Letter to the NYT on Mammograms, Pap Smears

The following is a letter I plan to submit to the New York Times.  Since the Times only accepts letters of 150 words or fewer, I’ve added additional points I would have made if given the opportunity below the text of the letter…

I write to voice displeasure with The Times’ coverage of the new recommendations for mammograms and pap smears (“Panel Urges Mammograms at 50, Not 40,” “Guidelines Push Back Age for Cervical Cancer Tests”). These articles lack information readers require to evaluate the new claims and assess their relevance to the larger debate about health care policy.

The Times reports that scientists justify the new recommendations on the basis of a net reduction in health risk. In other words, these scientists say that foregoing the screening procedures will save lives. Yet the only statistical estimates The Times reports are those that reflect the increase in fatality risk due to the missed opportunity of early detection. These figures, which indicate that this risk increase is quite modest, are necessary and relevant not sufficient to evaluate the recommendations. Equally necessary are estimates of the reduced risk of fatality or serious conditions produced by foregoing the procedures. Without these estimates, one cannot tell the degree to which the larger claim — that reducing screenings will improve health – is a matter of conclusive evidence or informed speculation, a distinction that is critical for both patients and policymakers.

I do not know whether the scientists provided such data with their recommendations, but since this information is necessary to understanding the story, it is The Times responsibility to either report it or report its absence.

[Those are my first 230 words, so I need to cut 80.  Here is the rest...]

The implications of this imbalance go beyond the reader’s inability to evaluate the recommendations. In both stories, evidence is provided to support the claim that losses will be minimal but is not provided to support the claim that gains will be obtained. If I trust that this imbalance is the result of the evidence truly available, rather than an omission by The Times, it appears the recommendations are well justified as means to reduce unnecessary treatments but not so well justified as means to improve patient health. This suggests that the recommendations are more motivated by a desire to save scarce resources rather than a desire to improve care quality. In other words, the imbalance suggests that the recommendations are an attempt to encourage health care rationing – precisely the charge made by politicians and others who wish to stir up controversy.

This suggestion is furthered in the pap smear story. The story makes explicit the concern that these recommendations have a political bent:

Arriving on the heels of hotly disputed guidelines calling for less use of mammography, the new recommendations might seem like part of a larger plan to slash cancer screening for women.

but the story refutes this suggestion only with a reference to the motivations behind the timing of the announcement.

But the timing was coincidental, said Dr. Cheryl B. Iglesia, the chairwoman of a panel in the obstetricians’ group that developed the Pap smear guidelines.

The group updates its advice regularly based on new medical information, and Dr. Iglesia said the latest recommendations had been in the works for several years, “long before the Obama health plan came into existence.”She called the timing crazy, uncanny and “an unfortunate perfect storm,” adding, “There’s no political agenda with regard to these recommendations.”

This is a form of damning with faint rhetorical praise.  As my analysis of the evidence provided in the stories demonstrated, the timing of the announcement is only one reason to suspect the recommendations are politically motivated.  A more substantial, and less conspiratorial, reason is that the logic presented for the recommendations implies that cost considerations were taken into account in their formulation.  If this is true, then critics are correct to point out that these findings are based in a science that already includes political concerns and evaluations, namely, the most effective and appropriate ways to spend money.  In other words, this story both suggests and supports a suspicion that these recommendations are politically motivated, even as it ostensibly attempts to refute this suggestion.

My larger point is that these ambiguities and insinuations could be easily avoided with true balanced reporting.  That is, with balanced reporting of the evidence.  If the scientific panels have a set of calculations that show that health outcomes will improve with these recommendations, these should be reported. These figures are both relevant to the evaluation of the claim and serve as a strong argument against the suggestion that the recommendations are politically motivated.  If the panels do not have such calculations, this absence should also be reported.  Without such calculations, it is difficult to see how the claim that overall outcomes can be justified without recourse to an argument about saving resources, and argument which is, whether politically motivated or not, an argument for rationing.

What went wrong with The Simpsons?

