armchair pundit

It’s been a while since I posted here, and I’m introducing a new category: Elimination Dance.

Instructions: An elimination dance begins with a crowded dance floor.  At a signal, the band stops playing and the announcer reads an elimination, say, “Any lover who has gone into a flower shop on Valentine’s Day and asked for clitoris when he meant clematis.” Any dancer answering this description must sit down, and his partner is also disqualified. The process continues (e.g. “Any person who has burst into tears at the Liquor Control Board”) until a single couple remains.

(from the description of Michael Ondaatje’s book by the same title)

This new category, in other words, is for all the things I wish would go away. My first is small-government fanatics. For some reason I’ve allowed myself to rant in the comments of a couple friends’ blogs this week in response to passionate small-government fanaticism and comments I somewhat unfairly deemed as such.

The rest of this post is a lightly-edited re-post of a comment I left on my friend Jay’s blog…

Small-government fanatics seem to believe we are a prosperous and successful country in spite of our government – rather than because of it, whereas I believe the truth is very much both.

We are beneficiaries of two centuries of government protection and support – much of which we basically seem to take for granted at this point, and much of which few people would really want to go back and undo. Of course there have been missteps too, but the small-government libertarian crowd usually fails to acknowledge the ways in which we have benefited.

One core principle of small-government fanatics is free markets, or as my friend Jay unambiguously put it: “The free market is one of the greatest gifts to mankind in all of our history.”

I think, however, that total market freedom almost inevitably leads to “tragedy of the commons” scenarios. People and businesses will pursue their own desires even to the detriment of everyone’s needs. They pursue immediate individual gains that risk (and often cause) generalized future catastrophe.

If government does not serve to protect the commons from the individual, then what – or who – will?

Before the FDA required drug companies to prove their products were not dangerous prior to putting them on the market, there were numerous incidents of contamination – sometimes maiming or killing thousands (thalidomide, diethylene glycol). What’s the free-market alternative to this? The free-market response might be to put a company out of business because one of their products killed a few thousand people, but um… the company KILLED people. That was the free-market drug industry before the FDA.

What about a more straightforward tragedy of the commons? I have a hard time envisioning a free-market solution to protecting fisheries from individual companies competing against each other to pull in the biggest catches. The companies know when they are pushing fisheries toward collapse, but they also know that if they hold back, then others will just step in and out-fish them. What’s the free-market answer?

This is similar in nature to what happened in our financial markets. Smart people knew they were taking insane risks that were not sustainable, in order to reap huge short-term gains. But they also knew that if they didn’t do it, plenty of other people would out-gain them in the short term, and they would be fired.

For whatever reason, it’s easier for me to stomach this problem with the financial markets (as part of the cost of doing business – even if it hurts a lot of innocent bystanders), than with things like forests and fisheries. Damage done to forests and fisheries is longer-lasting.

I have a hard time believing our country’s major parks and wilderness areas would ever have been created without our government deciding to do so (imagine how many more dams could have been built along the Colorado River and how many more trees harvested in Appalachia if companies were free to do so). I’m personally happier to have the parks and wildernesses.

Scientists have been sounding alarms about atmospheric carbon and climate change for five decades, warning us about a point-of-no-return. We probably needed to start doing things differently 10 years ago to avoid the point-of-no-return, but what free market incentive existed to do so? None, and that’s why we’re in the predicament we’re in.

If you believe there are no situations when the collective good is more important than individual gains, then my argument is lost on you. I don’t believe this. And it’s hard to imagine who would aim us toward the collective good if the government was not trying to do so.

It’s fair to argue that the government does not operate effectively or efficiently enough, but I think the answer is to improve it, not to eviscerate it.

I think it’s good and necessary to debate each threshold of government intervention (currently, healthcare), but I think we need to acknowledge how much existing government protection and support we take for granted and would not want to give up.

I have a somewhat irrational affection for Costco. The selection is good, the prices are low. They have a generous return policy (my friend just returned a printer he bought there four years ago and exchanged it for a new one). The folks who work at the one in San Francisco always seem to be enjoying themselves.

But many of my green-minded friends see Costco as a perfect embodiment of modern-day consumer culture and all that is wrong with America.

