Maxine Udall (girl economist)

An American Tragedy

When public discourse gets crazy, the crazies are usually paying attention.

My prayers are with Gabrielle Giffords, her family, the other victims and their families, and with our nation.

Please Vote!

If you are a US citizen, please vote today. I care not for whom you vote. Just vote. Many, many men and women forfeited their lives, their property, and the comfort of a quiet life to secure and protect this most valuable of political rights. Thank you.

_____________________________________________________________

AMENDMENT XV

Passed by Congress February 26, 1869. Ratified February 3, 1870.

Section 1.
The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of race, color, or previous condition of servitude--

Section 2.
The Congress shall have the power to enforce this article by appropriate legislation.

 

AMENDMENT XIX

Passed by Congress June 4, 1919. Ratified August 18, 1920.

The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of sex.

Congress shall have power to enforce this article by appropriate legislation.

 

AMENDMENT XXIV

Passed by Congress August 27, 1962. Ratified January 23, 1964.

Section 1.
The right of citizens of the United States to vote in any primary or other election for President or Vice President, for electors for President or Vice President, or for Senator or Representative in Congress, shall not be denied or abridged by the United States or any State by reason of failure to pay poll tax or other tax.

Section 2.
The Congress shall have power to enforce this article by appropriate legislation.

 

AMENDMENT XXVI

Passed by Congress March 23, 1971. Ratified July 1, 1971.

Note: Amendment 14, section 2, of the Constitution was modified by section 1 of the 26th amendment.

Section 1.
The right of citizens of the United States, who are eighteen years of age or older, to vote shall not be denied or abridged by the United States or by any State on account of age.

Section 2.
The Congress shall have power to enforce this article by appropriate legislation.

This Land is My Land?

Peter Coy at Bloomberg provides an excellent commentary on how banks playing fast and loose with property rights strikes at the heart of capitalism (something bankers, being capitalists, would be expected not to do). Coy directs our attention to Peruvian entrepreneur, Hernando de Soto's, book The Mystery of Capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else:

While people in developed nations can borrow against their property and use the money to start businesses and accumulate wealth, [de Soto] wrote, squatters in countries like Peru have no such option. Property rights beget prosperity.

That's why the burgeoning foreclosure mess in the U.S. strikes at the nation's economic heart. Confusion is so rife that Bank of America (BAC), the biggest mortgage lender, suspended foreclosures in all 50 states to determine whether faulty documents were used to confiscate homes. Americans took their title-recording system for granted, abused it during the housing boom, and let it deteriorate. "Somehow in the last 10 or 15 years, everything that was good record-keeping isn't telling the truth anymore," says de Soto, reached by phone while traveling in Copenhagen. "My feeling is this: Your recession is going to last. And it's going to last, and it's going to last, because essentially the trust has broken down."

"Americans took their title-recording system for granted, abused it during the housing boom, and let it deteriorate????" Which "Americans" would that be? Certainly not the buyers, I'm thinking. No. This is the part beyond belief: financiers, capitalists, abused the core of our property rights system, the laws that define it, during the housing boom, let it deteriorate, and now may attempt to dismantle it (except, of course, when it works in their favor). (Update: according to the BBC, BofA will be resuming foreclosures on 102,000 homes in 23 states.)

De Soto's take is that "trust has broken down," but if you read his book, especially Chapter 5, "The Missing Lessons of US History," what you will note is that the "trust" was a byproduct of a property rights system that evolved over time to favor he (yes, "he" at least at first) who occupied and improved property. Not necessarily he who paid for or held title to such property. Moreover, it evolved during a time when the US government for a variety of reasons had decided to expand the territories that it held and therefore needed to secure the (new) property as it was acquired. In doing so, property law on the frontier became something of a free-for-all and juries of squatter peers tended not to side always with those who held legal title.

De Soto's contention is that the body of US property rights law tended over time to adapt to and accommodate fairly populist notions of land ownership. Bolstered by the Homestead Act of 1862, under which settlers could hold 160 acres of free land as long as they lived on and developed it, the United States accomplished a redistribution of property and capital from indigenous peoples to future US citizens that while bad for the indigenous peoples would be extremely good for the then agrarian United States.

