There are, in general, three three things a government needs to create and sustain legitimacy:
(1) National Identity: The government embodies the ideals and interests of a self-defining "people" (cultural/racial/ethnic/religious/etc) .
(2) Law and Order: The government has the monopoly on overwhelming violence, and no one is inclined to challenge it.
(3) Prosperity: Life is better with the government than without it.
The US is pretty comfortable with (1) and (2). The ongoing debate about what it means to be "American" will likely, hopefully, never end. Our political leaders are drawn not from any particular demographic; waves of immigrants have contributed. Our inclusive political and commercial process is more appealing than trying to seize power outside of them. Our military and law enforcement systems are not perfect, but it's tough to find better.
However, the third leg of the stool is the tricky one. Prosperity is a highly subjective thing, but in general the greater the ability of a society to allow individuals to consume resources, the more prosperous it is. This is why, in a society that simply has too much debt, the stated policy goal is to "restore lending." To do otherwise is to admit that we've run out of future to raid, and our government has failed to provide the prosperity we expect. As always, it is the new middle class that reacts most strongly to losing its run on the ladder, but try to imagine an American city losing reliable internet, phone, electricity and water services.
So, why bail out AIG? Because, if you go back to my little story of Bob's Investment House, the reason WSB was willing to give BIH that big loan was the insurance policy AIG was willing to write against BIH defaulting. The "guaranteed 5%" investment BIH found was backed up by a second AIG insurance policy. So, if anyone seriously believed that AIG would collapse, WSB would "call" its loan to BIH (much like when you pull money out of a savings account), BIH's clients would demand their money back, and the value of all the mortgages in the MBS would collapse as Bob and his staff tried to arrange a firesale while everyone else was doing the same thing. The knock on effect is that an unpleasant deleveraging spiral like we're seeing now would turn into a pretty massive calamity as the banks that hold the cash for large corporations fail, leaving even well-heeled companies unable to pay their workers. City services would fail as those workers weren't able to pay their taxes, and huge swathes of the country soon start to resemble third world countries with inadequate power and sanitation.
The problem is not the bailouts and certainly not the bonuses. From policy makers to investors to voters, we all made mistakes, and now we're trying to clean up the mess. The bigger issue here is whether or not we want a world in which "prosperity" means committing as many people as possible to give as much of their future income as possible to securities owners (like hedge and pension funds) and financial services companies. Some good things to get upset about are that our entire system is based on unsustainable borrowing against future income, that we need unsustainable resource harvesting and consumption, and that the path to "prosperity" offered today was a path to slavery in the past.
Sunday, March 22, 2009
Thursday, March 19, 2009
An object lesson from AIG, cheap at the price
Many people reading the bit about sustainable, universal pie making as a policy objective tend to think that I'm closer to Marx than Hayek in my thinking. After all, the whole point of the pie-a-week notion of prosperity is that it is not resource intensive, and, in theory, could be achieved by a planned economy. History suggests otherwise. If you don't believe me, I'll spot you a rolling pin and a pie plate for a little trip North Korea, Cuba, Belarus or even Venezuela.
The problem, at least one among many, is that in a planned economy compensation is determined by political rather than economic forces. The way we determine the number of doctors, lawyers, ditch diggers, engineers, etc. in most of the world now is increase their pay when we need more and decrease it when we need fewer. In some cases, this system can get out balance, especially when governments try absorb risk. We, however, have a built-in correction mechanism that, while painful (or funny), sure beats the alternative.
So, at the low, low price of $160million (plus probably twice that in gov't employee and media air time), we get an object lesson in how a nationalized economy must respond to popular pressure. The result of this is going to be a flight of the people who best understand the financial WMD to smaller firms where, hopefully, they will be able to do less damage. The crisis will drag out an extra half year or more as the people willing to accept lower pay and the political risk of working Citi, AIG and others get up to speed on exactly what was going on, and despite all the calls for more lending, we won't see much.
The problem, at least one among many, is that in a planned economy compensation is determined by political rather than economic forces. The way we determine the number of doctors, lawyers, ditch diggers, engineers, etc. in most of the world now is increase their pay when we need more and decrease it when we need fewer. In some cases, this system can get out balance, especially when governments try absorb risk. We, however, have a built-in correction mechanism that, while painful (or funny), sure beats the alternative.
So, at the low, low price of $160million (plus probably twice that in gov't employee and media air time), we get an object lesson in how a nationalized economy must respond to popular pressure. The result of this is going to be a flight of the people who best understand the financial WMD to smaller firms where, hopefully, they will be able to do less damage. The crisis will drag out an extra half year or more as the people willing to accept lower pay and the political risk of working Citi, AIG and others get up to speed on exactly what was going on, and despite all the calls for more lending, we won't see much.
