Gaming The System Versus Designing It

The main point in this piece is that many people have become quite good at gaming the system but few understand what a good system design looks like.  Here I'm talking about social systems - whether driving on the highway, student and teacher behavior in school, citizen and legislator behavior in state or local government, or any other such system.  People have learned to play the game to their own personal advantage and do so without thought of whether their behavior is beneficial, benign, or deleterious to others.  Indeed, a further point of this piece is that quite often we don't know how to evaluate the outcome socially, so instead build a plausible (but possibly quite incorrect) narrative to give a thumbs up or thumbs down about the social outcome.  This second point I'm borrowing from Daniel Kahneman's Thinking Fast and Slow, where he argues that when we can't answer a difficult question because of the complexity involved we replace it with a simpler question, answer that, and then assume it is the answer to the original question as well, even when it is not. 

Innovation often aids the gaming behavior.  Consider radar detectors and driving, perhaps the least controversial example one might come up with.  Presumably a radar detector is purchased for one reason only, to lessen the likelihood of getting a ticket for speeding.  Armed with a detector, the motorist will drive faster, as long as the detector indicates there are no police in the vicinity.  If it is not the absolute speed of the vehicles that matters for safety (above a certain minimum speed, say 50 mph) but rather the variability in speeds that most impacts safety, then it seems clear that the detectors increase variability.  Those who have them will drive faster than the rest.  The impact on safety is unambiguous.  The detectors lower safety.  However, in a standard cost-benefit analysis that economists do, one must acknowledge the benefit to the drivers with the detectors.  They get to their destinations sooner.  So there is a time value to them.  What is the result in aggregate?  I really don't know.  What does seem clear, however, is that there is an equity issue with gaming.  Other motorists bear some of the safety risk but get none of the time value benefit.  So, conceptually, the analysis is straightforward but on the actual arithmetic, adding up the benefits and subtracting out the costs, who knows?   On a personal note, I'll make the following additional observation.  If the possessor of the radar detector is a well paid professional (hence someone with high time value), middle aged, and without serious mental or physical health issues, then I believe their own self-preservation instincts mitigate the safety risks.  On the other hand, if the possessor of the radar detector is the teenaged child of such a well paid professional, all bets are off.

Let's move on to a harder example, standardized test prep courses a la Stanley Kaplan.   When I took the SAT, in 1971, I believe the College Board's position was that the test prep was of no consequence with regard to the results.  My brother bombed the PSAT, took a test prep course thereafter, and his scores went up by over 300 points on the SAT.  That's only a single observation but based on that and what I have gleaned since, there is definitely real consequence from giving the student confidence about the strategy to use when taking the test, whether to guess or to not answer a question when the student is unsure, and then becoming proficient in implementing that strategy.  There can also be a real benefit from taking practice exams, doing diagnostics on those, and then cramming in areas of weakness where some concentrated study might help. Since each student should have the opportunity to put his best foot forward, some might not even consider private test prep as gaming the system.  Do note its only commercial test prep done outside of school that is being considered here.  Lower income students who can't afford commercial test prep therefore don't get its benefit.  So, again, there is an equity issue with regard to the behavior.  Leaving that aside, where is the social harm from the practice?  I'm not sure everyone would agree, but this makes sense to me.  If you treat the performance on the test as signal, an indicator of a hidden attribute of the individual which we might call "intellectual ability," then it might be that the test prep makes the signal less informative.  Students with good scores might have high ability, but perhaps their ability is closer to average and the score is more a consequence of the private coaching the students have received.  If that's true then schools in their admission practices either end up making more mistakes regarding whom to admit as a consequence of the test prep or the schools must incur substantial costs to consider other indicators of the students' ability, so as not to make those mistakes.  That's where the social harm is.

Before pushing on, I'd like to refine the above based on my perspective as an instructor.  The expression intellectual ability may not convey the right meaning.  What one really wants are certain habits of mind and that the student reads on a regular basis stimulating and challenging material of his own choosing.  Below is an excerpt from a post I wrote soon after starting this blog in 2005.  It indicates that frequently we fall far short of this requirement.   Further, I should observe that this requirement cannot be gamed the way a standardized test can.  It requires substantial deliberate practice. 

In particular I want to consider information literacy and its importance in the curriculum. As a teacher, I have to say that "old fashioned" literacy is more important to me. I'm of the mind that many of my students don't get the meaning from a New York Times story. I've tested that proposition on occasion with articles I've picked and assigned to the class, either from the Business section or the Magazine. I don't talk about this issue much if at all (except with a particular colleague who teaches Natural Resource Economics who agrees with me fully on this proposition). And I haven't seen it discussed, but it seems to me to be at the heart of the matter.

Students need a well trained "voice in their head" which argues propositions, including what they read. They need to disagree with things when they don't add up, but they need to be able to "get it" without undo difficulty when the meaning is straightforward. It is a reasonable expectation (in the normative sense) that students have these abilities when they enter college. But, I fear, all too many of the students falter here. Because these kids are bright, I'm going to say the culprit is they don't read enough and so this habit of arguing with the voice in their head is not well cultivated. This is a real problem. I don't have a great solution for it, other than that the kids need to develop the habit of reading and to think of reading as internal argument.

* * * * *

The innovations discussed above happened some time ago.   By focusing on the past where we are familiar with how the innovations have been subsequently utilized we can consider the impact of these innovations over the fullness of time.  I don't know the extent of the radar detection business since the 1970s (during the second OPEC price shock many states lowered their speed limits and that gave a boost to radar detection but when the price of gasoline came back down the speed limits went back up), but clearly test prep has been a growth industry, at least till the recent downturn in the economy.   Let's now focus our attention on past innovation in financial engineering.  In particular, I want to look at junk bonds and the subsequent behavior that engendered as well as the securitization of residential mortgages and the consequences from that, from the lens of whether they enabled gaming the system, and if so how, or if alternatively they promoted economic efficiency and then describe the mechanism by which that occurred.

There are a several reasons for doing so.  First and foremost, these innovations in financial engineering are what many people associate with the economic consequences of the Reagan Revolution.  Ironically, both came into being during the Carter Presidency, though they clearly were popularized under Reagan.  Michael Milken, who worked at Drexel Burnham Lambert, invented the junk bond.  Since about 10 years later he was convicted of securities fraud, in the minds of many the junk bond concept is highly suspect.  I hope that readers can suspend judgment in reading my arguments below.  In contrast, Lewis Ranieri, the inventor of securitization, had a largely intact reputation, at least until the subprime crisis unfolded.  A second reason is that in preparing for my class this fall, which will use the text Economics, Organization, and Management by Milgrom and Roberts, in chapter six that introduces the concept "moral hazard" there is a rather extensive discussion of the economics behind the Savings and Loan Crisis of the 1980s.  I thought their straightforward analysis was a good way to consider both the gaming the system and efficiency questions. The third reason is to consider the issue of resolution of underwater mortgages and the impact securitization has had on such resolution, especially in the case where an entire community is beset by such mortgages and hence where there isn't a market for repurchase of the homes at discounted prices.  I doubt the issue was considered at all in the 1970s, when Ranieri invented these instruments.  Yet it is something to think through now, since its resolution clearly matters a lot moving forward.  Joe Nocera had an interesting column about this yesterday.  He takes the point of view of the homeowners, which is natural.  One should be sympathetic to them.  But what of the system overall.  That system includes those who hold the mortgage securities. What is a good outcome for the system taking into account all interests?  The last reason is that by thinking through the gaming the system versus efficiency arguments, one can get a better feel for how much regulation in this sector is appropriate. 

Before getting to this, let's take a brief look at the macroeconomics by looking at the following two graphs.  The reason for doing this is to ask whether it is possible to "see" the efficiency consequences of a change in the economic environment by looking at GDP growth.  One might conjecture that if an important practice makes industry more efficient, that in turn would make the economy grow faster.  Alternatively, one might expect that improved efficiency would reduce the volatility in growth rates.  Then too, by looking at growth rates, one entirely abstracts from the distributional consequences of the change in environment.  So much has been written about income (and wealth) inequality as of late that I don't want to take it on here.  This is not to say those issues are unimportant.  It is only to say that there is enough on our plate to look at these other issues here.

To generate this first graph I took historical data from the Bureau of Economic Analysis available as an Excel workbook, with a series that measures real GDP in constant 2005 dollars.   For every pair of consecutive years, Y0 and Y1, I computed GDP(Y1)/GDP(Y0) - 1, expressed that as a percentage and then called that the growth rate in Y1.  Though Edward Tufte probably wouldn't like what I did next, I had Excel connect consecutive plotted points with straight line segments.  I found this easier to read than looking directly at the scatter without the line segments included.  Let me make a few observations, simply from reading the graph.  There are multiple periods where the growth rate is negative.  These are recessions.  (There were 2 in the 1950s, none in the 1960s.  Note that this chart uses annual data.  Typically when we speak about recession we use quarterly data and it requires two consecutive quarters of negative growth.)  Usually when the recession ends, there is a brief period of very high (over 5% real) growth.  Much of that is catch up for the lost time during the recession.  Then growth calms down to a more modest rate, until the next trough begins.  Also, note that external "shocks" can trigger a recession rather than simply the business cycle doing its thing.  In the 1970s, there were two OPEC Oil Price shocks.  The first in 1973-74.  The second in 1979.  This was the period known as stagflation.  Paul Volker pursued a tight money policy to wrest the inflation out of the economy.  The created another recession in the early 1980s.  The next recession, mild as indicated by this graph, happened during the 1992 election season.  You'll recall the the expression coined at that time, "It's the economy, stupid."  I trust that people know the rest of the history well enough to explain the remaining portions of the graph. 