What is interesting about de Soto's account of this process is that it is not a tale of rugged individualism, at least not in its entirety. In the absence of formal laws and law enforcement, early settlers formed claim associations and other voluntary organizations to protect their property rights from speculators and claim jumpers. These extralegal organizations evolved to protect informally acquired property rights. For example, a claim association would protect members if claim jumpers threatened their holdings. In addition, the members of the claim association would intimidate speculators who attempted to outbid a member claimant at a land auction. E pluribus unum, yes?

And don't go thinking that the claim associations were nothing more than a Rotary Club for early settlers. They had a well developed sense of what they viewed as justice and were willing to act as judge, jury, and executioner should the need arise to protect a member. They weren't above exploiting power for personal gain either. De Soto provides accounts of associations claiming land that was not in fact held by any member and demanding exorbitant payment from individuals attempting to claim and hold it. Monopoly rents, anyone? They also used their power to...well...speculate on land, drive prices up, drive prices down, basically gaming the "system."

Depressing isn't it? Nobody's perfect. Not government. Not corporations. Not John Q. Public. A little power corrupts them all. That's why good, enforceable and enforced laws and regulations are so necessary. Many of us have mute impartial spectators or perhaps we ourselves are deaf. But I digress.

De Soto's chapter makes the point that the US system of property rights evolved as a combination of precedent from British jurisprudence and populist pressure to accommodate what the small landholders and their various voluntary associations viewed as fair and equitable. The latter formed the basis for an evolving common law. It filled a legal void on the frontier of our new nation and most likely also sated early settlers' desires for justice. 

De Soto makes the point that these extralegal institutions supported property rights among the poorest of Americans (unless, of course, they were indigenous). This is very different from how property rights tend to evolve in, say, a feudal or semi-feudal system or in a country dominated by powerful and wealthy interest groups. It placed land (capital) in the hands of many and allowed them to keep it as long as they improved it, i.e., they produced from it. It unleashed productive power at the bottom of the economic pyramid. It almost certainly accounts for what I regard as one of the true sources of any US exceptionalism: the unfailing ambition, creativity, and productivity of its poor and its working and middle classes.

Now, those evolved property rights, rights that tended to favor those with little, may be about to be trampled by those with a lot. I'm willing to bet that, even as I type, the laws and the rights they codify are in danger of being dismantled by Congress out of fear that otherwise bankers will act like spoiled children and trash the economy and the country that made them rich and bailed them out.

The United States became great in part (IMHO) because a revolution in thought and government along with a (sometimes misguided) sense of manifest destiny put us on a path in which those at the bottom of the economic pyramid had opportunities to surpass the circumstances of their birth. Putting land (capital) into the eager hands of hard-working, occasionally extortionist miners, farmers, ranchers, and small businessmen at the bottom and middle of the social and economic pyramid is part of what has until recently given us historic levels of growth and development. 

As a product of the middle class and generations of small business owners and as someone who until recently had firm confidence in markets when they work, regulation when they don't, watching the real wealth of our nation siphoned off and destroyed in a financial casino enabled by laissez faire regulators and lawmakers has been deeply disturbing to me. That I and my own discipline may have provided rhetorical cover in the run up to the crisis also causes me pain. If the players in that casino now succeed in dismantling or weakening the US property rights system, especially those parts of it that favor homeowners and small businesses, they will have done more to destroy, not just the United States, but the Idea of the United States, than any foreign nation, communist or otherwise, ever could have done.

***************

Addendum: see here (hat tip to Raven)

An Economist Muses about Race

I'm supposed to be on vacation, but my self-employed husband is keeping us at home one more day while he responds to a client's last minute request for changes. A benefit of the delay is that it gave me the chance to read, listen to, and refer you to a recent blog from economist, Rajiv Sethi, about a conversation between economist, Glenn Loury, and linguist, John McWhorter. It is a frank and refreshing discussion about the public non-discourse about race.

