the stage for future growth)

Tax cuts stimulate “better” investment only in certain circumstances. Tax cuts put decision-making power in the hands of those who hold more precise, but more local, information: individuals. When the basic parameters of decision making are already set — prices are stable, technologies and infrastructure are relatively fixed — individuals make better decisions than the government. This is because they have access to more precise information — they need to track fewer variables and receive more rapid feedback.

But in times of upheaval, when there are insufficient number of givens, calculations at the local level become too complex. Individuals have precise data but lack sufficient premises to interpret the data, rendering the precision useless. For example, since there are a dozen candidates for alternative energy technology, it is hard for a small business owner to know which kind of vehicle to buy. The individual can hold precise knowledge of the particular prices and features which are relevant to his/her business right now, but he/she assumes that the very basis of “relevant” could change dramatically at any point in time. When faced with this complexity, the rational thing for local investors to do is “wait and see” how things play out.  The deflationary trap is the manifestation of this collective “waiting and seeing” by rational individuals.

At these times, the most effective allocator of capital is any actor who can impose parameters rather than needing to wait for them to emerge from the decisions of others. This actor is the federal government. This pattern of toggling between local and central decision-making is well known in the studies of organizations (starting with March & Simon) and individual decision-making (see the work of Gigerenzer). More frighteningly, in biological communities that lack a central decision-maker, these situations generate calamitous collapses that solve the problem by forcibly removing interdependency. We don’t want that.

In 25 years, the current understanding of neo-classical economics will be changed. Either we will solve these problems by recognizing that government investment is a logical component of market systems with rational actors, or we will fail to solve them and have rejected the philosophy entirely. Please do what you can to encourage the former.

Thank you and sincerely,

Drew Margolin

Draft of Letter to Krugman

Posted in Economics on February 7, 2009 by dmargolin

I’ve been working on this for a couple of days.   If anyone is reading… comments?

Dear Dr. Krugman,

I write to encourage you to add the following argument to your arsenal.

The neo-classicists argue that the market-clearing price is always the optimal price, but this is wrong.  As we know from game theory, locally rational decisions can produce collectively sub-optimal outcomes.  A depression is tragedy of the commons.

What is the externality that is lost in the depression?  Information.  Rational transactions are like scientific experiments.  They are informative both in their success and in their failure.  We aren’t normally aware of it, but when two parties transact there is an important benefit to third parties — it tells them something about the private beliefs of the transacting parties.  The transaction serves the market by calling attention to its basis and its outcomes.  This allows a third-party observer to form expectations about what the outcome “should be” based on his/her own information, which in turn gives the observer the ability to learn from the transaction’s outcomes.    Thus, the rational transactions of two parties creates the opportunity for third parties to gain information, improving their future decisions.

The market allocates capital efficiently given a level of information, but it does not allocate capital efficiently to produce information.  In a depression, there are fewer transactions and so there is less information gained.  Decisions by actors to hold their money are rational, but the market as a whole loses out.  The neo-classicists are correct in saying that for the government, or any other third party, to “force” investments is to spend capital on experiments that are likely to fail.  But the failure of investments provides information.  Neo-classicists would also be correct in saying that arbitrarily chosen, irrational transactions do not provide as much information as rational ones.  This is true, but slightly biased experimentation reveals more information than no experimentation.

Government investment is needed, and the emphasis should be on informativeness.

Sincerely,

Drew Margolin

Stimulate Disagreement and You Stimulate Trade

Posted in Economics on February 2, 2009 by dmargolin

I think economists sometimes lose sight of the fact that their policies work within a context of real world events, ideas and discoveries.

I don’t see how any purely financial maneuvering — be they tax cuts or money supply adjustments — addresses the problem we have.  People don’t lack liquidity, they lack an incentive to take risks.  This isn’t because risk taking isn’t cheap enough, it’s because the advantages of being a first mover are almost the same as those of being a second mover or a tenth mover, but the disadvantages are much, much greater.    This is because there don’t appear to be any really good, concrete ideas on the horizon for new industries.  There doesn’t appear to be any “next big thing.”  So there is little to miss by sitting on the sidelines, but a lot to lose by running into the game where no one else joins you.