GDP growth can be broken up into two components - population growth and productivity growth.  To abstract from the former, one also looks at per capita GDP growth.   This next table was generated from different data provide by the Census.  It is from the spreadsheet on Per Capita Income All Races.  The same sort of process was used to produce the growth rates.  It doesn't go back quite so far in time, but it covers the years that are relevant for this discussion.  The periods of negative growth in this table are what most of us think of as a recession, though that is not the official definition.  Using nothing more than an eyeball test, the cycle under Reagan looks quite similar to the cycle under Clinton.  The prior cycle, roughly from the end of Nixon to the end of Carter, has the same amplitude as the other two, but had shorter duration.  The cycle under Bush II had less amplitude, even before the financial crisis.  And the recession that started just before Obama took office had a lower trough and has not yet concluded. 

Let me make one more point before getting to the financial engineering.  These data only show the actual history.  They say nothing of the road not taken.  One might argue that without the move to deregulation, that Carter started but that was accentuated under Reagan, the economy would have performed much more sluggishly, especially in light of the threat from international competition, particularly from the Japanese.  That's a conjecture.  It might be right, but we really can't say.  A different conjecture is that it would have performed pretty much the same as the PC revolution would have happened anyway and that was a big driver of the economy under Reagan.  Likewise the rise of the commercial Internet gave a big boost to the economy under Clinton, irrespective of the policies his administration pursued.  This alternative conjecture suggests that much of the economic growth would have happened regardless of of which party controlled the White House.   I don't know if either of these arguments is correct.   All that the data allow you to compare is different historical periods.   The data also don't allow you to conclude whether the policy consequences are fairly immediate or, in contrast, only result after some very long lags.  It may be that the slower growth under Bush II is attributable to the deregulation under Reagan.  It's possible.  The data don't let you conclude that.

Let's get back to financial engineering and begin with the Milgrom and Robert's analysis.  Thee are three players - depositors, the S&L itself, and the government which provides deposit insurance.  The analysis shows the following, intuitive result.  When taking on an investment project that has both upside and downside risk, when the S&L faces limited downside risk (with the government bearing the bulk of that) then the S&L has a preference to invest in projects with a high upside regardless of the expected return on the project.   The moral hazard that Milgrom and Roberts discuss occurs in an example where the safer project also has higher expected return, but the S&L opts for the riskier project, thereby creating an expected social loss, which is born by the taxpayers. 

Let's next note that for any investor, financing a project with junk bonds in the presence of limited liability from the bankruptcy laws is very much like the situation for an S&L with deposit insurance.  There will be a preference for riskier projects, to take advantage of the big upside, since the investor is largely protected from the downside.  It's other creditors who will bear that risk.

Now the new wrinkle, an important one.  It may very well be that from the social perspective insufficient risk per project is taken.  Consider this piece about cancer research over the last forty years, which makes exactly this point.  Individual researchers, who have their own reputations to care about, take on safe projects so that they have a very good chance to succeed, thereby enhancing their own reputation.  But the field as a whole advances little as a consequence.  Let's bring this thought back to the investment context.  The efficiency argument about the hostile takeovers that the junk bonds enabled is that entrenched senior management, which received substantial perqs from the status quo, worked to preserve that rather than to invent the next great thing and engage in creative destruction of the old.  Further, the traditional motive for innovation, from competition in the product market, was muted in the early 1980s because of the oligopolistic nature of industry and the tacit collusion between the players.  (Think of the Big Three auto makers.)  Holmstrom and Kaplan use this argument to explain the merger activity and other changes in corporate governance that were widespread in the 1980s.

Let's stick with this framework as is for a bit before going outside it and critiquing it.   The incentive for hostile takeover or making other risky investments is driven by the potential upside, not the expected return.  When the expected return is high, the behavior can be socially advantageous, especially if the risks are independent going from one industry to the next.  When the expected return is low, the behavior will be socially deleterious and then amounts to gaming the system.  The same behavior can be one or the other.  There is no telltale sign up front which it is.   It may be that over the course of the business cycle early on there is a comparative abundance of risky but high expected return projects.  Later there may be comparatively few of those but more high risk and low expected reward projects.  Thus the gaming of the system is apt to speed up before the next trough.  It's what feeds the bubbles and makes the trough deeper.  Knowing this, a regulator would want to be pretty hands off coming out of a slump, but then start to apply the breaks as the economy improves and become heavy handed when the gaming behavior seems to be on the uptake.  If it is not possible to apply a time sensitive approach to regulation - the law is the law, the enforcement is the enforcement, some choice has to be made between more rapid growth out of a trough accompanied with more rapid plunging into the next trough, versus perhaps lower growth overall but less extreme in the business cycle.

Now some critique. I offer up three distinct criticisms.  Quite possibly more could be generated.

• Reform the company or gut it?  Reform of a company does not occur with a flick of switch.  It is hard work to change the corporate culture.  It may take substantial new investment.  It likely requires an extended duration to put the new business practices into place and make them effective.  Perhaps in some cases the efficient solution is to gut the company - its current assets on hand exceed the expected value to be obtained from reform.  The issue here is whether the hostile takeover approach gets this determination right or if there is bias in it.  On this I think it is telling to read this George Gilder quote from Miliken's Wikipedia entry offered up to defend Miliken from his critics.  "Milken was a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken … and others took the vast sums trapped in old-line businesses and put them back into the markets."  To me this reads - if a company has a lot of cash on hand, it is a good target for acquisition. That money should be put into circulation in new business.  Observe that many quite successful companies today, particularly the big technology firms, have a practice of keeping a lot of cash on hand.  If that really was the main criterion for takeover (and takeover threat) it readily could be biased toward too much gutting activity and insufficient reform of businesses that should have been sustained.

• Reactions at other companies?  It is well understood that many other companies which ended up not being acquired adopted defensive practices to avoid being taken over.  Thus poison pills and golden parachutes became part of the lexicon.  I'd like to focus on a different adjustment - the movement away from defined benefit pension plans to 401K plans. I've written about this elsewhere in an essay entitled Rethinking The Social Contract.  There I argued that we should return to the defined benefit pension approach, but make the plans balanced in an actuarial sense.  People have confused the generosity of benefits from the issue of who should bear the risk in the returns to savings.  Retirement savings should be insured.  Defined benefit plans do that while 401K plans do not.   The move to 401K plans surely has been pernicious for society as a whole.  It has lowered the personal saving rate.  It has substantially weakened the bond between employer and employee.  And it has created a large population on the verge of retirement yet unprepared for it, because employees have been myopic with regard to their contributions.  (They don't contribute enough early in their careers and can't make it up by contributing more later.)

• The wrong tool in a flat world?   What does the threat of takeover do in industries where there is vibrant competition between the players?   A good argument is that the threat is pernicious in that it forces incumbent firms to overly focus on near term profitability, especially when longer term projects require substantial lumpy investment and hence demand that they build up of piles of cash as discussed above.  So these firms eschew the longer term projects and invariably shorten their own half-life as successful companies as a result.  Perhaps there was a one time benefit in the Reagan years from the spate of takeovers that took place then.  But in the presence of tough external competition, under performing firms will fail of their own accord.  Yet these possibilities engendered by leveraged buyouts still exist.  Why?  Here it also should be noted that balance sheets are a very limited way to measure the likelihood of future success in an industry.  There has been a historical tension between MBA leadership in firms and engineer leadership. The financial engineering tools have tilted the balance in the wrong direction. 

Let's wind up this piece with a consideration of securitized mortgages versus mortgages held by local lenders as it pertains to the issue of what to do with underwater mortgages, where the value of the loan exceeds the market value of the house.  When this is true for an individual home in a community where otherwise the mortgages are healthy, the efficient solution is to have the current owner default on the loan, have the property assumed since it was collateral for the loan, and then have the property resold at the current market price.  In this solution most of the loss is borne by the lenders.  The current owner bears the loss to his own credit rating, including making it harder to obtain a subsequent mortgage.  But the financial loss is borne by the lender.  At the outset when the loan was originated, the lender indicated a willingness to assume the risk of such loss by making such a loan.  That's why in the old days mortgages were restricted to 80% of the selling price or, if a 90% loan was issued, then mortgage insurance was required by the lending bank.  Neither of these practices eliminate the possibility of underwater mortgages, but they do make them less likely.

