demandside

When the ethical element is missing, can collapse be far behind?

After some news, we look the collapsed premise of Ayn Rand’s novel Atlas Shrugged.  It now appears that rather than lifting anything the Atlases are rolling their load ahead of them and over the rest of us.  We wonder why we don’t tax them instead of giving them a free ride.

We then touch on some research on how altruism survives in a world of selfishness, and we finish up with some Jeffrey Sachs offering perspective.  This copy is from a couple of months ago.  Let’s see how it has held up.

First the news.

Fed Minutes:

http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20090429.pdf

I always forward to those Fed minutes that reveal the forecasts of the FOMC members.  This was an innovation Ben Bernanke installed after he became chair and before the stuff hit the fan.  It has given me hours of enjoyment by displaying just how at sea these nabobs of the central bank, arguably the most powerful economists in the country, are.  It was meant to be a way of delivering an implicit inflation target to the markets.  So far, the predictions are following the data rather than the other way around.

Again this time the forecasts from April have virtually all migrated out from under the dotted lines of the January forecasts on GDP and unemployment and inflation for virtually all time horizons except the most remote.  There is no tracking of the actual versus the predicted path of the economy.  Transparency is not a hallmark of the Fed.

Mark Thoma, Economist’s view http://economistsview.typepad.com/economistsview/2009/05/geithner-interview.html

Geithner Dismisses GOP Socialism Charge as ‘Ridiculous’, Federal Eye: Washington Post http://voices.washingtonpost.com/federal-eye/2009/05/geithner.html

Treasury Secretary Timothy Geithner admits private investors are worried about investing in new government-backed commercial mortgage securities and dismisses as “ridiculous” a recent Republican National Committee resolution stating that Democratic policies bordered on socialism. …

Update: Calculated Risk comments on Geithner’s remarks: http://www.calculatedriskblog.com/2009/05/geithner-fails-to-correctly-describe.html

Although there were many factors in the housing and credit bubble, the two keys were: 1) rapid innovation in the mortgage industry (securitization, automated underwriting, rapidly expanded wholesale lending, etc), and 2) a complete lack of oversight by regulators. … Geithner failed to mention the rapid changes in lending and the failure of government oversight as the two critical causes of the bubble. Either Geithner misspoke or he still doesn’t understand what happened - and that is deeply troubling.

Denounced for decades as a millstone preventing growth and competitiveness, particularly by free-market advocates in the United States, the French government’s dominant role in economic activity has suddenly found new favor at home and grudging respect abroad.

The crisis has landed hard in France, just as it has elsewhere. European Union specialists estimated last week that the number of unemployed is likely to rise to more than 3 million by next year as factories close. But the French economy is expected to shrink by just 3 percent, markedly less than in Britain or Italy, largely because of the country’s traditionally high level of government spending, they added. From the Wall Street Journal also via Calculated Risk: http://www.calculatedriskblog.com/2009/05/banks-lobby-to-game-ppip.html

… Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government’s Public Private Investment Program. … The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government’s overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

Federal officials haven’t specified whether banks will be allowed to both buy and sell loans …

Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases. … “The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts,” said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

Hopefully the answer will be a resounding “NO”. The purpose of PPIP is to remove the toxic legacy assets from the bank’s balance sheet, not to allow the banks to game the program at taxpayer expense.

Either a buyer or a seller be - but not both, says Calculated Risk.  We agree.

…

The premise of the Ayne Rand fantasy novel Atlas Shrugged is that certain members of society are far more productive than others and so are underpaid for their services.  If they went on strike, all would suffer.

from enotes http://www.enotes.com/atlas-shrugged

the mysterious John Galt begins a revolution against the existing order, believing that the parasitic society would destroy itself if its competent and hardworking members would simply stop working. But first, the protagonists must learn how to let go of the ties of obligation, responsibility, and guilt connecting them to the abusive community in all aspects of their lives.

the political and industrial parasites support each other and live off of the creative and productive “giants” who remain and must support them on their shoulders. The apathy of the people is summed up in a new slang expression, “Who is John Galt?” which conveys hopelessness, fear, and a sense of futility, as well as everything unachievable and imagined.

from Wikipedia http://en.wikipedia.org/wiki/Atlas_Shrugged

Rand stated that the idea for Atlas Shrugged came to her after a 1943 telephone conversation with a friend who asserted that Rand owed it to her readers to write a nonfiction book about her philosophy. Rand replied, “What if I went on strike? What if all the creative minds of the world went on strike?”