Imagine a herd of gazelles standing in a valley.  They all believe, based on the information that they have, that there might be a lion just over the hill in any direction.  There might be food, too, but none of them have any idea where.  Let’s assume the assign the danger (lion) and the value (food) the same probability.  Collectively, then, they have to try to leave the valley sooner or later.  But individually, the rational thing for each of them to do is to wait.  Maybe some other gazelle will get the urge and head over the mountain?  Sure they’ll have to go eventually, but they figure they can hold out at least as long as the average gazelle, so a decent set of lesser gazelles will have to check things out first.  So they just sit tight where they are.

Tax cuts and money supply adjustments can be represented by free steroids that make the gazelle stronger and faster.  If one goes over and meets the lion, its chances are marginally better.  They change the calculus slightly on the margin, but they don’t modify the driving calculation, which is that it’s still better to let somebody else go first.

What can the gazelle government do?  They can pick a spot where some (government bureaucrat) gazelles are just going to go over the hill, period.  They are taking tax revenue to make armor for these gazelles so they are safe.  They’re going to go over and see what’s there.

The free marketeer gazelles complain, with compelling arguments, that the government never chooses the best spot to go over the hill.  They are looking in the wrong place!  They’re taking our resources to make armor so they can go find a lion.  How stupid!

It’s true, it might be the wrong place, but this isn’t the point.  By forcing risk, the government is altering the distribution of outcomes.  Those gazelles that stand near the government expeditionary force could get a nice payoff or a terrible one.  Those that stand far away get neither.  Depending on a gazelle’s private information about that spot and their own risk preferences, there is now a reason to move.  It’s either time to move closer or farther from that spot.  In other words, there is now something to disagree about, something to debate, i.e. something to trade.

These trades (of position) start the herd jostling.  Other opportunities emerge to reflect their divergent preferences.   There is also more of an incentive to consider inventing new techniques identifying lion or food location, because now these ideas can be sold to gazelles who want to head to the front, rather than having to be tested by the individual who concocts them.  In other words, creative talent and risk-taking appetite don’t have to be located in the same gazelle.

Let’s assume the gazelle government picked a lousy spot to go over the hill.  The suboptimality of that probability is a cost.  But there is an enormous benefit to paying that cost — the reduction of uncertainty (entropy).  Our government should do the same.  Pick projects that make concrete claims about their outcomes: not just road improvements, new roads and bridges; not just school fix ups, specific promises about educational performance; not just money for alternative energy, concrete goals and timelines.  Yes, it would be better to be right — to achieve those goals, but there’s money to be had in betting against those things, too.  Let the disagreement begin!

Text of the Inaugural

Posted in Reasons4Obama on January 20, 2009 by dmargolin

My favorite line: “we reject as false the choice between our safety and our ideals.”  I love the sentiment, and l love the scientific language.

My fellow citizens:

I stand here today humbled by the task before us, grateful for the trust you have bestowed, mindful of the sacrifices borne by our ancestors. I thank President Bush for his service to our nation, as well as the generosity and cooperation he has shown throughout this transition.

Forty-four Americans have now taken the presidential oath. The words have been spoken during rising tides of prosperity and the still waters of peace. Yet, every so often the oath is taken amidst gathering clouds and raging storms. At these moments, America has carried on not simply because of the skill or vision of those in high office, but because We the People have remained faithful to the ideals of our forbearers, and true to our founding documents. So it has been. So it must be with this generation of Americans.

That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our healthcare is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land — a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.

Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America — they will be met.

On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.

On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn out dogmas, that for far too long have strangled our politics.

We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of happiness.

In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the faint-hearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things — some celebrated, but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.

For us, they packed up their few worldly possessions and traveled across oceans in search of a new life.

For us, they toiled in sweatshops and settled the West; endured the lash of the whip and plowed the hard earth.

For us, they fought and died, in places like Concord and Gettysburg; Normandy and Khe Sahn.

Time and again these men and women struggled and sacrificed and worked till their hands were raw so that we might live a better life. They saw America as bigger than the sum of our individual ambitions; greater than all the differences of birth or wealth or faction.

This is the journey we continue today. We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise healthcare’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.

Now, there are some who question the scale of our ambitions — who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public’s dollars will be held to account – to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control — and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our Gross Domestic Product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart — not out of charity, but because it is the surest route to our common good.

As for our common defense, we reject as false the choice between our safety and our ideals. Our Founding Fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience’s sake. And so to all other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and that we are ready to lead once more.

Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

We are the keepers of this legacy. Guided by these principles once more, we can meet those new threats that demand even greater effort — even greater cooperation and understanding between nations. We will begin to responsibly leave Iraq to its people, and forge a hard-earned peace in Afghanistan. With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet. We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.

For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus — and non-believers. We are shaped by every language and culture, drawn from every end of this Earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.

To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society’s ills on the West — know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist.

To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to suffering outside our borders; nor can we consume the world’s resources without regard to effect. For the world has changed, and we must change with it.

As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us today, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment — a moment that will define a generation — it is precisely this spirit that must inhabit us all.

For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job, which sees us through our darkest hours. It is the firefighter’s courage to storm a stairway filled with smoke, but also a parent’s willingness to nurture a child, that finally decides our fate.

Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

This is the price and the promise of citizenship.

This is the source of our confidence — the knowledge that God calls on us to shape an uncertain destiny.

This is the meaning of our liberty and our creed — why men and women and children of every race and every faith can join in celebration across this magnificent mall, and why a man whose father less than 60 years ago might not have been served at a local restaurant can now stand before you to take a most sacred oath.

So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America’s birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:

“Let it be told to the future world … that in the depth of winter, when nothing but hope and virtue could survive … that the city and the country, alarmed at one common danger, came forth to meet [it].”

America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children’s children that when we were tested we refused to let this journey end, that we did not turn back, nor did we falter; and with eyes fixed on the horizon and God’s grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations

Krugman and Bubble-Mania

Posted in Economics on December 22, 2008 by dmargolin

Krugman had good column today on the weak long term prospects for our economy and our desperation for another bubble.  Here is the comment on I posted.

I agree, we appear to be bubble-addicted and bubble-reliant.  This is largely because our understanding of the economy insists that “growth” is the single criterion of economic health.  But as any investor knows, growth must be adjusted for risk to capture true return.

Almost all of the concepts we use to measure and describe the economy are measures of or references to transaction volume: gross domestic product, recession, stimulus, balance of payments etc.  When people say “the economy” is in trouble, they mean “transactions are down.”  When people say they are hopeful about an economic turn-around, they mean “I can see transactions increasing in the future.”

There are no strict measures of national economic volatility.  We carefully measure and debate whether we are in a “recession,” but not so whether we are in a “bubble.” Thus, even though there are times when volatility reducing recessions would be preferable to volatility increasing bubbles, we lack the tools to argue for this choice.  Recessions, we believe, must be avoided, and if the way to avoid them is by encouraging bubbles, so be it.  If you lose money at the track, try hitting the slots on the way out to “win it back.”

It is possible that, at one time, interest rates could have served the role of volatility monitors, but in the era of active management of the money supply (to serve growth) interest rates are tools of economic management rather than outcomes of economic performance.  For example, the low rates of the last five years clearly did not reflect the risk in the economy.

The recent attention to contributions by sector (e.g. how much of GDP comes from consumption, how much of profit growth comes from financial services) shows we are beginning to look in the right direction, but a more formal recognition and treatment of the topic is required.  Similarly, the long standing criticisms of economic policy by those concerned with environmental degradation and sustainability are informed by the same concern but tend to be stated in moral, rather than economic, terms.  Their arguments thus implicitly suggest that the growth-at-all-costs champions have the economic high ground.  They do not.

Put simply, some forms of growth are better than others.  Growth in the ability to efficiently satisfy deep human needs is likely to be stable, as those needs aren’t going to change, and is therefore productive.  But growth in the ability to tap the moods of the moment is not really useful at all.  It allocates scarce resources to industries and skills of short-lived application, sowing the seeds of future crashes.  This, more volatile growth, is economically inferior and should be treated by policy as such.

Krugman nailing it

Posted in Economics on December 19, 2008 by dmargolin

I don’t always agree with Krugman, especially when it comes to politics.  But on economics he’s dead on, and this column nails it.  The point: people on Wall St. get paid far too much, not because no one deserves that kind of cash, but because the way they “earn” it is not really providing a valuable service.

First, the free market determines Wall St. compensation, so it must be adding value to the economy, right?  Wrong.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

Ok, so a few guys got rich and that is unfair.  What is the cost to us?  Well, the cost is in wasted resources.  Money invested that does not bring a return is lost.  It’s the equivalent of an agrarian society taking a storehouse of grain and lighting it on fire in the expectation that it would bring rain.  When the rain doesn’t come, the grain is still gone forever.  How much grain did we burn for rain that is never coming?