When an entire community is beset by underwater mortgages, there is no market for resale of the home and the efficient solution probably entails the existing owners staying in their homes.  If the mortgages were held locally, this solution could be obtained by a negotiation between the lender and the homeowner to a new mortgage that makes sense in the current environment.  There might be some delay getting to that new mortgage as the result of the haggling between the lender and the homeowner over the terms of the loan.  But given those terms, each party has incentive to move to the new mortgage asap, for fear that the old mortgage will become under performing and then the lender will assume the property with no ability to resell it.  That outcome would be unfortunate and benefits nobody.  Thus, if the mortgages were locally held, one might envision that it would take a while to get the first few mortgages renegotiated but thereafter many of the mortgages would be renegotiated quickly as the new terms became more standardized.

The situation is quite different with securitized mortgages.  There is first the question of the extent of reinsurance (credit default swaps).  If a loan renegotiation triggers a payment on a credit default swap, then those obligated to make such payments have incentive to block the renegotiation if they can.  There is second the issue of whether the valuation technique in the securitization accurately reflects true loan value, inclusive of the likelihood of renegotiation, or if it is more an artistic rendering tied principally to the face value of the original loans.  If there is this artistic valuation aspect, the holders of the securities may have incentive to block the renegotiation, since that would force downward the securities asset values.  There is third the issue of whether the terms of renegotiation of loans in one community would be independent of the terms so negotiated elsewhere in the country.  If rather than independence early settlement in one community created a benchmark for settlement elsewhere then the security holders would have incentive to block negotiation in that initial community unless the terms were quite favorable to them.  Taken together, these reasons suggest that securitization is a significant force in blocking getting to a sensible solution and hence is a significant factor in prolonging the economic slump.

Now let's unfold this via a backwards induction.  Miliken, in the NY Times piece about him that is linked above, argues that the sub-prime crises was entirely attributable to a decline in underwriting standards (making 100% loans and not verifying the income of the new homeowner).  But he does not ask whether underwriting standards can be controlled by the market or if they will deteriorate naturally over the course of the business cycle and further whether securitization facilitates their decline, by masking the riskiness of the loans.  Even absent this masking from combining mortgages,  at the local level there is an incentive for appraisals to come in high and for the lenders to want to make the selling price high, especially for loans with points, because the originators of the loan profit more this way.  Full securitization of the mortgage undoes the incentive for the local lender to play the role of impartial monitor of the loan and thereby to not make loans that are likely to go bad.  This is a problem that can be anticipated.

Yet a system of partial securitization, where some of the loan is locally held and the remainder is resold, means there is a lower volume overall in mortgage securities.  Since these instruments seem so profitable in good times, the market wants 100% securitiztation then.  This myopia can then be seen as a reason to regulate and also provides a sense of the sort of regulations that are necessary.

The gamers of the system can move faster than the designers of it.  System design is always a compromise between competing ends.  Gaming can be pure towards a sole purpose.  That much should be understood about any system.  These thoughts should be with us and it is why a total embrace of Laissez-Faire is extremely dangerous.  It empowers gamers and allows them to do much damage.  Our debates on the matter should be about comparing different forms of imperfection rather than about a search for the elusive and the impossible.

Why Don't Economists Run for High Political Office?

I wonder whether there would be more coherence in discussing fiscal Policy if some Members of Congress or the occupant of the White House were economists.  Then, too, one can ask whether that being the case would place a higher standard on the press to explain what is going on with the economics.

With respect to the example given by the McLaughlin's in the clip below, what was their income in the decade before the Bush Tax Cuts were put into place?  Was it that same $82,000?  If their income has declined precipitously since Bill Clinton was President, then perhaps one can understand why going back to the pre-Bush tax rates would be so onerous.  If, alternatively, their income has been flat, why would going back to the Clinton tax rates cause such a hardship?  Do they now have private spending needs that they didn't have twelve years ago?  Or is something else amiss here?

There is the further issue that in talking about fiscal policy sensibly, one has to consider the entire picture - expenditure and revenue, near term and long term.  Economists, whether of the left or the right, would insist on that much.  Alas, we hardly seem to get this in the public discussion.  

The article makes it seem as this latest policy recommendation is merely posturing for the fall election.  Suppose that's true.  Why should the posturing matter at all to voters.  Given the gridlock we've seen with this Congress, there shouldn't be any hope that the lame duck session will do something sensible about the "fiscal cliff" mentioned in the clip below.  The thought would then be that with a different Congress perhaps something sensible might be done.  If that's the thinking, economists in high office would insist it be discussed now.

There is a strong case to be made for new near term federal spending, simply to offset the reduction in state spending since the stimulus package has worn off.  Where is that in the policy recommendation?

Obama Seeks 2013 Tax Cuts Within Limits - NYTimes.com via kwout

Lessons Learned

We offer up a note of thanks.
Here's hats off to fraudulent banks.

Their profits from the trading desk
Are more obscene than bad burlesque.

Wanting big returns more and more
They fixed the rate known as Libor.

"In God we trust," they danced the jig.
Now we know the system is rigged.

This has created a schism
Regarding capitalism.

The markets know best some will say.
Their advice?  Get out of the way.

Others see a vast infection,
Which suffers from late detection,

And from not applying a cure,
A part of which must be de jure.

Punish wrongdoers they aver.
That's how to malfeasance deter.

Reasonable folks disagree.
That much is plain to you and me.

Doing too much or too little
Credit markets now are brittle.

Government efforts to no avail
The true end of too big to fail.

The banks had the ability
To show us instability

About the system as a whole;
That has been their positive role.

Ignorance is bliss, it is said.
With knowledge there is only dread.

Yet here let's give the banks a hand.
It will work out though not as planned.

A corrupt system has a plus
For it shows the true problem's us.

Libor’s Dirty Laundry - NYTimes.com via kwout

Sweet Potatoes

I'm prone to experiment, not the scientific method type of experiment, just trying things out that are not standard, to see how they go.  Last week a couple turned out pretty well, for a change.  Several different friends from out of town were coming for the eTextbook UnConference.  Each wanted to see me socially while they were here.  So I invited them out to the house as a group.  I said I'd grill out and have plenty to drink.  We could all relax that way.  That became the plan.

I chose that instead of going to a restaurant for a couple of reasons.  One is simply that going to a restaurant is what we do when each of us is out of town, on neutral turf.  In this case, however, we were on my turf, so I felt obliged to signify that in some way.   The other was that one of the group, Steve Acker, was coming with his wife, Suzanne, and their dog, Jasmine.  They were en route to their house in Colorado, using the conference as the first resting point during the trip.  If we went out to dinner, either Suzanne and Jasmine wouldn't come, not a particularly friendly outcome, or Suzanne would come but Jasmine wouldn't, in which case Suzanne would be the only non learning technologist in the group and Jasmine would be alone in a hotel room.  Neither of those were happy prospects.  By having them all to the house my wife and kids would also participate - making it much simpler and more comfortable for Suzanne and Steve.

We have a dog too, Ginger, a golden doodle, now eight years old.  Ginger is pretty set in her ways.  She's calmed down a lot since she was a puppy, but when people come to the house she temporarily forgets her age and starts acting like a puppy again.  She barks up a storm and might jump onto someone - not with the intention of hurting them, only to test the waters.  Eventually the person starts to look familiar and Ginger calms down.  That's been here routine for quite a while.  But we haven't had another dog in the house for several years.  So we didn't know how Ginger would react to Jasmine.  Plan B was to put her in the basement and let one of the kids be down there with her.  (When we have a thunderstorm, that's her hiding place.)  We didn't need Plan B.  Jasmine and Ginger got along okay.  They even played a bit together outside.  And Jasmine did one of Ginger's favorite tricks when it's hot out; climb into the pond to cool off. 

The other experiment started with the decision to grill the night before and serve the food cold the next day.  That way I wouldn't be all grotey when the guests arrived.  With things prepared in advanced I'd feel a bit more in control.  I grilled several different meats - pork tenderloin, brats, and turkey breast. (I thought the turkey breast would be for dinner the night of the grilling, but the rest of the family had some of the pork tenderloin, which was fine because there was quite a lot of that.   I didn't serve the turkey to the guests.  It wasn't fresh and it proved to be very salty.)  I also did salmon.  Who knew what the guests would like and whatever they didn't have we'd eat over the next several days.  I did a few russet potatoes and some sweet potatoes in foil and let them cook slowly on the grill - for more than an hour.  And near the end of the grilling I did some asparagus and red and yellow bell peppers. 

Day of my wife had committed to making a regular salad.  To round things out I made a pasta salad with peas that I planned to serve cold.  There's a restaurant in town called The Great Impasta and they have a pasta salad with spinach pesto that I've always liked (I'm less fond of pesto made with basil), so I was trying to do something in that vein.  I used both (whole wheat) rotini and bowtie pasta for contrast in color and shape.  I had a big bag of frozen peas.  After cooking the pasta for about six minutes I added the peas in and cooked another six minutes.  It all came out pretty well.   But I couldn't find spinach pesto in the store, so I bought tomato pesto instead.  Sometimes necessity forces improvisation. 

It occurred to me that was going to be a lot of food for dinner so I decided to serve the grilled vegetables and sweet potatoes as appetizers and a few of the brats as appetizers as well.  I made a large platter with the vegetables.  The bell peppers and asparagus I put out as is.  For the sweet potatoes, I sliced them with slices thicker than when you slice an egg but not so thick as a slice of bread.  I left the skin on.  Color-wise, I thought it was quite an attractive platter.  I made a separate plate with the brats cut up with a toothpick in each piece.  That's a great appetizer with beer, though probably not great for you. 