Rand then set out to create a work of fiction that explored the role of the mind in man’s life and the morality of rational self-interest, by exploring the consequences when the “men of the mind” go on strike, refusing to allow their inventions, art, business leadership, scientific research, or new ideas to be taken from them by the government or by the rest of the world. Leonard Peikoff noted that “Atlas Shrugged did not become the novel’s title until Rand’s husband Frank O’Connor made the suggestion in 1956.” The working title throughout her writing was The Strike.

According to Barbara Branden, the change was made for dramatic reasons––Rand believed that titling the novel “The Strike” would have revealed the mystery element of the novel prematurely.

…

In the final section of the novel, Taggart discovers the truth about John Galt, who is leading an organized “strike” against those who use the force of law and moral guilt to confiscate the accomplishments of society’s productive members. With the collapse of the nation and its rapacious government all but certain, Galt emerges to reconstruct a society that will celebrate individual achievement and enlightened self-interest, delivering a long speech (fifty-six pages in one paperback edition) serving to explain the novel’s theme and Rand’s philosophy of Objectivism, in the book’s longest single chapter.

Anyone with a sense of reality can get through only about three pages of this nonsense.  The society of collapse it begins with bears resemblance to nothing so much as the Great Depression, caused by unbridled free markets.

Rand was unfortunate in her choice of steel and railroads as industrial vehicles for her heroes.  Steel rose on the back of the War.  Railroads on the back of a gargantuan land give-away.  Neither rose from its own.

It is the fact that the benefits of the society flow to the powerful.  The barons of industry collect income far beyond their contribution.  Of course, these folks bear no resemblance to the Atlases of Rand’s imagination.  They are organization men who control corporations titularly owned by stockholders, but run primarily for the benefit of their executive teams.

It is no accident that the dicta of Rand when allowed to work into the society, say through the auspices of disciple Alan Greenspan or through the Reagan Revolution, have resulted not in prosperity, but in collapse.  Those who have end run the law and ignored moral imperatives have simultaneously run the society over the cliff.

Mighty scarce these days are advocates of the free market who ascribe no role for the government today.  Much more common are those who say we must rescue the prodigal financial institutions from the enormous mess they made so they can again operate in their former styles.  We have transitioned into an unsteady corporate welfarism, which allows the private sector the profits and assigns the losses to the public sector.

How are we going to pay for this mess?  This is often the segue into how irresponsible the government is to run deficits.  Today I would like you to consider how can we asssign the costs to those who incurred them.

I would like to suggest we tax the wealthy.  It is no stretch to say that those who retain wealth today are those who benefitted from the out-of-control market fundamentalism and financial sector excesses of the past decade.  By taxing the wealthy we will be taxing the beneficiaries, if not the culprits, of this massive error.

The Atlases of the world exist only as convenient folk figures to justify the coddling of the wealthy.  Economic actors, from the minimum wage worker to the CEO, all act from incentives.  To think that those at the top deserve outsized incentives while those at the bottom can be content with the incentive of subsistence is contorting the idea of incentive.

In fact, the wealth of a market society automatically flows to the talented.  They have a monopoly, as it were, and can benefit just as any monopolist can benefit.  Corporations often think they can corner the market of talent in a particular area just to ride on this monopoly.  Of course, all too often, the talented develop better in a garage than on floor three of module A-6.

But take for example sports.  The top twenty stars get millions.  The next five hundred get some lesser millions.  Below that, even if only a small gradation in talent different, the reward is a particle of the others.  We could go on.

The point is that it is a distortion and an illusion that Atlases exist in today’s society.  Rewards are cornered by the powerful, often the monopoly power associated with talent, but more often simple political or institutional power.  However they are cornered, the role of the government is to access them for the benefit of the society upon which these gains have been made.

morals and selfishness

March 18 http://economistsview.typepad.com/economistsview/2009/03/selfish-punishment.html March 18, 2009 “Selfish Punishment”

How does altruism survive?:

Thriving on Selfishness, by Marina Krakovsky, Scientific American:

It’s the altruism paradox: If everyone in a group helps fellow members, everyone is better off—yet as more work selflessly for the common good, cheating becomes tempting, because individuals can enjoy more personal gain if they do not chip in. But as freeloaders exploit the do-gooders, everybody’s payoff from altruism shrinks.

All kinds of social creatures, from humans down to insects and germs, must cope with this problem; if they do not, cheaters take over and leech the group to death. So how does altruism flourish? Two answers have predominated…: kin selection, which explains altruism toward genetic relatives—and reciprocity— the tendency to help those who have helped us. Adding to these solutions, evolutionary biologist Omar Tonsi Eldakar came up with a clever new one: cheaters help to sustain altruism by punishing other cheaters, a strategy called selfish punishment.