Lexy was kind enough to send Will and me this column from Salon.com called Ask the Pilot.  The writer is a pilot who provides explanations and answers questions about the more technical ins-and-outs of flying to re-assure anxious or inform curious travelers.  But he also delves into pop culture on occasion.  Lexy sent this to us because he had these spot on words regarding the Simpsons…

can we talk for a minute about “The Simpsons”? I lamented this popular show’s remarkable downfall in a column a few weeks ago, but I need to elaborate.

How tragic it has been for something once so brilliant to become so crass and embarrassing. Poor Matt Groening — only those six-figure royalty checks, I imagine, keep him from drowning himself in the California surf. From 1990 through 1995, “The Simpsons” presented what was arguably the most cunning satire in the history of television. What made it so was its style — its masterfully hewn characters, rapid-fire comic timing, and a welcome lack of the sort of self-congratulatory comic vanity the networks normally give us. The scripts were wry and irreverent but never obnoxious. “The Simpsons” was art.

And then something — I don’t know what, precisely — began to go terribly wrong. There is no single moment — a switch of writers or producers, for instance — that commenced the demise, but within a season or two the scripts began falling apart. By 1998 the show was unwatchable, and it has remained that way: tediously self-conscious, bloated with slapstick and annoying plots hitched cheaply to various events and celebrities (and products) drawn from popular culture.

Am I the only one who feels this way? In October 1990, the openly gay actor Harvey Fierstein appeared in a fondly remembered episode playing Homer’s personal assistant, Karl. Watching this episode today, you see how deftly the writing and directing were able to incorporate the theme of implicit homosexuality. Not once is the word “gay” uttered; there are no political overtones or kitschy ironic references to Karl’s sexuality. By comparison, one need only to endure the 1997 guest appearance of filmmaker John Waters to see how weak and witless the scripts would become. When Fierstein was asked to appear in a sequel to his 1990 appearance, he found the script so void of subtlety and overflowing with kitsch that he refused not only the initial offer but a rewrite as well.

What ever made the show sick, it so unraveled its DNA that today, in reruns, the eras are plainly distinct: A veteran fan can usually differentiate “Simpsons” old from “Simpsons” new within the first 10 seconds or so.

Sadly, the longer “The Simpsons” plays on, the weaker and more diluted it becomes in our cultural memory. Somebody kill it, please.

I could not agree more!!  We’ve all been talking about this for a long time.  Specifically, we mark the “beginning of the end” for the Simpsons as the episode where George Bush moves into Springfield.  So I thought I’d commit my point of view to the page….

Vatican 2.0

I watched Paul Volcker on Charlie Rose the other night. They discussed the role the Fed should have in over-seeing the “systemic risk” posed by firms that are too big, or too inter-connected, to fail.

Volcker was responding to Chris Dodd’s suggestion that the Treasury Secretary take on this responsibility. Volcker disagrees with Dodd. He thinks the Fed is the right candidate because it is the only “independent” entity. He also argued that the Fed was a superior choice because people who work in Treasury would not have the professional experience to assess these systemic problems appropriately.

I have a lot of respect for Paul Volcker and I tend to agree with his views on the economy. And I don’t, out of hand, dismiss the idea that the Federal Reserve would make a better regulator of systemic risk than the Treasury or any department or committee of the executive or legislative branches. But implementing these kind of changes, in particular, for these kind of reasons, is very, very dangerous.

To give the Federal Reserve increased regulatory authority because the Fed is staffed by experts who are independent of political pressure is to intentionally move away from democracy. What are we giving them? Law-making and enforcing authority. Who are we giving it to? Experts. Why do we want to give it to them? Because they are not accountable to the people.

Just to be clear, I am not saying I am against this move. I think a reasonable argument can be made that, because of the complexity of the global economic system, such moves away from democracy are required. But I think that we should acknowledge this fact and either find a way to compensate for it, restoring democracy, or conceive of ways to make non-democratic political institutions function in a way that approximates the intention of democratic institutions.