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

I read somewhere that something like 60% of growth in profits in the U.S. over the last 3 years was in financial services.  An accurate figure on this is needed, but even if that’s close, it’s bad news.  It means that most of our “profits” were zero.

Then there is the demographic effect…

Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science,public service and just about everything else?

If half of the minds that went into developing derivatives had gone into, say, alternative energy, where would we be?

And finally, the corruption of reason effect…

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

The laws of economics are very simple and straightforward.  Incentives and self-interest rule.  Markets favor two kind of innovation — innovations of production (new, useful ideas) and innovations of deception (new ways to make people think you have useful ideas).  If you see the market lavishing rewards on someone, it tells you they’re really good at at least one of these things, but it doesn’t tell you anything about which one.

No, wait, actually it does.  Truly brilliant, useful ideas are rare.  Brilliant ways to deceive are, depending on the environment, not so rare.  As we all know, there are times and places where it is easy to lie and get away with it.  So when lots of people start making atom-splitting money, it’s a good bet that their innovation is in the craft of bullshit.

On David Brooks on Malcolm Gladwell…

Posted in Books on December 16, 2008 by dmargolin

David Brooks’  column on Gladwell’s “Outliers” critiqued Gladwell for suggesting that individual choice does not matter for success.  I commented on the NYT site (pasted below)

Everyone (including David Brooks and Malcolm Gladwell) knows that genes, environment, and individual choice each play a critical role in determining a person’s fate.  The purpose of these arguments about the “cause” of success is not to isolate a universally dominant factor but to identify the factor that is most worthy of attention right now.

There are times when environments are stable, culture is stifling, and innovation and success demand individual action at the expense of the dominant, collective view. There are two or three roads and everyone is taking only one of them. These are the times to emphasize individual choice.

But there are also times when the world is chaotic and disjointed and individual actions do not have reliable, predictable consequences.  There are a thousand roads and only one person on each, and they keep criss-crossing.  These are the times when cooperation and collaboration are required to pool ideas and stabilize the options so that individual choices can be relevant to outcomes.

Reading David Brooks over the last year or so, I am quite certain he knows we are in the latter situation.  It is true that individual choice still matters, and always will, but the challenge of our day is to set policy, the rules of cooperation, such that it can matter even more in the future.  I haven’t yet read Gladwell’s book, but my guess is it contains many ideas and insights that will help us do so.

Response to Di Rita’s Criticism of Shinseki

Posted in Politics on December 15, 2008 by dmargolin

The following is my response (submitted as a comment on WP.com) to this Op-Ed in today’s Washington Post criticizing General Eric Shinseki and his supporters for viewing his actions favorably:

I am confused by Di Rita’s essay.  I must have misunderstood.

As I understand it, the argument on behalf of Shinseki’s wisdom and courage is as follows:  Shinseki had a different estimate of the troop requirements than the administration did.  The administration discouraged the communication of views, such as troop estimates, that differed from its own.  Shinseki was one of a very small number of participants in the decision-making process who voiced his difference of opinion.  The wisdom of this opinion was ignored and Shinseki was punished in some way for expressing it.  Thus, Shinseki took a personal risk on behalf of the country to advocate an plan from which the country would have benefited.  Therefore, this action is deserving of our respect, and the actions of those who sought to discourage him are worthy of shame.

I do not see what aspect of this argument is refuted by Di Rita.  In fact, he seems to be supporting it.  Most tellingly, he offers that “At no time, even as a surge was being considered, did anyone recommend doubling U.S. forces to the ’several hundred thousand’ troops Shinseki said might be needed.”  Right.  That is the whole point.  No one, other than Shinseki, recommended this course of action, even though it might have had serious advantages.

Why wasn’t it recommended?  There are two competing hypotheses:
1) because it was unrealistic — it didn’t really merit serious consideration
2) because it was just the kind of idea that the administration sought to discourage.