My wife was mildly horrified when she saw the platter.  It's true that the asparagus was incredibly thin - the guests originally thought it was string beans.  And the tips were bruised when I bought them.  But I figured they'd eat the same no matter what.  I knew these folks pretty well, except Suzanne, who proved to be a sweetheart, and I know what it's like at the end of a day after being in a conference the whole time.  The real purpose of the food is so the alcohol doesn't feel lonely.  This time around I was on the mark.  The platter was a big hit and since it really was finger food, eating it helped everyone relax. 

It was a delightful evening.  I like it when my experiments work out.  And after my wife complimented me for doing such a good job as host.  That's incredibly rare.

* * * * *

I don't know if it's hanging around with learning technologists that encourages this, but having a good experience like this I want to know if I can replicate it.  That's the obvious next step so I think I'll do something in this vein for the locals in the not too distant future.  I don't know precisely when.  It would be good for the heat to break first.  But then from my point of view it could really be anytime.

If replication also gets a thumbs up, the next question is whether it can scale.  The night of that party as I was trying to go to sleep I thought about a chain restaurant called The Sweet Potato that served an eclectic menu of the sort described above but featured grilled vegetables served cold.  I told this to a colleague today and she was wildly enthusiastic about it.  She said there would be great demand for something like this in town - a healthy alternative to the fast food places.  Whether that can be delivered at a reasonable price, I have no idea.  When I shopped at Schucks for the vegetables I used in that dinner, they were not cheap.  (I think the bell peppers were 2 for $3.)  So this could be a pipedream.  I've done enough with learning technology in the past to know that even with wonderful small scale experiments, that's no guarantee something good will come when done at scale.  Nevertheless, the idea is intriguing.

A few columns back, Joe Nocera wrote about Burger King, that it was teetering because the Private Equity folks who "run it" have been using it as a cash cow.  If it goes belly up in the near future perhaps a new enterprise called The Sweet Potato can buy up the properties in a fire sale and convert them along the lines in the previous paragraph.  I can imagine the IPO already. 

A New Progressivism?

Let me begin with a disclaimer.  I'm really not knowledgeable enough to write this post.  I'm not an expert in the History of American Political Thought.  I'm writing as much to make sense about what I've been reading as of late as for any other purpose.  The reading itself has been fueled by two reasons.  One is simply to satisfy my own curiosity.  As I indicated in an earlier post, I took a course as an undergraduate at Cornell in the mid 1970s on American Political Thought, which was taught by Eldon Eisenach.  I didn't have sufficient background at the time to make sense of all that we read, but some of it moved me, particularly Croly's The Promise of American Life.  Also, then I didn't have the means to follow up on the feelings and inclinations that the readings generated.  All these years later, I'm now more time abundant and the inclination is still there.

I've recently finished reading The Lost Promise of Progressivism, a book that gives an in depth look at the history of ideas behind Progressivism and the people who articulated those ideas.  Interestingly to me, several of these people were Great American Economists, notably Richard T. Ely.  (The Ely lecture is given by the incoming President of the American Economic Association at the annual winter meeting.)  I had always known the name, but otherwise didn't know why he was important.  The copyright on Lost Promise for the book that I got from our Library says 1994, which I assume was the first printing, not quite twenty years after the course I took.  One additional fascination in reading this book is to see Eisenach as a consummate scholar, grappling with the ideas he was teaching us as his life's work.  I don't know many people who have done this with their research.  Most of the economists that I know seem to move their research agenda from time to time, either to keep up with what's then current or because the area they had been investigating becomes pretty well mined, so they look for a more fertile and fresher landscape. In contrast, Eisenach found his Shangri-La with this work on Progressivism as an intellectual movement.

The other reason for the reading is that today we (people with a "liberal" inclination) seem so desperately in need of a coherent social philosophy.  In search of one my inclination is to look backward in time for when such coherence existed.  This is the case for Progressivist thought circa 1900.  According to Eisenach, Progressivism dominated in American social consciousness, roughly from the election of William McKinley to the Presidency (1896) through World War I.  It died out quickly thereafter.  The election of Warren Harding to the Presidency in 1920 signified a shift away from Progressivism.  Some of the Progressivist ideas survive in current liberal thinking, but not in a coherent manner.  Those ideas are garbled with New Deal Liberalism to produce a hodgepodge that lacks a principled basis.

As Eisenach convincingly argues, Progressivism borrowed heavily from early Puritan thought.  America was to be the New Israel.  The ocean voyage from Europe to America that the first Puritans made was akin to the wandering in the desert.  The Progressivist thinkers of the late nineteenth and early twentieth century were almost all Protestant Evangelical, but of the liberal kind, raised in the New England Puritan tradition.  They produced a synthesis that married the historical ideas with then current issues and dilemmas, some of which I'll elaborate on below.  If we are to produce a coherent social philosophy today, why not repeat the exercise that the Progressivist thinkers of the late nineteenth century went through, but this time updating it to the 21st century?

With this as background let me also try to distinguish how the word Progressivism is used by Eisenach versus how it used in most contemporary writing, where it seems interchangeable with Liberalism or, if not that, then each can be identified with certain policy positions and it is those policy positions themselves that we attach the label to, not some set of underlying principles.   David Sirota tries to parse out the difference in a way that to me fails because it ultimately focuses the labels onto the issue of the proper role of government.  I would argue that is not a first principles issue, but is itself derivative.  Progressivism a la Eisenach is akin to nationalism, a love of country and its people, along with a way to express that love.   This kind of nationalism is unique to America in that the notion is not tied to a particular tribe, race, or creed.  Religion remains an important concept to bind the people, yet it is a distinctly American religion, one that can accommodate non-Protestants and non-believers.  So in this piece I want to discuss a new Progressivism as first principles. Then I'd like to conclude with a partial list of policy recommendations that I believe follow from the principles.

* * * * *

There are two parts to the principles argument.  The parts are intertwined but I'll put the argument forward initially as if they are distinct.  Then I'll sketch how to tie them together.  There will be gaps in the thinking, as I'm still trying to make sense of it.  I hope there is enough presented so the reader can get a decent picture of the arguments.  One piece is economic.  The other piece is ethics.  Given my background, I feel more terra firma on the economics, so I'll do that one first.

The U.S. Constitution (1783) was written around the time of Adam Smith's Wealth of Nations (1776).   Capitalism at that time was mainly of the small market variety.  Most economic exchange was local.  Producers were close to their customers.  Further, the scale of production matched those market conditions.  So the production scale was small.  The Constitution was written with that as the implicit economic model. The emphasis in the Constitution was on individualism and local control, hence a weak central government.  This wasn't merely a reaction to the tyranny of the King of England before the American Revolution and it didn't necessarily reflect an endorsement of pure laissez-faire without any government interference whatsoever.  Instead, it reflected a view that government, where it does regulate the marketplace, should be of the same scale.

Of course, there was a tension on this key issue among the Founders.  Hamilton advocated for a strong national presence.  Jefferson preferred a much more limited Federal government.  More generally, the more industrial north leaned Hamilton's way while the rural South was in Jefferson's camp.  And, as a humorous recent column by Gail Collins indicates, these divisions in point of view are still with us.  (She also indicates that some of this is more a mindset than a reflection of practical reality, with Texas the second most populated State in the Union but clearly with a southern/rural mindset.)

One hundred years after the Constitution the economic situation was substantially different.  Much industry had reached a national scale (or larger).  Think of the transcontinental railroads, big steel, big oil, meat packing, etc.  The titans of industry who led in these sectors were not Caspar Milquetoasts.  They engaged in many predatory behaviors - much were aimed at workers, while still more were directed at rivals or potential rivals. We learned a bit about this in high school by taking American History.  The muckrakers exposed many of these predatory practices.  Though sunlight is the best disinfectant, the muckraking in itself was insufficient to reform industry behavior.  Alas, state and local government, the primary mechanism specified by the Constitution, was also insufficient for the task, both for the scaling reason already mentioned and because it was too easy for the leaders of industry to get into cahoots with the local regulators, for their mutual benefit but to the detriment of everyone else. Progressivism argued for a strong national government as the only possible solution.

This issue of insufficient jurisdiction for government to oversee industry remains with us today, and is particularly manifest with e-commerce.  Consider, for example, that Apple sidesteps paying state corporate taxes, notably in California where its corporate headquarters are located but also in other states where it does business, by incorporating in Nevada where the corporate tax rate is zero.  Apple does likewise in the international arena.

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies. 

In the public psyche Steve Jobs has been cast as an American hero, not a latter day Robber Baron in the style of Jay Gould.  The above suggests we should have a more mixed view of him, jaundiced by the evident stinginess and lack of social responsibility.  That we don't perhaps is because on balance he achieved much good and made only little harm.  But partly this may be because avoiding taxation is as American as apple pie (no pun intended) so we don't hold it against him.  Many people do aim to avoid paying taxes, working people as well as big corporations.