I don't write or talk about race much because I have no idea what it is like not to be white. I have always had a firm conviction that anything I could say would be completely irrelevant to those for whom being on the receiving end of racism is a common experience. The closest I may ever have gotten to approximating something that felt like racial discrimination was the time a state policeman in a southern state pulled me over (I was going the speed limit) and proceeded to write me up for driving 14 miles per hour over the speed limit. I was told by my southern friends that he had probably profiled us because of the whitewater boats on our car and that when he realized I was a Yankee to boot, my goose was cooked. And you just try being a Yankee in a southern state...no, amend that to uppity Yankee woman in a southern state (I swear I was polite and pleasant at all times)...trying to find an attorney in a small southern town you happened to be passing through who will take your case. When I complained about the unfairness and the outrage that a law enforcement officer would outright lie and that attorneys would refuse to take my case, one of my friends looked me in the eye and said, "Well, I guess now you know what every black and Latino person in this state lives with, Maxine."

That shut me up and it made me think. I shut up because it was one incident in my life, not something I lived with every day. It made me think because it shook me to the foundations of my white privileged soul, it outraged my sense of fairness, and it made me wonder what this country looks like to people who aren't as lucky as I have been. I mean, I did eventually find a lawyer, and I did have the $400 the lawyer charged me. That's privilege. Yes, I had thought about injustice before. This was the first time I had felt it in my soul. Contrary to all those children's books, the policeman was not my friend and justice was not served. I still think about this incident whenever I read about racial or ethnic profiling and laws aimed at undocumented workers.

Now you think about it, too.

Rajiv's blog and the accompanying video also made me think that maybe it would be OK for a white person to say something about race and it got me thinking about whether or not there is anything useful I could say.

I could probably talk a little bit about the racism of white people because I have seen it from the "white" side. It's subtle and usually masquerades as an obsessive concern with "states rights" or "property rights." It seems to manifest more in the voting booth than in face-to-face encounters, at least when I've been around to observe it. That doesn't mean it doesn't happen one-on-one, it just means it's easier to be mean when no one whose opinion you might value is watching. I have encountered very few frank, outright white racists in my lifetime. Most of them have been older and southern, but even they seem to recognize on some level the unseemliness of their attitudes. I know that is no comfort to people systematically exposed to it.

As an economist (and ignoring the moral aspects of slavery) I have always been puzzled by the willingness of white farmers and tradesmen to fight an entire Civil War to support a borderline feudal system of slavery that can only have harmed them economically and in other ways. It provides a dramatic example of the way that race can be used to drive a wedge between what ought otherwise to be a large group of workers with fairly homogeneous ambitions and who will all lose nearly equally if they can be successfully divided politically, just as they would all gain nearly equally if only they could remain united. Loury says he's tired of the national non-conversation about race. Frankly, I'm tired of watching people who have more in common with each other than they do with the leaders of either political party (or investment bankers or CEO's) so easily divided by race (or gay marriage or abortion or undocumented workers).

As an economist, I also find myself thinking about Schelling's checkerboard model. Given weak individual preferences to live in neighborhoods and to socialize with people who are like us and in the absence of some sort of coordinating or "mixing" force, I suspect that we will not be a racially or ethnically homogeneous society for a very long time, even after most of us have ceased to be even mildly racist. But I don't know this. I base it on a long held suspicion that we underestimate the impact that small, but finite sentiments have on aggregate social outcomes.

As someone who grew up in predominantly white Appalachia and who was relatively privileged in an area where "privilege" is not the first word that comes to mind when contemplating the residents, I was sympathetic to James Webb's recent Wall Street journal editorial. Particularly this

Contrary to assumptions in the law, white America is hardly a monolith. And the journey of white American cultures is so diverse (yes) that one strains to find the logic that could lump them together for the purpose of public policy.

There are poor, white kids in West Virginia who, compared to poor, black kids, have an equally low chance of ever seeing the inside of Widener Library or even the inside of the West Virginia University Library. I would like to see them all have an equally high chance if they're willing to study hard. I'd like them to live in a world where education is valued and rewarded and within their reach if they want it.

I'll close by saying that I feel grateful daily for the advances we have made in this country, especially since 1965. It's not enough even from my "privileged" perspective. The fact that some of us are proposing to rewrite the 14th amendment; that some of us seem hellbent on creating yet another slave class, paid this time, but still outside the law; that we will not provide a road to citizenship or to legal working status seems clear evidence that we have a long way yet to go.