We have at least three facts that support the conclusion that the answer is #2, not #1. Two of these are provided by Di Rita himself.  First, there is the basic fact (not provided by Di Rita) that the Iraq invasion has failed in comparison to the standards offered by the administration prior to the invasion.  This means that either the administration knew things would be worse than they said, meaning they deliberately deceived the rest of us, or they sincerely mis-estimated the situation.  If the latter is true — their assessment of the situation was seriously flawed — then, necessarily, their assessment of alternative courses of action was also flawed.  Thus, Di Rita is in no position to claim that any strategy was not worthy of consideration on its merits — he and his colleagues clearly didn’t know what the merits were.  This is evidence against choosing #1.

Furthering this case is the fact that Di Rita, now, even with the benefit of hindsight, offers no critique of Shinseki’s argument.  He says nothing in this essay about why 300,000 troops would have been a mistake.  He merely appeals, again, to the fact that no one recommended it (other than Shinseki).  This defense is predicated on the belief that the process by which recommendations were brought forth and entertained was a sound one, yet it is precisely our doubt of this process which makes Shinseki’s testimony compelling.  Thus, it is precisely the situation where some other defense is called for, something that indicates that there was good reason, other than a flawed decision-making process, to ignore Shinseki.  The absence of any such defense in such a circumstance is at least some evidence that no such (credible) defense exists.

Finally, there is the tone and emphasis of Di Rita’s essay, which is to blame Shinseki for what he claims, initially, is a media phenomenon.  According to Di Rita, it is Shinseki’s fault that public opinion has turned against Rumsfeld.  I wonder, did Di Rita talk like this when he was working in the administration?  Because if he did, that sounds to me like exactly the kind of insinuation that would discourage people from stepping forward and voicing disagreement.

Di Rita’s argument matches closely to the logic we have observed the Bush administration use in many contexts: Since, before events occur, we know we are right, debate that exposes the weaknesses of our rationale is purely disruptive dissent and should be suppressed.  Then, after events occur, when it is clear we were wrong, we claim that we “couldn’t have known any better” because everyone agreed our rationale had no weaknesses, and so the fault lies with those who didn’t speak up.  In this case, the fault lies with the person who did speak up for not speaking up even more.

Letter to Friedman

Posted in Economics on December 15, 2008 by dmargolin

Tom Friedman had this column in Sunday’s NYT.  The basic point was that Obama should deal with the major problems of Detroit, Afghanistan, and banking with an eye toward fixing the underlying problems.  I sent this to him to further his point:

Great column today (Sunday). One thing to emphasize with both Detroit and the banks: bad decisions now will make things worse in the future.  And yes, they can be worse (see 1932).

The major reason the economy can, and will, get worse if we aren’t smart with the bailout money is that it is borrowed money.  Since the bailouts involving loaning money to companies, we citizens tend to think of ourselves as the big bankers assessing these companies with our charitable but scrutinizing hearts.  We forget, though, that just like most bankers, we’re not loaning our own money.  We’re loaning money we borrowed and had better pay back on time, or else…

These loans allow us to keep our economy alive in the short term, but like all loans, there is a time limit to their health-giving power.  Loans soothe short-term pain by re-packaging it as the risk of long term catastrophe.  This means that by borrowing money to give bailouts, we just made our short term situation less important and our medium term situation more important.  We don’t need to be marginally more healthy now, when our credit is good enough to borrow, we need to be considerably more healthy in the future when, if we aren’t healthy, we won’t have any credit to fall back on.  This means that any use of the money that doesn’t improve our fundamental economic health is not only “wasted” but is in fact endangering us at the time when we are most vulnerable — the future.

This is not to suggest that we should just let Detroit and many banks die on the spot.  Institutional stability plays an important role in the process of learning and innovating.  It is hard to grow anything in an environment of chaos.  But our goals cannot waiver: long term, sustainable growth.  And if that means short term pain, we need to accept that, because we still have a supply of pain relievers…. for now.

Community Squares

Posted in Economics on December 11, 2008 by dmargolin

I agree with David Brooks column yesterday on how Obama should spend on infrastructure. We need to spend money to help people connect with one another. This will both improve the economy, because it will help with innovation and the distribution of risk, and quality of life.

Liesl and I were in Mexico this summer and in Belize in the fall (visiting the wonderful Cesiak and Blackrock resorts). In the towns there they always have a central square, the “plaza.” In the evenings, particularly on the weekends, everyone in town gathers there. Families with young kids, the elderly, and teenagers. They all do their own thing but they are there together and can’t deny they are part of a common experience. It’s great!