It may be that the move away from democracy is inevitable, much as the move toward democracy may have been inevitable a few hundred years ago. I believe that the structure of society is heavily influenced by the distribution of knowledge, and that this distribution grows naturally — it can be shaped but hardly re-structured. We may be entering a phase where democracy is simply untenable. But if that is the case, we’d better recognize it soon.

Health Care Reform — Why Change is Needed

I believe in the free market, and that is precisely why I am for major healthcare reform and the introduction of a public option.

I’ve detailed my argument in this previous post so I will only summarize here.  Free markets work because they permit supply to meet demand at a market clearing price.  Free markets insure that we spend the fewest resources we can to provide the things that people most desire. This does not work for health care because there is no proper, independent demand curve for health care services.  In simple terms, consumers do not know what health care services they want.   When demanding health care, consumers only know the outcomes they want.

In health care, as in many other industries, outcomes and services are de-coupled.  For the most expensive to treat, most pressing health care needs, doctors cannot know for sure what services will lead to the desired outcomes.  The variation across patients and the variability of complicating factors is too great.  This gap between services and outcomes is especially large for preventative and diagnostic medicine.  The sicker a person is, the greater the immediate risks to their life or particular bodily functions, the clearer the need for intervention.  But for long term care — managing risks of heart disease or diabetes, treating cancer — we just don’t know.  We don’t know enough about how well any particular treatment, test, or procedure will work to tie it to an outcome with an appropriate price.

The impact of this service-outcome disconnect is most evident in the proliferation of unhealthy behaviors in early and middle life.  What, for example, is the appropriate price for a service that sends you a sarcastic, disparaging text message (via your iPhone/Blackberry) every time you try to eat a cheeseburger?  Given today’s information, few young people would sign up for this service.  But given what they know in 20 years, when many people realize they have heart disease, many might. That is, when people find out later that their desired outcome (long life) is improved by a particular service, they’ll desire it.  But there is a good chance that, regardless of how many cheeseburgers one eats, there will be no heart disease.  There are too many complicating factors — we just don’t know.

Since we can’t expect the price of health services, particularly for long term outcomes, to be accurate, we can’t expect that a system that uses price to allocate resources and decide outcomes to be efficient.  In other words, for the resources people would desire to spend on healthy outcomes, the current system does not maximize health.

The current system performs exactly as we would expect it to perform.  It over-allocates resources to services that can be tied directly to outcomes, specifically, drugs and surgeries, particularly close to the end of life when consequences to inaction are imminent.  These are the services for which there is robust demand.  At the same time, suppliers spend resources trying to avoid these high demand customers — the sick and the elderly — in favor of low demand customers, i..e customers for whom no services are required to meet their desired outcome — the young and the healthy.

A crucial source of efficiency is lost in this shuffle.  We don’t spend enough on making young people healthy and this makes our old people sicker.   Or, in other words, we could have a lower cost, higher outcome system if we found a way to get young people to take better care of themselves.

Now here is the trick.  In whose interest is it to make this happen?  Insurance companies?  No.  As described above, this is fundamentally a demand side problem.  An insurance company cannot make more money off of healthier young people unless it can capture their health expenditures over their entire lifetime.  That is, if the demand curve was for a total lifetime expenditure, insurance companies could profit by making you healthy now so that you were healthier later.  What about employers?  No.  Same problem.  Only if the health plan is part of a vested pension would the company save money if people were healthy after they retired.  What about the individual?  This is the original point of the critique.  The individual lacks the information necessary to make an appropriate decision.

As I see it, there are only two entities that could conceivably gain from addressing this inefficiency:

The Government

The Family

These institutions can gain because they are the only institutions that stay the same for people throughout their entire life-span.  There are exceptions, of course, but for the most part people remain in the same country their whole lives, and people remain in close bonds with their parents and children their whole lives. Thus, these institutions stand to gain from better allocation of health care resources and are the biggest losers in the current, poorly allocating  system.

I will debate the pros and cons of these approaches in a subsequent post.

Letter in different form

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

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

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

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

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

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.