Tuesday, March 17, 2009
A higher pie-centric calling
William Easterly, the first person I've encountered in the foreign aid community to quote Hayek, edited a fantastic book book. The Introduction, written by Dr. Easterly, suggests that the foreign aid system is broken. Its original intention was, and it is sold today as, a means of giving people a boost out of the "poverty trap". Complicated plans have been developed, the most ambitious being the Millenium Development Goals. Each component in these plans builds on the others, creating a sort of chain used to pull the recipient out of poverty and into prosperity with one big heave. Unfortunately, the chain always seems to break before the trapped people can be pulled free.
Since each link in the chain is necessary, resources must be allocated to strengthen weak ones instead of reinforcing the strong ones. The will to pull is sustained by public personalities who remind us of our obligation to help those in need. And so the aid system sustains itself with the belief that a good plan will someday bear fruit. If only that darn chain wouldn't break and we could convince the pullers to just pull harder, we'd make it.
Dr. Easterly argues for a different model. Rather than thinking of planned aid as the key to ending poverty, think of it as providing a small boost. In other words, instead of a "poverty trap" with steep walls that must be cleared in one go, think of progress as a continuum. It isn't necessary, or even desirable, to try and plan a path to prosperity. Instead, foreign aid should be seen as a collection of ropes, each pulled independently with the modest goal of improving local conditions. The most effective "ropes" can be strengthened, while ones that don't yield results can be cast aside without endangering the whole system.
This approach, however, begs the question of what interventions are most effective. The bulk of the book is devoted to answering that question, and is by no means the final authority on the subject. I wonder if there's room in the debate for pie-based metrics . . .
Since each link in the chain is necessary, resources must be allocated to strengthen weak ones instead of reinforcing the strong ones. The will to pull is sustained by public personalities who remind us of our obligation to help those in need. And so the aid system sustains itself with the belief that a good plan will someday bear fruit. If only that darn chain wouldn't break and we could convince the pullers to just pull harder, we'd make it.
Dr. Easterly argues for a different model. Rather than thinking of planned aid as the key to ending poverty, think of it as providing a small boost. In other words, instead of a "poverty trap" with steep walls that must be cleared in one go, think of progress as a continuum. It isn't necessary, or even desirable, to try and plan a path to prosperity. Instead, foreign aid should be seen as a collection of ropes, each pulled independently with the modest goal of improving local conditions. The most effective "ropes" can be strengthened, while ones that don't yield results can be cast aside without endangering the whole system.
This approach, however, begs the question of what interventions are most effective. The bulk of the book is devoted to answering that question, and is by no means the final authority on the subject. I wonder if there's room in the debate for pie-based metrics . . .
Saturday, March 7, 2009
And back to econometrics
Back in September of last year, I proposed an economic index with the playful title of Pie Making Capacity in Nation, with the acronym "PMCIN", pronounced "pumpkin". I laid out some suggestions early on about how to compute it, but never went any farther. Now to see if I can implement those, and give us a more objective measure of how "pie friendly" various policies are.
Rather than try to do it all at once, I think I'll take a lesson from my own craft and work in stages. First, the "crust": the basic necessity of food. The fundamental question of pie making capacity is this: is enough food grown, harvested and available for everyone to meet basic needs and have enough left for a pie each week?
A good source of such data is the USDA website. They issue a regular World Agricultural Supply and Demand Estimates (WASDE) that breaks down production of various types of food. From this, it's pretty easy to subtract a healthy diet for a standard population, and then divide up the remainder by the amounts needed for pie making. Once I'm in the "wait for video processing" stage of my dissertation, I will try to write the script that collects that information and put it up on the blog as a widget. People willing to volunteer IT help will be rewarded.
Rather than try to do it all at once, I think I'll take a lesson from my own craft and work in stages. First, the "crust": the basic necessity of food. The fundamental question of pie making capacity is this: is enough food grown, harvested and available for everyone to meet basic needs and have enough left for a pie each week?
A good source of such data is the USDA website. They issue a regular World Agricultural Supply and Demand Estimates (WASDE) that breaks down production of various types of food. From this, it's pretty easy to subtract a healthy diet for a standard population, and then divide up the remainder by the amounts needed for pie making. Once I'm in the "wait for video processing" stage of my dissertation, I will try to write the script that collects that information and put it up on the blog as a widget. People willing to volunteer IT help will be rewarded.
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