People who made their livelihoods in a high tax northeast state often retire to a southern state where there is no personal income tax.  They may have contributed to the public good (a significant component of which is the educational expense of the next generation) and did so when their own kids were in school in that northeast state, but then they dramatically reduce their contribution to the public good after moving to a southern state.  (There are property taxes and sales taxes in the southern state, so they continue to pay something, but at a much lower rate than they had been paying.  If they retired but stayed put in the northeast, they'd be paying more in state and local taxes.)  In this, do they feel guilty of not paying their fair share of the educational expenses?  I suspect that most do not - out of sight, out of mind.

Indeed, the crux of the economic argument is that the main 21st century issue is demographics and geography.  We have been reckless in ignoring the issue, but we can no longer afford to do so.  Migration patterns within the country matter a great deal.  Our (lack of) policy on this matter has already made things bad.  We need a national strategy to put us on a right footing.

In other contexts, however, we think of the migration issue quite a lot.  Consider this gallows humor piece by Timothy Egan, The Schadenfreude Sports Fan.  In the piece Egan talks about the no longer NBA team the Supersonics and their fans in Seattle, chagrined by the move of the franchise to Oklahoma City, which was done in large part because Seattle refurbished the old arena but didn't build a new one.  That sports franchise owners can hold municipalities hostage by (credibly) threatening to move the team, with the core issue typically that of aging facilities and who will bear the cost of a new arena has become so commonplace that fans not in the affected cities hardly notice.  If there were a common governance structure in both locations there would not be such a credible threat and the building of a new arena might be better determined purely by efficiency criteria.  Likewise, the total number of sports franchises would be close to optimal.  (Existing owners have incentive to keep the number below optimal, just so the can exercise this sort of threat.)  Further, the "right cities" would have teams.   One measure of that is population.  On this chart of metropolitan areas, Seattle (really the Sea-Tac area) ranks 15th nationally, while Oklahoma City ranks 43rd and is less than half the population.  On those grounds the move makes little sense.  Of course there are exceptions with small(er) towns hosting professional sports teams, Green Bay and Buffalo in football providing good examples. But there was some historical basis for where those teams are sited. 

Let's return to migration more broadly considered.  The general argument goes something like this.  The population has been aging.  Senior citizens prefer warmer climates for retirement.  So it is natural for a good chunk of them to move south when they retire.  Those seniors who have decent income (or estates that they can draw from) will have demand for a variety of goods and services.  This means there will be jobs available where it is that seniors migrate to and hence the senior migration creates a complementary migration from among the rest of population or from among the immigrant population.

Should the policy encourage the flow to certain places, retard the flow, or be neutral on this front?  Let's keep this question in mind but not answer it yet.  Instead let's look at the recent history.  I took a table of state populations over the last 50 years (1960 - 2010) with data from the decennial census and massaged it a bit to include rank in population and percentage of the total population as well as an overall growth rate.  The country as a whole grew by 72% in population over those 50 years.  Most northern states grew but at a rate slower than the population as a whole and their ranking among states fell as a consequence.   Nevada had the highest growth rate.  Arizona was next.  Neither is coastal and both are largely desert.  Florida also had a high growth rate and it was a comparatively large state back in 1960.  Both California and Texas grew well above average and both were very large states already back in 1960.

Consider the real estate bubble in this light.  The bubble was mainly in those states mentioned in the previous paragraph.  Rapid population growth or substantial population growth in an already densely populated area seems to contribute to speculative behavior, which provides the genesis for the bubble.  It also helps fuel the mindset that real estate prices must continue to rise, because demand growth is apparent.  To the extent that the burst in these bubbles has had macroeconomic consequences of national, indeed international proportion, there is an obvious need to deter such bubbles from happening in the future.  For this reason, balanced population growth should be preferred to massive growth in a few southern states and modest growth in the north.  This suggests that policy should aim to retard the flow if not to totally reverse it.

Now consider the ecological issues, focusing on one particular scarce resource, fresh water.  Texas is still in a drought, the worst in its history.  Global warming may make water shortages a permanent condition in the American Southwest, but even Florida is susceptible to the problem.  Perhaps in the future new retirees will develop a different preference, wanting water in abundance as their primary end, rather than craving warm weather first and foremost.  I don't know.  The issue is whether we can wait till such a preference emerges.  I think not.  Thus, the ecological issues also suggest that policy should aim to retard the flow.

Viewed this way, state income tax rates (and the state's general regulatory environment) are a matter of national concern and it should not be left to the individual state to set these things.  This had led to chaos regarding population migration.  We'd be far better off if tax rates were equalized across states and thus were taken out of the equation when people decide to relocate.  Yet we should note that an under populated state gets a near term benefit from cutting its tax rate as a way to steer migration to that state and thereby encourage growth.  There can be too much a good thing; having opened the spigot it is difficult if not impossible to close it later, which is what the last fifty years have taught us. 

I do not know what overall population growth rate we should aspire to for the next fifty years.  Focusing on the ecological issues encourages a Malthusian (limited natural resources) view, one that may be too pessimistic, especially if we can achieve more balanced growth.  So I don't have much to say about immigration except these two points.  The anti (Hispanic) immigrant perspective seems most pronounced in the Southwest, Arizona in particular.  Perhaps that's because some of these Southwest states share a border with Mexico.  But let's not discount that some of these states have experienced rapid population growth and their economies have become especially volatile as a consequence.  This volatility contributes to the sense of decline and the threat that aliens might create.  So, it is my belief that balanced growth would contribute to a more welcoming attitude about immigration.

The other point regards whether our views about immigration are consistent with still holding a belief in America as the New Israel.  The New Colossus, Emma Lazarus' famous poem which is posted at the Statue of Liberty, has a view of immigration that truly is consistent with America as the New Israel.  It includes these lines:

"Give me your tired, your poor, 

Your huddled masses yearning to breathe free, 

The wretched refuse of your teeming shore. 

Send these, the homeless, tempest-tost to me, 

I lift my lamp beside the golden door!"

A view of immigration that says it should be blocked because the immigrants will become leeches on the good life that America has to offer seems more consistent with an image of America as the New Rome, an imperial nation whose empire is spent.  It is for this reason that I'd like to see us more pro immigration.  Having made that point, this is a good place to segue to the ethical issues.

* * * * *

"I pledge allegiance to the flag of the United States of America, and to the republic for which it stands, one nation under God, indivisible, with liberty and justice for all." 

The line, one nation under God, indivisible, is a tribute to Abraham Lincoln.  Progressivism found its hero in Lincoln.  He saved the Union.  One nation, indivisible was the guiding principle.  The expression under God was added during the Eisenhower administration.  The linguistic history of the Pledge is interesting to learn about.  Here, however my purpose is more practical.  What mechanisms are in place to make America one nation, indivisible?

Pretty early on in The Lost Promise, Eisenach introduces the reader to Albion Small, a sociologist, a professor at the University of Chicago, and author of this still intriguing essay, The Bonds of Nationality, published in 1915.  The glue that ties us to one another Small calls social bonds.  They exist in all groups, can be strong or weak, and determine effectiveness of group function and how enduring the group will be.  Viewed from the perspective of the individual in regard to the group, the principal bond is loyalty.  In turn, loyalty begats responsibility for the welfare of other group members.

In the context of a small group operationalizing the abstract ideas of loyalty and responsibility is not hard.  Their expression depends on the circumstances and needs of the group members.  As applied to an entire nation, however, that is harder to do given the far greater number of members of the group and the larger distance between members.  I will give my interpretation in what follows, using the academic setting as first example.  But before I do I need to make the following point, because these notions seem to be especially controversial just now.  In Eisenach's telling there was one area of American society exempt from Progressivism, even during its heyday.  That area is the Law, where the Constitution did hold sway and a rights-based approach prevailed.  So legal scholarship developed separately from Progressivist thought.  The two are hard, if not impossible, to reconcile.

When I teach the economic notion of a public good, where the emphasis is non-excludability in consumption, I give as example the questions that students pose in class.  When many students have the same question on their mind, asking the question promotes a response from the instructor and then perhaps further discussion after.  All students in the class benefit from that. Something that was muddied for them has become clearer or some connection with other ideas has been established.  This point about the social benefit of questions is transparent to them and its a good example to use, because many of them hadn't thought of the public good aspect.

Asking a question during lecture, if it is already a regular practice in the classroom, is a matter of fact thing, no big deal.  But if posing a question is unusual, then asking questions can be a bit heroic on the part of students, because they might feel that the asking makes them look stupid.  Nonetheless, it is the responsible thing to do and in this particular setting students can readily see that.  The point is that doing what's responsible isn't necessarily what's convenient or what's easy.  But it's what is right.

Dissecting this example even more, there can be cases, of course, where the question posed is not a public good.  The question may be so off point as to not to be useful.  Or it may be that the student asking the question is really just showing off, by asking a question that wouldn't occur to the classmates and hence one where the answer doesn't illuminate on the subject.  So it takes some discretion on the part of the student to determine whether the question is appropriate or not.  It is simply not possible to specify with precision beforehand which questions are public good and which are not.  Thus, part of responsibility is exercising such discretion. 