I have two nephews who are of Latino descent and a niece of Nepalese descent. One nephew is at basic training for the National Guard even as I type. All are beautifully brown skinned and would be stopped in any state that passes a law like that in Arizona. I want them to live in a country where race doesn't matter except in the sense that blue eyes or brown eyes matter. A physical trait among many, uncorrelated with work opportunities, income, or health.

The fact that I have so many colleagues, friends, and role-models who are of African or Native American or Indian or Chinese or you-name-it descent is a comfort to me and a source of hope that we are moving in the right direction. I know that I am a better person for it just as this nation is a better nation for it.

David Coates on Why Elizabeth Warren Should Head CFPA

Professor David Coates, Worrell Chair of Anglo-American Studies at Wake Forest University, asks

So why is the possible appointment of Elizabeth Warren to head the agency whose creation she championed now causing such waves? What unwritten codes might Elizabeth Warren inadvertently have broken?

He goes on to review and summarize Professor Warren's reports for the Congressional TARP oversight panel as well as a news interview, concluding that

...Elizabeth Warren has proved over and over again that she will fight for the full implementation of programs designed to promote the health of Main Street, not just that of Wall Street.... in 2009 she had both the capacity and the courage to turn a small but empowered Oversight Panel into a major watchdog for the interests of ordinary Americans. ...since she has performed that task once, she can legitimately be expected to do it again.

There is no gain in giving teeth to a watch-dog if the watch-dog will not bite. Elizabeth Warren clearly bites. It is not much fun for those being bitten, but then they shouldn’t have needed biting in the first place. Biting is good when the cause is right. Tim Geithner might not want Elizabeth Warren to head up the Consumer Financial Protection Agency; but the rest of us definitely should.

Read the full blog here please.

Amartya Sen: The Uses & Abuses of Adam Smith

Presented at Duke University last March. Thank you to the student of a friend for this link.

Link to Amartya Sen's 2009 Cornell U Lecture on Capitalism & Confusion

This was sent to me by a friend. Many of you may already have seen it. The sound is too low for speakers. Headphones will remedy this. The lecture itself is excellent. Sen provides a more accurate account of Adam Smith's notion of self-interest than is commonly found in political and economic discourse. There are also excellent descriptions of the public good aspects of health and the environment. I highly recommend it.

The Rules of the Game?

I've been thinking about "the rules of the game." Consider this from a recent ProPublica article by Jesse Eisinger and Jake Bernstein on Magnetar, the hedge fund that took short positions on CDOs it helped create and that it appears also helped to fail (thereby realizing large gains from its short positions):

 From what we've learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn't cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom.

“The rules in place,” I said to myself. “What does this remind me of?” And then I remembered:

 There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud.

               --Milton Friedman, Capitalism and Freedom, Ch VIII

Clearly, if the ProPublica article is accurate, Magnetar scores high on “deception and fraud.” The problem is, as the article notes, perverse private incentives led to suboptimal social outcomes yet no laws were broken. Magnetar was playing by the rules of the game while betting against the American dream.

Friedman had great confidence that the rule of law was sufficient in combination with competitive market forces and a modicum of self-interest to assure individual virtue, societal cohesion, and economic growth. That confidence resulted in a role for government limited mainly to determining and enforcing the rules of the game:  

 The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on. What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color-the majority wants and then, if he is in the minority, submit.

                                    --Capitalism and Freedom, Chapter 1

Fortunately, each woman can also vote for the color of scarf she wants. Unfortunately, at present, representation in both markets and the political system appears to be proportional to corporate size and income. And we, the economically and politically less powerful majority, are being asked to disregard that last little tremor in the financial sector so that the “wide diversity” of financial “innovation” can continue to misdirect capital, both financial and human, to where it will evaporate when the next bubble or Ponzi scheme implodes.