When you think about it though, one giant jug of laundry detergent requires significantly less plastic than the same amount of detergent sold in six smaller bottles. And buying a mega-bundle of toilet paper means fewer trips to the store than buying six rolls at a time. Plus, they sell recycled paper products and phosphate-free detergent.

I’m just sayin’

I just finished watching the second season of Mad Men, and I’m left with a familiar bittersweet feeling. The same one you get when you finish a great book. I don’t often get this feeling from a TV show, so I’ve begun to reflect a little on what it is that makes the show so good. One thing, of course, is the place and time.

1960 in America

Setting a show in 1960 was a stroke of pure genius. America, having recovered from World War II hit it’s stride in the 1950s. The country was enjoying an unprecedented era of era of prosperity. The big companies that created the machinery of modern warfare reinvented themselves as purveyors of household magic. Plastic revolutionized packaging and changed the whole concept of disposable goods. Chemicals emerged to ensure everything from green lawns to wrinkle-free clothing. A proliferation of new gadgets promised to erase every inconvenience from our lives. This is when Modern America was born. We were seduced by technology, and we never looked back.

At the same time, there was so much about America in 1960 that seems so quaint and primitive now. Often comically so. There’s a voyeuristic joy in watching kids play spacemen in front of their parents by putting plastic bags over their heads. Seatbelts didn’t even exist yet. Pregnant women smoked and drank. Everyone, for that matter, smoked and drank constantly – even at work. Every executive had “a girl” to take care of all the minutiae of meetings and phone calls (plus coffee, dry-cleaning and sometimes other “perks”). “Homos” were perverts, and “negroes” were only fit for household help and operating elevators.

Looking back on this era is to witness the fascinating disconnect between what Americans in 1960 believed about themselves – and their culture and their country – and what we now understand to be the reality. This makes for many gasp-producing, head-shaking moments. But I believe there’s also something much more personal going on. I suspect that in 2009 there is a similar disconnect at play in America.

1960 as a mirror

The Internet has resurrected our reverence for technology and our faith in technology’s ability to solve our problems (if it ever went away). We constantly crave the next new thing – then we adopt it, adapt to it, become disillusioned by it and discard it. This whole cycle can happen over a few months or even weeks.

Today, for example, everyone seems to be excited about Twitter’s third anniversary. At the same time they’re wondering if Facebook’s home page redesign is a harbinger of impending decline.

Women and minorities have come a long way of course. There are whole categories of things we consider unjust today that were acceptable in 1960, but there is still plenty of injustice in the world. And for the most part we still coast through our lives, blissfully untouched by it.

So partly, we love Mad Men for the same reason we love most great stories – because we recognize ourselves in the characters, and we see our world in the one they inhabit.

There’s no shortage of ideas for how the newspaper industry might save itself – by adopting new business models, distribution strategies, etc. The other day, my friend Ben suggested a new twist on subscriptions that would work something like cable television. Others hint that newspapers should push for mass adoption of the Kindle. Still others believe it might make sense to run newspapers as charitable trusts, and organize periodic pledge drives – like NPR.

In these strange and stressful times, people across the political spectrum seem resigned to the likely demise of some major banks and possibly the whole U.S. auto industry. Even my most liberal friends seem almost eager to see GM and Chrysler bite the big one. Yet they’re unwilling to accept a similar fate for the New York Times.

They may not have a choice of course. Michael Hirschorn suggested in the Atlantic Monthly that the Times could disappear by this summer (prompting this response from the Times).

I more or less share my friends’ sentiment. I’m an avid reader of the New York Times (online edition), and I’d miss it. On the other hand, I’ve never owned an American car, so I feel somewhat indifferent to the possibility of their extinction. In my mind, American car companies have made one bad business decision after another, failing to adequately respond to major shifts in the market. On top of that, their product actually harms the planet.

But is the newspaper industry really so different? Newspapers have made plenty of bad business decisions, and they haven’t adequately responded to major shifts in the market. Plus, ink, paper and all the driving involved in distribution take their own toll on the planet.

But the bigger question is, why do we need newspapers? And I’m not just talking about the physical offline versions. I mean why do we need the New York Times at all? Who needs their classifieds when you have Craigslist, Ebay, Amazon, Facebook, etc.? And there are plenty of other – and better – places to keep up on sports, finance, travel, food and entertainment.

That leaves general news of the nation and the world. Again though, would we really miss what the major newspapers provide? We shouldn’t equate newspapers with journalism.