In an academic environment where students and instructors act responsibly in this way a sense of collegiality will develop and the participants will enjoy those interactions for the most part.  It is the feeling of collegiality upon which the loyalty arises.  Indeed, the collegiality may produce affection for one another.  In such a setting it is quite possible to have disagreements that are principled and not personal.  Indeed, the collegiality might be a prerequisite for that.  So another aspect of responsibility is to offer up a point of view in a respectful way and to keep the discussion from getting personal and overly heated.

I belabored this discussion for the academic setting so I can talk about loyalty and responsibility as a citizen.  In my way of thinking, it means acting collegial in this manner in whatever circumstance the person finds herself in - as a neighbor, as a co-worker, as an involved parent at the school, in civic settings, with friends, literally wherever social interaction occurs.  Personally, I find this a tough standard to live up to.  I'm most comfortable doing so in an academic setting, where I think I have a reasonable sense of how others are thinking and reacting.  I find it harder outside the university setting and there am apt to act more like the shy student.  Being responsible in less familiar settings may be the ultimate in good citizenship.

We have a tendency to think of public service only formally, if not military service then the Peace Corps or something like that.  My sense is that this is too narrow a view.  There is a public good aspect to almost all our social interactions.  If you're a sports fan this is obvious.  The game is more fun when other fans in attendance make a lot of noise cheering for the team.  In other social settings, vigorous participation by all makes the group more productive.  Good citizenship then demands such involvement, even when there is no government sanction of the activity.

Professor Small actually spends the bulk of the essay on a related question.  How does a person become loyal and responsible?  His answer, not surprising at all but one to contemplate because we don't discuss it enough, is that the person must be educated to do so.  The person must literally be socialized to understand what loyalty means and to implicitly know what burdens attach to being responsible.  What individual or group of individuals is charged with socializing people in this way?  Professor Small identifies two groups.  The family is first.  The parents are responsible for socializing their children.  A nation can't be effective unless the families do well by their children in this way.  It is notable that in our current Presidential campaign Rick Santorum is known as the one making this point.  The stereotype is that family values are a Conservative issue.  Small makes it quite clear that it is core to Progressivism as well.  He goes to lengths to laud the Jewish tradition, perhaps the first of the organized religions to ascribe this role to the family. 

The other group that Small signals out is organized religion, not one particular religion, but all of them.  Whatever church the person is a member of, it has as one if its goals to socialize the person into becoming a loyal citizen and to behave responsibly in a social setting.  Apparently in saying this Small was entirely unconcerned about the separation of church and state.  As I will indicate in a bit, in his view a citizen's feeling for country were of a religious nature.

I found it somewhat surprising that Small didn't discuss other groups.  For example, school is not part of this list.  I'm not sure why.  Whether it is because in his own upbringing family and religion were the two primary factors or for some other reason, I do not know.  Other Progressivist thinkers did allow for other groups to play this role.  For example, Mary Parker Follett advocated informal learning for adults a la the collegiality I discussed above via community centers.  More recently the political scientist Robert Putnam, has lamented the decline in social capital in his book Bowling Alone.  The new media may be superior to old forms of group interaction in its entertainment value, which of course is why it has caught on, but according to Putnam is far inferior in instilling a sense of responsibility in its participants.  If Jeb Bush is right that the country is in decline, perhaps Putnam's argument provides the reason. 

I want to return to Small's essay.   He has a grander view than I'm capable of describing here.  Take a look at how he ends the piece, by discussing a vision of The American Religion.  (It's in the smaller font that starts at the middle of the page.)  He views citizenship as a spiritual matter.  It is the way by which we make our lives genuine.  The intensity that one feels while reading this passage is palpable.  Though I'm an atheist (one who mumbles about it), I'm inclined to agree with Small here.  How would Small's argument be made today?  Can it be done without making any explicit reference to religion at all or would that be throwing the baby out with the bathwater?

* * * * *

When I had first thought about writing this piece I wanted to make a different argument than I've provided above.  If nationalism was the answer in the late nineteenth century then today we need a different answer, one on a global scale.  We're citizens of the world.  Surely the argument that states in the U.S. have collectively offered up an incoherent approach to population migration can be recast in other dimensions and then instead of states we can talk about nations internationally collectively producing incoherence.  This certainly seems obvious with respect to macroeconomic policy.  And it surely seems correct that large multinational corporations need effective international bodies to regulate them in a meaningful way or they'll will continue to play off one nation against another just as the professional sports leagues have done with regard to where they locate their franchises.   But I shied away from drawing out the obvious parallels for one particular reason.

We don't seem anywhere near ready to have an international governing body with authority in economic matters.  Look at all the trouble the EU is having in trying to get coordinated fiscal policy across its membership.  Having parallel organizations on other continents let alone one very big intercontinental governing body just doesn't seem in the cards, at least not now.  When Progressivism got started there already was a national government, though a comparatively weak one.  Building a large governing structure from scratch is a much more daunting task.  For now it seems best to muddle through with our trade agreements, treaties, international bodies for discussion, and other ad hoc arrangements in a framework that is based on each nation as sovereign.  Likewise, focusing on America only, it seems prudent to recognize that the states will continue to have considerable authority, even as the policies they set have national importance.

The thought in marrying the ethical argument to the economic one is not to produce some idealized structure.  I know enough at a practical level about campus governance and serving on committees that can be effective or alternatively can be do nothing to be comfortable in asserting that the goodwill and intelligence of the members matters far more than the structure.  It is in this sense that I'm hopeful for making a "better muddle," based on the following additional observation.

The history of the robber barons, at least for some of them, Bill Gates offers a latter day example, is that they were absolutely ruthless in amassing their fortunes, but then at some point in their lives they stopped doing that and turned to philanthropy instead.  Whether this was atoning for past sins or later in life simply wanting to do good works I can't say.  But it does cause one to ask: why not have a more mixed approach in the first phase or why not have a more socially responsible view to wealth creation at that time?  Joe Nocera had an interesting recent column on this point, The Safest Bank.  A good deal might be achieved in this regard simply by having the wealth creators take a longer term view.  There are pressures, to be sure, to consistently show near term profitability as a way to keep shareholders and other investors at bay.  But clearly some of this near term focus is pernicious.  Effective leadership could help push us in the opposite direction. 

Beyond this building social responsibility into a corporation's objectives may be quite controversial. There is a fairly well known piece by Milton Friedman that argues The Social Responsibility of Business is to Increases its Profits.  In making effective economic argument, Friedman is without parallel.  Nevertheless, I think he's wrong.  As one example consider Apple's use of the Double Irish with a Dutch sandwich.  Were Apple aware at the time it first considered doing this that the practice would produce a massive amount of copycat behavior, would it still be the socially responsible thing to move ahead with it?  Couple the notion of unfair and possibly irresponsible behavior with the idea that in our present hyper connected world such ideas can go viral, quite quickly, and you have a decent argument that the behavior should be nipped in the bud.

This same thought regarding building in social responsibility might occur to lawmakers at every level of government in that the policies they pursue often will have impact beyond their own jurisdiction and that should be accounted for.  Given the (lack of) popularity that elected officials seem to have today, one might be less sanguine on this possibility than that social responsibility will emerge among this group.  But I'm not saying we should expect this any time soon.  Instead, what I'm arguing is that there needs to be a gradual change in social norms that move toward a socially responsible outlook.  Leadership, whether in business or in government, will reflect those norms.  This is how change might occur.  Even if the prospects for that look bleak now, they don't have to remain that way indefinitely.

* * * * *

I would like to conclude with a few suggestions to move us in the direction this piece suggests we should be heading.

• Demographic Issues - Talk about these directly.   Heretofore we've mostly discussed these issues indirectly, speaking instead of the national debt and the size of the current deficit.  There are a host of issues to consider that result from increases in life expectancy and the concomitant aging of society.  These include labor force participation of senior citizens, the role for immigration in helping achieve a sensible age distribution of the population, the amount spent on medical research and in what domains, and ways that the elderly can contribute to the welfare of future generations so that the flow is more in both directions.  We should be talking about these issues directly instead of ignoring them and only considering the financial issues at the Federal level.

• National Service - The principal argument against national service by such notable economists as Gary Becker, is that it inefficiently allocates labor - many doing such service would contribute more socially by working in private sector jobs.  The argument is most convincing when national service is compulsory and the unemployment rate for young adults is low.  In contrast, consider a program of voluntary national service, one that is open to people of all ages 18 or above, and that the softness in the labor market which prevails now is apt to persist for some time to come.  This would seem to get around Becker's objections.  It would be a way to build substantial social capital a la Robert Putnam.  I'm particularly interested in middle aged persons and senior citizens performing national service, a topic that seemingly gets little or no attention at present.

• Dual Careers and Second Careers - We should follow Peter Drucker in suggesting that all knowledge workers follow a dual career path.  The first career is the one that pays the rent and puts food on the table.  The second career is volunteer work done either via national service or through some not-for-profit organization aimed at doing good works.  The second career is there as a need to satisfy the individual's social conscience and to learn how to be effective in doing so.  At some point in middle life, if the individual has amassed sufficient wealth so the person can retire from the first career, the prior second career becomes the primary work.  The individual then can continue to make a contribution in this way and in the words of Albion Small lead a genuine life.