Magnetar and the challenges of financial regulation remind me of the early challenges in US food and drug regulation. You can read about them in Philip J. Hilts book, Protecting America's Health, in the chapter titled “Capitalism in Crisis.” Admittedly, Hilts appears to be no fan of capitalism, but the account he provides was also reported by Cynthia Crossen in the Wall Street Journal on October 3, 2005 (How Elixir Deaths Led US to Require Proof of New Drugs’ Safety). I note that the article appears no longer to be available from the WSJ, but I have a pdf version of it downloaded at the time that agrees in substance with Hilts.

In Hilts’ book we learn that it was difficult to get food and drug regulation in the US for a variety of reasons, most of which amounted to variants of the reasons we are having trouble getting financial regulation now. Like the more complex products of the finance sector, there was considerable information asymmetry in food and drugs markets. Manufacturers were not obligated to provide detailed information on contents, except the amount if any of alcohol, opium, cocaine, morphine, chloroform, marijuana, acetanalide, chloral hydrate and eucaine. (You can thank the Food and Drug Act of 1906 for saving us from unwittingly becoming a nation of addicts.) Manufacturers were not obligated to test products for efficacy or safety. They could label tap water as mineral water and sell it as a cure for rheumatism. They could claim cures for cancer or diabetes. Worse, they could put sugar in a drug marketed for treatment of diabetes or morphine in a drug marketed as a cure for addiction with little fear of prosecution under existing law. As long as their intent was to heal, there was little legal recourse if they killed people.They were playing by the rules of the game.

A confluence of jointly necessary, but individually insufficient, events eventually provided us with better food and drugs regulation. One reason I like the story is that an economist, Rexford G. Tugwell, figures prominently and positively. Tugwell was part of Franklin Roosevelt’s transition team in 1933, a professor of economics at Columbia, who was second in command at the US Department of Agriculture. As an economist, he knew that in the absence of full information, consumers could not be relied on to make efficient choices and he knew that there was nothing in the law or the prevailing social institutions that would compel drugs manufacturers to reveal all the contents of their products, much less test them for safety or efficacy. Nor would market forces make it happen. The preceding years had seen multiple deaths from improper canning techniques, loss of eyesight from use of aniline dyes in mascara, and pure and simple deceptions about ingredients in foods and drugs. Despite these, manufacturers persisted in producing and selling dangerous or useless products. When caught or when someone died, some simply changed the product name and continued to produce it.

Over a period of about four years from 1933 to 1937, Tugwell and Walter Campbell, head of the Food and Drug Administration (FDA), attempted to move a bill through the US congress that would strengthen the regulatory power of the FDA. In fact, one bill had already passed both houses of congress. I quote from Hilts, p. 88:

Eventually, one[bill] passed both houses of Congress, was agreed to by a conference committee of the two houses, and was killed by a Republican maneuver in the House of Representatives just before it could be sent for the president’s signature. Representative Clarence Lea of California killed the bill; he was close to fruit growers there, and they were incensed with the FDA’s attempts to cut back on the chemicals used to preserve fruit in drying and shipping.

Sound familiar?  Here’s Hilts again.

Drugmakers wrote that the bill would “Sovietize” drug sales in America and produce a “virtual dictatorship over trade.  

Sound familiar?

So how did we get an FDA that has some power to regulate?

Hilts tells us there were two critical elements: 1) a bill was already present in Congress and 2) legislators and significant portions of the public were paying attention when a crisis hit.

The crisis took the form of 107 deaths, most of them children, from a drug, Elixir Sulfanilamide, produced by the Massengill Company of Bristol, TN, in 1937. Massengill, in an effort to respond to customer preferences, had tried to make a sweet liquid version of the pill and powder form sulfanilamide that they already manufactured. So far, this seems like an example of the good that the market can do.  Sulfanilamide was a sulfa drug used to treat strep throat and respiratory infections. A sweeter, liquid version would be easier to administer to children. Market forces were working, just as Friedman predicted, to produce something more palatable to consumers. Good. Massengill’s head chemist determined that diethylene glycol (DEG), which has a sweetish taste, would solvate the sulfa drug. DEG is poisonous to humans, which was apparently not known (at least to the head chemist) at that time. Massengill bottled the elixir without testing on humans and shipped 240 gallons in early September 1937. Bad.