“All the theories addressed how altruists keep the selfish guys out,” explains Eldakar… Because selfishness undermines altruism, altruists certainly have an incentive to punish cheaters—a widespread behavior pattern known as altruistic punishment. But cheaters, Eldakar realized, also have reason to punish cheaters…: a group with too many cheaters does not have enough altruists to exploit. … That is why, he points out, some of the harshest critics of sports doping, for example, turn out to be guilty of steroid use themselves: cheating gives athletes an edge only if their competitors aren’t doing it, too. … …

Demand Side suggests that the altruists make a point of hiring policers and acknowledging that the more altruists there are the better off everybody is, so that the rewards to cheating are then much higher as well.

Jeffrey Sachs Huffington Post

http://www.huffingtonpost.com/jeffrey-sachs/capitalism-and-moral-sent_b_177637.html

March 28, 2009

In recent days, both Tom Friedman and David Brooks urged us to take our attention away from the trivialities of the AIG bonuses (just 0.001 percent of GDP, sniffed Brooks), to focus on truly weighty macroeconomic matters. Friedman bade us to look forward to, and support, the next mega-bailout of the banks, and Brooks applauded the leadership of Mssrs. Geithner and Summers in leading the G20 to macroeconomic stimulus and a rejuvenation of the International Monetary Fund.

Both pieces had the feel of planted stories, with insider tips about what’s coming next and praise for the economics team as it battles against little minds in Europe and populist sentiments at home. Whether or not the stories came from Washington, both stories are wrong. There is no tradeoff of great macroeconomic themes and attention to little details like AIG and Merrill bonuses. We can focus on both the bonuses and the macro-economy. Indeed, we must. Nor is the concern over the bonuses mere populism. It is, rather, woefully overdue attention to the core issues of reckless greed and arrogance that did so much to get us into the current fix.

During the last 20 years Wall Street has had its way with us. On a bipartisan basis it provided the Treasury Secretaries, filled the regulatory agencies, paid itself unconscionable bonuses, and stuffed the campaign coffers. The greed knew no bounds. The distortions of public policy — right up to Greenspan’s infamous decision to leave financial regulation up to the firms themselves — have wrecked the world economy.

The fascinating thing about this greed is that it is so deeply ingrained that neither the bankers themselves nor our economic leadership understands just how disgusting and dangerous it is. Even after the music stopped, to use Chuck Prince’s now famous simile, the bankers keep dancing - with our money. They continue to grab billions of taxpayer dollars (in Merrill’s case) or at least hundreds of millions of dollars (in AIG’s case) with giddy abandon, in full view and with a straight face. And our economics officials declare that this is unavoidable or too dangerous to curb. Contracts are sacred, unless of course it is union contracts, in which case we should demand that wages and benefits be cut as conditions for government help.

The great scholars of capitalism, from Adam Smith to John Maynard Keynes, understood full well that a functioning economic system depends not on greed, but on moral sentiments and an acceptable social contract between the rich and the rest of society. The rich can make money, of course, but they must not flaunt it or consume it frivolously. Instead, they must invest their wealth for social benefit, whether in business or in philanthropy, or in both as in the case of history’s most celebrated capitalist-philanthropists, from Andrew Carnegie and John D. Rockefeller to Bill Gates and Warren Buffett. It is only the dangerously arrogant rich or the servants of the rich who believe that morals don’t matter in the great matters of finance.

Here is how Keynes famously described the “psychology” that propelled the first successful era of global capitalism in the late 19th century and early 20th century.

Herein lay, in fact, the main justification of the capitalist system. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect . . . The capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of ’saving’ became nine-tenths of virtue and the growth of the cake the object of true religion.

Understanding the need for a moral code in the economy will enormously help the economics leadership not only to weather the storm of outrage that has rightly hit Washington and Wall Street over Wall Street’s rampant and continuing abuses, but also to fashion — finally — a successful solution to the tottering banking system. The stalemate over banking has arisen because the economics team has been unwilling to take on the bank shareholders and management. It now reportedly plans to clean up the banks’ assets through a new alliance of hedge funds and taxpayer dollars. That simply won’t happen.

The public won’t tolerate such games for another round. The public won’t accept more money going into financial bailouts until the banks are clearly being run for public benefit, not for the private gain of undeserving shareholders, management, and traders. America will not right itself until it regains a moral compass in economic affairs. That will require a new generation of financial leaders who will forswear the abuses of the past generation of Wall Street leaders. The faster that the economics team and Congress heed the public call for simple justice and decency in financial matters, and the more rapidly that translates into a true Wall Street clean up, the faster will come the economic recovery.

Jeffrey Sachs

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