• Progressivism as an Emblem of Democracy -  The Cold War ended but History did not. Capitalism clearly is on the ascendancy.  Democracy's future is less certain.  Authoritarian or Feudal regimes may yet win out in the Middle East, China, Russia, and elsewhere around the globe.  Material well being matters, certainly.  Spiritual well being matters too; it matters quite a lot.  Embracing a new Progressivism would be a way to convincingly demonstrate there can be a functioning system that does both.

Crabby

Having gotten completely spoiled as a fan by the Yankees recent winning streak, I must say I'm distressed by them losing their last two games, though Baltimore has lost its last three so the Yankees lead in their division has not yet dissipated.  That isn't the real reason for being irritable.  The true cause is lack of sleep.  One child is anxious about something, which keeps him (and me) up to all hours.  My spouse sleeps through her alarm (but I don't).  I lead with this preface because I will be blunt below.  Normally I attempt an artful presentation of my points.  Not today.

• Boards of Major Universities - Seeing the same mistake being made over and over again with high profile business types (and their big egos) constituting the board, it should occur to somebody that there needs to be experts from within higher education on these boards; past or existing presidents and chancellors of other universities are the obvious candidates.  In other words, the interests of higher education need to be directly represented.  The quite public argument that is happening at U VA right now should have happened within the board first and it should have been resolved there. How many times do we need to repeat the cycle of big hopes based on pie in the sky ideas leading to badly thought through (or not thought through at all) initiatives that end up crashing and burning?  

• Does anyone remember Fathom.com and UNext.com? - In case you don't, look here.  That was more than 10 years ago.  Those ventures failed, but they had the same sort of hype as the ventures now.  Where is the skepticism, simply as business proposition?  The market nowadays seems to relish option value on a possibility for success rather than asset value based on a likelihood of success.  Bully for the market.  For the rest of us, let's work through the analysis of how free course offerings to students is long run sustainable after the initial startup funds have dissipated and even if the revenue side works does the demand continue to grow or stagnate?

• MOOCs are not for eighteen year olds with helicopter parents - With a lot of self-direction in learning and learning-to-learn skills perhaps a MOOC can be a valuable experience for the student.  Maybe working professionals have such skills.  Without these skills such a course will end up being the blind following the blind and then dropping out because they are not getting anything out of the experience.  The typical entering freshman does not have these skills.  Many graduating seniors don't as well.

• If you really want to control costs in higher ed - Look directly at personnel expenditure and hold the line on that.  This includes administrative bloat, start up packages for faculty in engineering and the sciences, and high price tags for star faculty across the board.  Each of that must be contained.  Higher Ed needs to do this as a system.  It can't be done by a single university, because it will lose its better people in the process of cost containment.  Some leaders in higher ed need to start talking this up soon.  Otherwise Congress will eventually get into the picture and there will be an Affordable Higher Education Act that almost surely will have worse consequences than self-regulation. 

• If instead you want to piddle around on the cost issue - Keep hyping online learning as the answer.  Ignore the experience with online learning over the last fifteen years.  (It has been great for access.  It hasn't done much if anything about cost.)

Still crabby, but at least I got that off my chest.

Golf Lessons

The U.S. Open concluded yesterday.  It was played at one of the hardest courses in the world, Olympic, in the San Francisco Bay area.   The winner, Webb Simpson, seemingly came from nowhere.  He posted a score, one over par.  The leaders stumbled and that's how Simpson won.  As several announcers said during the day, really it was the golf course that won.

Jim Furyk was either in the lead by himself or tied for the lead for much of the last two days of the tournament.  He is a cautious player, a grinder.  The U.S. Open rewards that type of player.  But he's also getting up there in age, for a professional golfer.  He's 42.  There is a huge amount of pressure on the players in a tournament like this, especially the front runners.  For the leader, it's almost too much to bear.  It is psychologically burdensome to play from the lead, especially when the lead is only a stroke or two as it was yesterday.  There is not much room for error and yet a very high expectation on the player to win the tournament.   Further, the choices a player needs to make - club selection, shot selection, line and speed on a putt, are harder at a U.S. Open than at most other golf tournaments, because the player is penalized when having hit a poor shot.  The rough is thick and the putting greens are treacherous.  It's all very fatiguing.  Near the end of the tournament it seemed that Furyk faltered because he was exhausted.  He did make a terrible swing at the tee on hole number sixteen.  But he made some bad judgments thereafter.  It's not the one bad shot that cost him the tournament.  It was the additional mistakes that followed.  With pressure and fatigue comes anger and frustration, which you can see in the quote below.

There's some irony to all of this.  One of Furyk's sponsors is 5-hour ENERGY and they continued to air this commercial through the entire tournament.  I wonder if they'll continue to air it now. 

Webb Simpson rallies from pack to capture U.S. Open - ESPN via kwout

Taking a Sabbatical from David Brooks

I'm a pretty regular reader of the Times Op-ed page.  I don't devour it all, at least not any more with the expanded content on the site.  But some columnists I feel an obligation to read.  David Brooks used to be one of those.  For the indefinite future, I'm taking him out of that category.  Both in his "I told you so" tone and on his analysis that frequently over simplifies the social science (and occasionally is just wrong) his writing has become more than I can take now.

I don't know whether I'm typical of other readers or an outlier.  If the former, then perhaps other readers will do something likewise and the Times editorial board will take note.  I do want to emphasize here that the issue is not mainly about a Conservative columnist writing for Liberal readers.  I will continue to read Michael Gerson of the Washington Post and Ross Douthat of the Times.  They write in a way that understands their readership.  That's the issue.

Old Spurs

In spite of the proximity to tonight's game six and apart from the apparent word play and concurrent recognition it brings about, this piece does not concern the San Antonio basketball team.  It's really not about any sports activity at all, though if it makes reference to one it's the tennis I played in high school and college and then continued to play with some frequency till about the time I took sabbatical in 1989.  I don't recall playing much after that, perhaps only family tennis when we went to visit my parents in Boca Raton, which we did for a few days a couple of times a year.   Once the kids got a little older that stopped too.  So it's been a while.  If there is a connection, it provides an example of very long lags in causality at play.

I had always thought that with aging growth in the body ceases, cells simply wear out, and if not that then growth slows measurably.  It turns out that's not completely true.  In my case, I seem to have a proclivity for growing bone spurs.  Implicitly, I've known this for quite a long time.  I've got one that is apparent to the touch on the back of my left hand, near the wrist, and another on the left shoulder.  But I've only had it confirmed by medical professionals a couple of years ago.  I went to the doc then because I thought I had sciatica.  They took x-rays and sent me to an orthopedist.  I learned that I had arthritis in both hips and the lower back and that I had bone spurs there too.  One of them might have impinged on a nerve, which was why I was in such pain at the time.  Exercise was recommended as the best way to deal with that. 

Yesterday I went to a different orthopedist for a different problem.  I had a fall several weeks ago and as a consequence got a small tear in the rotator cuff in my right shoulder.  I needed that diagnosed.  The process in my HMO is to first go to the walk-in clinic to have a look by the doctor on call  (scheduling something with my primary care physician would  just take too long), then have an x-ray, then schedule a visit with a physician's assistant, then get an MRI, and finally have a meeting with the orthopedist.  They physician's assistant read the x-ray and pointed out a rather massive bone spur in the shoulder.  While the tear may have been due to the fall, there were some pre-existing chronic issues in the area that likely would create problems for me eventually, even without the fall.  The doctor gave me a cortisone shot for the pain, told me that arthroscopic surgery is a possibility in the future, and that the tear would not heal by itself; indeed it might get worse over time.  He also said that neither physical therapy nor any other form of exercise would be helpful, but that I should try to do some full range of motion movements with the arm, just to keep it functional.  I've been doing that, though it hurts.

I was never a great tennis player but I was on the high school team.  I played first doubles with Jimmy Kraft during our senior year, and was known to hit the ball hard, particularly the forehand and the serve.  I think that serve must have eventually done a number on my shoulder and is the source of the bone spur.  I told that to the doctor.  It only occurred to me this morning that some more recent activity may have exacerbated the problem. When I would do the treadmill I'd break up the monotony of that with some other mild exercise - stretches and lifting some light weights.  I'd do a rotation with some 5 lbs dumbbells - curls, reverse, curls, a different motion I made up to try to work the triceps a little, and some lateral raises.  In retrospect, I must have taken a very large stupid pill to have come up with that routine.  Other people try to grow muscles by working out.  Though I didn't know it at the time, I was growing bone spurs.  If I ever  get back to the treadmill (it's been nice outside so I've been going for walks instead) I will leave the weights for somebody else.

* * * * *

There is a different use of the word spur (definition 2)  that I'd like to discuss in the rest of the piece.  It is social conscience.  You see that spur providing motivation for certain high profile individuals, Diane Ravitch for example.  As interesting as her singlehandedly taking on the new Education establishment is, I find it more interesting to focus on the tenets of that social conscience.   What set them?  For what purpose do they exist?

I am now reading The Lost Promise of Progressivism.  I took a course at Cornell in the mid 1970s on American Political Thought.  It was taught by the author of the book, Eldon Eisenach.  Somehow there was a different spur inside me then to get at the root of these questions.  I was interested in political science more for the ideas that played a role in the background than for the rough and tumble of the current American politics.  (Between the Presidencies of Johnson and Nixon, the Watergate Hearings had recently concluded, I had my fill of the rough and tumble part.)  I am still extraordinarily interested in the ideas.  Eisenach's book has been an eye opener and a pleasure to read.