By October 11, the AMA had received an inquiry about the drug because six people in Tulsa, OK, had died after taking it. By the end of November, 107 were dead, not counting Massengill’s head chemist who committed suicide. FDA investigators had recovered 90% of the original 240 gallon shipment within 4 weeks of the first report of a problem.

The only law under which Massengill could be prosecuted was that the drug had been mislabeled (substances labeled "elixirs" had to contain alcohol). Massengill was fined $26,000 (about $240/death or, if I’ve done my arithmetic correctly, the equivalent to about $4,000/death in 2010 dollars based on the St Louis Fed's All Consumer CPI.) 

Samuel Massengill wrote to the AMA that the deaths were regrettable, but “I have violated no law.” Indeed, he had not. There was no law on the books that required his company to test for efficacy or safety any of the products they sold and that would be ingested by humans. Mr. Massengill and his company were playing by “the rules of the game.”

Representative Lea, under pressure from outraged consumers, released the bill and Franklin Roosevelt signed the Food, Drug and Cosmetic Act into law on June 15, 1938. It required manufacturers to demonstrate safety prior to marketing and it codified a scientific approach to doing this. In the long run, it proved a great boost to the drugs industry by sweeping out the low price, low quality, low or negative marginal benefit chaff that tends to dominate in unregulated markets where information is asymmetric. That it led to other problems is a topic for another blog.

The FDA story has always caused me to wonder: how does it happen that US voters are sympathetic or neutral to corporate pleas for protection from regulation that would benefit consumers? And why must children die or an economy fail before US voters are willing to apply sufficient pressure to lawmakers to obtain regulatory reform?

In the case of the FDA in the 1930s, consumers received very distorted news reporting because patent drugs advertising represented a large portion of newspaper revenues at that time. Hilts discusses the distortions that resulted from that conflict of private incentives and public interest. Modern news distortions may have less to do with advertising revenues and more to do with campaign contributions coupled to wholly-owned media outlets. The effect is much the same.

But I think it is more than that. I think voters are sympathetic, not to investment bankers, but to an idea. The idea results from uncritical acceptance of a syllogistic fallacy derived from American beliefs that we now take to be self-evident. Adam Smith may have said it first and best: “I have never known much good done by those who affected to trade for the public good.” The modern variant is "government is the problem." The logical fallacy is to conclude that, if true, it implies that those who affect to trade for private good always and everywhere benefit the public “which was no part of [their] intention;” that the pursuit of their own self-interested intention promotes the interest of society “more effectually than when [they] really intend to promote it.”  

In my very humble opinion, both Smith and Friedman were right only in very limited senses. Market forces will “reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game.” But there are many markets where market forces are dampened or non-existent and where private and public interests will diverge without regulation. It seems to me that as we evolve and progress, new and complex innovations and even the quantity and nature of information itself have tended to obscure transactions thereby increasing the costs of and the need for determining and enforcing "the rules of the game." For these reasons, I’m almost certain that Smith would view the financial sector as more like the East India Company than like the butcher, brewer or baker, at least in terms of the public benefits it is likely to yield without regulation.

Contrary to Friedman, this is no “game.” In 1937, 107 (mostly children) died because basic, common sense regulation was not in place. In 2009, millions in the US became unemployed and thereby lost both their main source of income and their health insurance, many more lost value on their primary asset, their home. All of this because the regulation that would have prevented it, the rules of the game, had been dismantled over the last 30 years and what regulation remained was very weakly enforced.

Now (or soon) there will be a bill in Congress. A crisis has occurred. People are paying attention (not always to the best sources of information, but still paying attention). The rhetoric and tactics used by investment bankers are remarkably similar to those used prior to the 1938 passage of the Food, Drug and Cosmetic Act. I know I could have written all of this about Glass-Steagall, but I think it’s important to understand that this happens over and over and over again in many different markets and about many different issues that relate to the public good. The rhetoric seems never to change: “sovietize,” "socialist," "socialism," "stifled innovation," "liberty," "freedom," "hurt America." It doesn’t matter what the details are. It is a one-size fits all obstructive strategy that protects the interests of business and power at the expense of consumers, taxpayers, future generations, and the country as a whole. And it works nearly every time.