After all, the major newspapers dropped the ball with respect to the current financial crisis. In hindsight, there are all kinds of questions they should have been asking. The alternative press and bloggers were arguably doing better at what the fourth estate is supposed to do, but the very existence of the newspapers casts a pretty long shadow over these guys.

The major newspapers failed during the Vietnam War to report on things like illegal bombing campaigns and widespread atrocities committed by U.S. soldiers, although there was ample evidence and no shortage of credible sources willing to come forward without anonymity. Again, the alternative press were the only ones willing to write about these things until the war was basically over and the tide of public opinion had completely shifted.

The major newspapers failed during the run-up to the Iraq war to question the motives or tactics of the Bush administration. And they neglected through the first four or five years of his presidency to adequately scrutinize anything his administration did – from suspensions of civil liberties and habeas corpus to rampant corruption and deceit.

The major newspapers failed for many years to lay out the straightforward scoop on climate change, opting instead for a misguided even-handedness. The perception of impartiality was more important to them than the truth.

In so many important cases, the major newspapers put their bottom line ahead of journalistic principles, unwilling to report anything that ran against the public opinion of the moment. This is why nine out of the ten most emailed New York Times articles on any given day are op-ed pieces. This is the most trustworthy section of the Times because it’s the most uncorruptable, the least subject to compromise.

In my view, the only newspapers that don’t have an obvious replacement are the small-town ones. Without small-town papers, where will people find out about the latest zoning ordinances and high-school wrestling results? But the potential demise of local news sources isn’t a tragedy. It’s a business opportunity. The Internet still needs to get a lot more local. And it will.

It’s OK to let the newspapers die.

In the tradition of The Giant Pool of Money, its spinoff Planet Money and this fine piece of writing by Henry Blodget in the Atlantic Monthly, here’s a nice piece of animation that explains how we blew up the economy:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

There are a lot of people lining up for stimulus dollars, a lot of ambitious and long-dormant projects being dusted off by governors and mayors across the country.

But there’s another group of opportunists taking advantage of the debate. I’m talking about the G.O.P. who are stonewalling and stalling in the name of prudent spending. At least that’s what they’d like us to think. They’re going through the proposed bill line by line and collectively decrying as wasteful almost everything in it.

I suspect something else is behind the political theater.

It’s possible the Republicans think they have nothing to lose by delaying or even derailing the President’s plan. It’s reasonable for them to believe they won’t be blamed if the final plan they approve ultimately fails to fix the economy. If it fails, the Republicans can be pretty sure that the president and not congress will bear the blame. Likewise if it succeeds, he will get most of the credit. Congress will share very little of either.

I’m not sure I’m so cynical as to suspect the Republicans of trying to engineer a failure, but looking at it as a purely political opportunity, they have much more to gain from failure than they do from success.

Here’s a remarkably simple formula for personal finance. It’s genius, and I wish someone had told us this sooner.

Well, the Eagles lost the NFC championship game… again. This is what Philadelphia teams do. Instead of outright sucking like you can always count on, say, Detroit doing, the Philly teams like to take their fans to the absolute brink of triumph before they break your heart.

I was a little bummed when the Eagles lost to the Cardinals last weekend, but at least they beat the Giants, and therefore I will always have this…

As I wandered through the crowded mall in Washington D.C. on Inauguration Day, chatting with people and overhearing many other conversations, a theme emerged.

Or rather, two themes.

Folks of older generations as well as the African-Americans on the scene seemed to see the day in largely symbolic terms. Obama is our first black president, sworn in the day after the Martin Luther King Jr. holiday. Obama represents a significant step toward realizing Dr. King’s dream of a just world and one in which men are judged by the quality of their character and not the color of their skin.

This symbolism was not completely lost on the younger folks on the mall, but people too young to have personally witnessed (or participated in) the civil rights movement seemed to see the day more pragmatically. To them, the election of Obama represents a shift back to a government that values competence and toward a post-partisan one that welcomes debate, seeks consensus and eschews ideology.

I think the big deal about Obama is that both perspectives are true, although I count myself mostly as one of the latter group.