The core issue that underlies everything else in the book is whether the Declaration of Independence and The Constitution are "the Bible" from which all other American social ethics are derived or if Abramham Lincoln and the Civil War changed that, with a newer conception of "the Bible" necessary.  Eisenach refers to the former view as a rights-based approach and the latter view as nationalism.  The Progressivist thinkers who are the focus of this book advocated for nationalism as primary and did so based on a notion of American exceptionalism. 

Yesterday I read the chapter on public opinion.  It talks about a kind of intellectual noblesse oblige where the Progressivist thinkers would shape the ethos that would drive the the various institutions which were the backbone of the nation.  These institutions, in turn, served as more direct prods for ordinary people.  One point that comes through the book loud anr clear is that these thinkers were for the most part Evangelical Christians, but of a liberal kind.  The social ethic they advocated for was to them an American Religion, with its principles stemming directly from liberal Christian thinking.  In doing some background reading for this piece I found an essay, Calvin and American Exceptionalism, which appears to make Eisenach's analysis spot on.  In this sense Progressivism was the Puritan concept of the City on a Hill, updated for the early twentieth century.  That observation nonetheless, the ethics are not immediate.  They derive from a thoughtful working through of the implications from that image.  This is why there needs to be an intellectual elite to shape them.

I do not want to write a full book review in this post.  I will do that later when I've finished the book.  The only point I'd like to make here is that we need to do such an  exercise anew.  If the rights-based approach was flawed at the time of the Civil War it can be flawed 150 years later.  I think people sense this yet can't translate their intuitions into a well articulated and coherent set of positions. 

It is funny to me that my intellectual inclinations when I was at Cornell as an undergraduate are motivating me now, since I didn't pursue them when I went to graduate school and in my subsequent career as an economist.  Somehow what's inside you remains there, even as you take a new path.  And if this particular spur grows, that's a good thing.

Helping Students Read Complex Graphs in Economics

Based on the issues I raised in my previous post about presenting the graph in a sequential manner, consider the brief movie below.  It is based on this Excel spreadsheet.  (You have to download it.  It has functionality that is not in Google spreadsheet.)  I would think this sort of thing would help the conscientious student understand what is going on in the graph.  I wonder what others think about it.  By the way, the full argument isn't give here.  It's in the video linked in the previous post.  Here the goal was simply to make the graph more readable. 

Coordination Failure in Coordination Games/Micro-Lectures for Economics

This post follows two distinct things I've been worrying about as of late.  The first is what I've been reading about in the (not so) funny papers, regarding what is going on in Europe on an economics front and the related issue of whether in response there should be austerity or Keynesian pump priming.  Paul Krugman has a good analysis on this today, in my opinion.  And yet I believe that those educated enough to have taken a course on Principles of Microeconomics might nonetheless not understand what Krugman argues.  Doesn't the "Invisible Hand" (or the First Fundamental Welfare Theorem) say that markets work?  If so, what is wrong with making the argument that Government should get out of the way and instead let the markets solve the problems (which is what those who are for austerity tend to argue)?

That there is a conceptual flaw with the argument requires a different framework than the usual Supply and Demand (or Edgeworth Box) to make the case.  One candidate framework, still simple so that most anyone can get the point in a hurry, but subtle enough to demonstrate that coordination problems are possible, are bi-matrix games that have multiple equilibria, where the equilbria can be Pareto ranked (that means where the players preferences concur on which is the preferred equilibrium).  In that setting the idea is that when there is strategic risk it can trump social efficiency in determining which outcome is likely to prevail.  The strategic risk aspect is simply absent in the thinking of those who argue for austerity.  It needs to be acknowledged.   Once it has agreed upon, then coordination failure becomes a distinct possibility.  The Keynesian approach attempts to address the coordination failure.  The austerity approach exacerbates it.

I've written up a little PowerPoint presentation to illustrate the issues in the coordination game and made a short movie in YouTube that gives a voice over annotation of that presentation, a micro-lecture if you will.  This gets me to the second thing I've been worrying about - how to teach my class this fall.  Last semester I taught it as a seminar, because enrollments were quite low.  The department wants me to teach it as a lecture irrespective of the enrollments and do so in future iterations of the course as well, hoping that enrollments will likewise pick up.

One of the issues with that is how to handle the math modeling that is part of the subject matter.  Last semester I simply soft pedaled the math.  This time around, my intent is to do something similar to what I did in the late 1990s.  Do online presentations in PowerPoint with voice over, have assessments linked to those, and in the live session run something like a TA session where related problems are worked.  Emphasize that some of these problems will be on the test, so understanding how to do them is critical.  This is pretty old school in approach.  But it seems like what the department wants.  The only difference I see here is that I will do micro-lectures that are briefer and more focused, rather than one big PowerPoint to cover the entire lecture, and I will deliberately use Excel for assessment to try to make that richer.  I'm not showing such an Excel assessment in this post.  When I've generated some I'll make a subsequent post about that.   The movie linked above is supposed to emblematic of the micro-lecture.

With this as the way to handle the math, the rest of the time I can take a narrative approach as I did with the seminar last semester.  With the narrative part my goal is to have a bit of in class lecture and then try to have discussion around the issues.   Then I will try to mix and match the narrative approach with the math, perhaps by making Tuesday problem solving day and Thursday narrative/discussion day.  We'll see.

I'm aware that the micro-lectures are kind of flat, so one issue is whether students will watch them.  On the extrinsic motivation front, it would seem key that doing the assessments requires watching the videos first.   An alternative is to consider the videos as a resource for those students who want them, but not a requirement otherwise.  I suspect I will get some request to deliver the micro-lecture content in the live class session, during the TA part.  In so doing the students will show that they want the micro-lectures but aren't willing to put in the out-of-class time to get them.  I will try to resist acceding to such requests.

There is a related issue on how much work my class will entail for students relative to the workload they have in the other classes they take.  My sense is that it is appropriate to demand more from them than what they are used to.  We'll see how that goes as well.

I don't think micro-lectures are appropriate for narrative content.  Personally, I'm more convincing writing an essay than I am giving a lecture on a subject, since on the latter I don't like to go by a script and sometimes the forethought I've gone through gets omitted when I wing it.  The essays are usually well thought through, and the argument given is coherent.   But it is different doing that with the math.  Then you have to reason it through and I believe talking aloud through that has value above and beyond writing it out.  The only issue I can see is whether having canned PowerPoint can substitute for "writing it out" longhand, both equations and diagrams when doing the voice annotation.

I have pretty bad hand writing and I haven't practiced hand drawn graphs for a while, so I'm going with the canned approach, in good part because of these limitations.  (Also, I no longer have a Tablet PC at my disposal and while I'm aware there is software now for the iPad to do inking there with a stylus, I'm less sure screen movies will work okay in that environment.)   This is my first stab, at doing such a micro-lecture.  For the equation part I've adopted an approach to chunk the content, white out that part which has not yet been covered and isn't the current focus, and gray out the part that has already been covered.  For the diagrams I've not done this.  Perhaps I need to for future presentations.  I've been using Excel for the diagrams and in this case I already had them constructed from other things I've done so I didn't bother with that sort of chunking in the diagrams.

Technically, I'm recording a slideshow in full screen and doing voice over using Snagit.  My home computer has a 16:9 aspect ratio.  I found this useful presentation about how to make the PowerPoint itself into 16:9 aspect ratio.  Doing this means that when you go to slideshow mode there won't be any distortion in the way the presentation looks.  That's a plus.  I'm afraid that if your monitor is in 4:3 aspect ratio, then you can't produce a 16:9 result with a full screen capture, so you must do what I used to do and capture a region that is 16:9 (and thus not use slideshow mode).  In that past I've been wary about full screen captures ending up blurry.  So I was pretty spartan with the content in my slides.  There is a lot of white background.  Perhaps YouTube has gotten better in this respect.  I don't know.  But at least in terms of image quality the result is quite good. The image is sharp even in full screen.  Snagit is a nice product.  It does pretty much what I want.  Since I used to rely on Jing Pro, I'm glad there something with a similar ease of use and functionality in product delivery.  It would be nice if there were a way to pause the recording when in slideshow mode.  One can readily do that with a screen region capture.  Sometimes its useful to stop for a few moments and collect your thoughts about the rest of the presentation.  If there is such a functionality in Snagit, I've yet to learn about it.  If there isn't, I hope TechSmith can put it there in the future.

Let me close with one last point.  There is nothing slick or glitzy in this presentation.  That is my preference.  It helps to convey that I made these.  They aren't generated elsewhere.  I'd be willing to use presentations from colleagues produced in a similar manner to mine and I'd like to see some exchange process occur for that.  Getting their perspective would be valuable and sharing in this manner would make for a community approach to the subject matter, something to be aspired to.  I'd be much less inclined to use one from a publisher where I've got no personal connection to the person making the presentation.  That would make me the servant and the publisher provided content the master. That's not the way I like to teach.