I fear that George Santayana was right and that we are doomed to repeat the Great Depression over and over again because we appear to have forgotten the lessons it taught us. I fear that Milton Friedman is right and that this is a “game” to some. I fear that Adam Smith is right and that “as merchants their interest is directly opposite to [the public] interest.” And I fear that misplaced tea bagger rage, unlike misallocated capital, is more newsworthy, more interesting and more understandable than CDOs and the ways in which Gyges gains unearned power and wealth, hidden behind the opacity of complex investment instruments. 

The rules of the game must be changed. They must be changed now. And they must be changed in ways that serve the public interest. Investment banks and bankers must be regulated. Leverage, transparency, size. I'm sure there is more. Toxic assets, toxic instruments, and toxic casino-like speculation are no different from toxic patent medicines. They harm us all.

The Socrates Parameter

A few days ago, I attended a seminar on the economics of obesity and overeating that left me thinking, not about obesity and metabolic syndrome, which are epidemic in the US and important contributors to both national health care costs and declining national health indicators, and not about medicine’s inability at present to provide satisfactory preventive remedies. It left me thinking about the “split” between our presumably rational, self-interested, fully-informed or near fully-informed deliberative selves and our primitive, acquisitive, also self-interested (if a trifle myopic), less than rational selves.

The seminar speaker motivated his analysis of overeating and obesity by providing a nice, albeit simplistic, overview of human brain areas and function. The limbic system, the primitive part of our brains, gives rise to impulsive behavior and affective (emotional) responses to stimuli that may have had and may still have value in promoting at least short-term survival of the individual, for example, fight or flight, “eat this now it will lay down fat for winter”, “mate now for tomorrow we may die.” Our deliberative functions, the thought, the marshaling and integration of cues, stimuli, signals, previous experience, and conjectures about future states of the world and our place in them that temper the primitive impulses emanating from our limbic system to form more complex and rational behavioral responses, resides in the frontal lobe.

The seminar provided a simplistic framework for thinking about what I think is a key metaphysical question that we economists are only recently starting to wrestle with: what really determines the behavior of homo economicus? Or perhaps more correctly, is there such a being as homo economicus, at least as economists have tended to conceptualize him?

As I listened to the seminar speaker, I kept thinking of John Stuart Mill’s famous quote from Utilitarianism:

It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides.

It seems to fit exactly the dilemma we face in understanding and in modeling human behavior.  (Note: use of this quote is in no way meant to imply that the obese and overweight are “pigs” or “fools.” This same model fits people making choices about saving for retirement or taking preventive measures against (bad) future health or income states. It also fits investment bankers making decisions about whether or not to continue to invest in mortgage backed securities even after being warned that they are on a collision course with disaster. It fits economists and bank regulators who were warned a decade ago that derivatives markets should be regulated.  We are all pigs and fools at some times in our lives, some more so than others.)

But there was another stark question raised by the seminar that economists in particular must come to grips with: are consumers really utility maximizers or are they, at best, preference satisfiers? It matters because our theory takes as given that consumers are utility maximizers. Implicit in this are the essential requirements of rationality, self-interest (presumably long-term and broad enough to encompass family, friends, and community), and full-information.  If we are primarily preference satisfiers and those preferences do not correspond to some approximation of “utility” where utility comprises more than immediate, uninformed happiness or satisfaction, we are at the heart of an epistemological conundrum: are consumers the best judges of what is best for them? We take as given in economics that they are and much of welfare economics rests on this assumption. We often take it as given regardless of uncertainties and information asymmetries that clearly compromise the assumption.

What then is it within us or without us that forms the bridge between affect and deliberation? What are the determinants and what are the public and health policies that would strengthen that bridge in ways that benefit the utility of both individuals and society?

One seminar participant suggested that the relationship between the ideal or utility maximizing state of the world (as judged by the individual, for example, their optimal body mass index  (BMI)) and the actual state of the world (in this case a person’s actual BMI) be modeled as a weighted average of the empirically observed or inferred desiderata of the two portions of the brain. A simplistic equation may help here:

B=θD + (1-θ)A

Let  B be the “bridge” between the two parts of the brain or between our primitive selves and our rationally self-interested, fully-informed selves. D is the empirically observed output or state of the world that results from the deliberative portion of reason. A is the empirically observed output or state of the world that results from the affective or primitive portion of reason, and 0 ≤ θ ≤ 1 is a weight.   (My words and interpretation, not his.)