In politics, superficial things matter, and if dark skin isn’t enough to kill a person’s chances of becoming president, then a funny name often is. I remember people saying in 1988 that “Michael Dukakis” was too ethnic-sounding a name for the White House. If that’s the case, then “Barack Hussein Obama” should have been catastrophic – especially in these Islamophobic times. Obama, however, transcended his name and his race (not to mention his exotic upbringing and his lack of experience) almost at the outset of his campaign. He transcended it and brought enough of us along with him to get elected president.

At a cocktail party before the inaugural ball, a question was circulating: “When did you decide you were going to vote for Obama – instead of Clinton, or McCain, or someone else, or no one at all?” One person said it was when her 10-year-old daughter told her she thought Obama would be the best president “for the future.” Another person said he refrained from choosing until Obama seemed like the candidate who had the best chance of defeating McCain.

As for me, Obama had me at “no red states or blue states, but only the United States.”

Who killed the economy? Hint: call your lawyer.

The witch hunt to expose the people responsible for the current financial crisis has been underway for several months, and there is no shortage of suspects. This week, however, I read a couple of articles that together lay out the best case so far.

Why Wall Street Always Blows It by Henry Blodget in the current Atlantic Monthly puts the reader in the shoes of someone sitting on a bad mortgage and at risk of being laid off. He surveys the list of candidates to blame for the mess we’re in.

• There were the predatory lenders of course. Mortgage brokers sold millions of “ticking time bombs” known as ARMs, and they encouraged people to lie about their incomes. But this was fine because a) home prices were going to go up forever, b) the buyers were probably going to sell before the mortgage rate adjusted anyway and c) they got fat commissions and bore none of the risk.
• There were the sleazy real-estate agents. Many probably knew it was a bubble but wanted to close as many sales as they could before it popped. On the other hand, real estate agents are always trying to close as many sales as possible, and most were probably as deluded and blind as everyone else.
• What about home buyers? If a mortgage broker encourages you to lie about your income, does that make it OK? A lot of people who knew it was a bubble expected it to burst five years ago and stayed out of the housing market only to see a gazillion idiots get crazy rich. Only then did they finally decide to jump in – right at the peak. The bottom line is that too many people forgot a home is a home first and an investment second.
• There’s Wall Street of course. ‘Nuff said.
• On the other hand, Investors demanded that their banks and brokers deliver higher returns than all the other banks and brokers, and if they failed, then the investors simply moved their money to one of those other ones. When this happened, bankers and brokers got fired. So, the career incentive (to not get fired) ended up outweighing the incentive to invest prudently, and bankers and brokers made more and more risky bets in a race to outdo each other.
• There’s the SEC, whose leaders seemed to be mostly concerned with positioning themselves for future jobs in the Wall Street firms they were supposed to regulate.
• And there’s Alan Greenspan, who most people now agree kept interest rates too low for too long.

The second article was a two-part Op-Ed piece in the New York Times by Michael Lewis and David Einhorn:

1. The End of the Financial World As We Know It
2. How To Repair a Broken Financial World

Lewis and Einhorn look at many of the same players, but they focus more on the SEC and the ratings agencies:

It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

A big theme across these three articles is incentives. No one had any reason to care about the larger and long term consequences of what was happening. The short term – in some cases just the next commision – was all that mattered. Everone was making money, so everyone just assumed the system was working. The few naysayers who insisted it shouldn’t be working – or, preciently, that it would soon stop working – weren’t taken seriously.

Bernie Madoff’s victims are a case in point. They were happy enough not to ask any questions about where the exceptional returns were coming from, as long as there were returns. That Madoff, like most scammers, was unwilling to disclose anything about his investment strategies didn’t stop them from handing their money over.

Investors’ enthusiasm for complex and inscrutable investment vehicles like CDO’s and credit default swaps was not that different. People didn’t care to know what was happening inside the black box, as long as money was coming out of it.

Americans accept the reality of a broken and corrupt system – even take pains to preserve it – as long as enough people think they can personally profit from it. Most people may over-estimate their ability to predict the collapse of the system in the hope of timing their exit. They lose money and eagerly join the witch hunt.

Nonetheless, Americans still prefer this corrupt system for the same reasons people play the lottery. The lottery has a few winners and a multitude of losers, but the people who spend loads of money playing it no doubt imagine they will win someday. A corrupt system by its very nature offers opportunities for crafty and motivated people to “win,” and the possibility of tremendous wealth for a few is more enticing to too many Americans than guaranteed prosperity for all.

And this is why it will never be fixed.