What I liked about this suggestion is that it provides a nice conceptualization of what I like to think of as the “Socrates parameter, “ θ. The parameter that determines how deliberative, how reasoned, how fully-informed, how forward thinking we really are. A high value implies high deliberation, but it can also imply better information or better use of available information, or even openness to new, information that conflicts with preconceived ideas or ideology. A high value may also imply lower rates of time preference or a longer time horizon to a quasi-hyperbolic  “cliff.” Low values imply low deliberation and are consistent with poor information or poor use of available information, higher rates of time preference and/or very short time horizons, or an inability or unwillingness to consider novel information and perspectives.

(For those not used to thinking in equations, it may help to notice that θ can only take values between 0 and 1.  When θ = 1 (the highest value it can take),  (1- θ)=0, so a person with the highest possible value of θ had B=D, i.e., they are pure deliberative with no influence from the limbic portion of their brain. Conversely, a person with θ = 0, the lowest value it can take, has (1- θ) = 1. That person is pure limbic, affective with no deliberative influence on choices. A person with θ = ½ will have (1- θ) = ½  implying a 50/50 split between deliberative and affective influences on his/her decision making. Thus, varying values of θ describe the degree to which a person or group of people temper emotion and impulse with deliberation.)

Behavioral economics and neurological economics are now helping us to understand the Socrates parameter; the dimensions of being, belief, and behavior that serve to bridge and temper affect with deliberation as well as the aspects of being, belief, and behavior grounded in emotion that serve as barriers between the good that we will to do and our actual behavior.

This is important stuff to understand. Right now, A in the equation above usually shows up in our error terms. If it is a genetic component we all share, then it may well generate correlation across individuals and communities as might also D, but in less easily measured and quantified ways.  In the absence of widely disseminated, easily understood information bolstered by regulation, A may well be a major contributor to bank bubbles and bailouts as well as to obesity and overweight, youthful smoking initiation, and unfettered appetites for risk and sweets to name a few.

The seminar speaker made the point that marketers of food and drink (and this could also apply to marketers of subprime mortgages and subprime political ideas) have tended to focus on the emotional, primitive part of our brains rather than the deliberative part. Foods have been engineered to contain more calories and fewer nutrients per portion as portion sizes have increased. To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.

Paul Krugman Weighs in on Health Care Reform

You can read his NY Times Op Ed here.

As it happens, Reuters published an investigative report this week that powerfully illustrates the vileness of our current system. The report concerns the insurer Fortis, now part of Assurant Health, which turns out to have had a systematic policy of revoking its clients’ policies when they got sick. In particular, according to the Reuters report, it targeted every single policyholder who contracted H.I.V., looking for any excuse, no matter how flimsy, for cancellation...

...But this is much more than a law enforcement issue. For one thing, it’s an example those who castigate President Obama for “demonizing” insurance companies should consider. The truth, widely documented, is that behavior like Assurant Health’s is widespread for a simple reason: it pays. A House committee estimated that Assurant made $150 million in profits between 2003 and 2007 by canceling coverage of people who thought they had insurance, a sum that dwarfs the fine the court imposed in this particular case. It’s not demonizing insurers to describe what they actually do.

Beyond that, this is a story that could happen only in America. In every other advanced nation, insurance coverage is available to everyone regardless of medical history. Our system is unique in its cruelty...

Can we afford this? Yes, says the Congressional Budget Office, which on Thursday concluded that the proposed legislation would reduce the deficit by $138 billion in its first decade and half of 1 percent of G.D.P., amounting to around $1.2 trillion, in its second decade.

Remind me again, please, why is it we prefer the private sector to the public sector when it comes to health insurance? It can't be that it's more cost efficient. This less than optimal bill will save money. Do we prefer the private sector because it's more efficient at managing risk than the public sector? It does this by failing to provide insurance to those who need it most and dropping beneficiaries when they cost "too much." Is that health insurance we can believe in?

Write or phone your putatively Democratic representative, please.

If not now, when?