The Emperor has no Clothes

For years I argued in vain with those who absorbed the economic fads of the 1980s and 1990s. It good to see that with this Great Recession the scales have fallen off people's eyes and the great paragons of economics in this era, the Chicago School of economics, has been shown to have feet of clay. Here is Barry Ritholtz taking them to task. His experience echoes mine:

I first encountered the Chicago theory in law school. The Chicagoists somehow read into law a market efficiency component that was never there. I recoiled against it — not because of the libertarianism, which I embraced. Rather, it seemed a backdoor way to circumvent democracy, and force into the legal system rules that were never debated, voted on, or agreed to by a representative government. I found the extremist legal theories of Judges like Richard Posner and Frank Easterbrook intellectually repulsive. They were undemocratic, anti-representative government. When I told a professor that the law and economics movement was an attempt at a political coup, he laughed and said, try to stop it.

I disliked the neoclassical price theory. It was authoritarian, a worship of a form of mob rule outside of the usual legal channels. The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable. Its always the extremists that seem to control a discipline or school of thought. If I have any dogma, its extremism in all forms is undesirable (I know, radical, huh)

Ritholtz's whole blog entry called "RIP Chicago School of Economics: 1976-2008" is well worth reading.

Naming Names

Time to issue the subpoenas, call in the suspects, and demand that they name names. Here's Barry Ritholtz in a blog entry taking the usual suspects to task for playing with words to protect their ideological worldview:

Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives!

What bullshit. ...

What a terrible sham the no “regulation cry” has been. It is really a vote for no rules against illegal and/or criminal behavior . . .

Ritholtz points out that language is a tool and the misuse of language is a well-honed art to mislead the gullible:

One of the best ways to win a debate is to control the language used. This was one of the elements George Orwell was discussing in 1984, and why the language in the novel was degraded to phrases like “double plus good.” All nuance was dismissed. He who controls the language controls the political economy is what Orwell was saying. In modern times, its done not with boot-jacks and guns, but with catchphrases and clever marketing. Its not as heavy handed, its just more insidious.

When we discuss “Regulations,” we are talking about regulating human behavior. And that behavior can range from following misplaced incentives to falsifying accounting data to overtly legal but destructive actions — like putting people into loans they knew (or reasonably should have known) were likely to default.

What's Old is New

When I was a kid the generation raised in the 30s and 40s became the conformists of the 50s and 60s. But my generation, raised in the 50s and 60s, were supposedly rebels dancing to their beat. But Stanley Milgram created a famous experiment to show how the great majority of people are deeply conformist, to the point of torturing their fellow humans if the situation seemed to demand it.

This experiment has been redone with the kids of the Millennial Generation, and guess what? They are just as conformist as the kids of the 60s. Here's an article in The Mercury News by Lisa M. Krieger reporting that Jerry M. Burger, a psychologist at Santa Clara University, has replicated the results. Here's a snippet. The whole article is worth reading. And if you want to have have an in-depth understanding of this phenomenon, then read The Lucifer Effect: Understanding How Good People Turn Evil by Philip Zimbardo:

Replicating one of the most controversial behavioral experiments in history, a Santa Clara University psychologist has found that people will follow orders from an authority figure to administer what they believe are painful electric shocks.

More than two-thirds of volunteers in the research study had to be stopped from administering 150 volt shocks of electricity, despite hearing a person's cries of pain, professor Jerry M. Burger concluded in a study published in the January issue of the journal American Psychologist.

"In a dramatic way, it illustrates that under certain circumstances people will act in very surprising and disturbing ways,'' said Burger.

The study, using paid volunteers from the South Bay, is similar to the famous 1974 "obedience study'' by the late Yale University psychologist Stanley Milgram. In the wake of Nazi war criminal Adolf Eichmann's trial, Milgram was troubled by the willingness of people to obey authorities — even if it conflicted with their own conscience.

Reich on the Choice Confronting Americans

Here is an excellent blog entry from Robert Reich laying out Greenspan's role in the financial crisis, the role of Congress, and the stark choice facing Americans. The whole article is worth reading. But for those for whom speed dial is too slow, here are the crucial bits...

On Greenspan:

Barely two months ago, when Greenspan appeared before Congress to explain what had happened to the economy, Representative Henry Waxman asked him pointedly: "Were you wrong?"

"Partially," Greenspan responded. "This crisis has turned out to be much broader than anything I could have imagined."

It might be argued that Alan Greenspan’s failure of imagination was not just about the scale of the crisis. More basically, his ideology had made it difficult for him to imagine what could happen when financial markets are left to themselves. He had supposed that the interplay of millions of self-seeking individuals would make government regulation unnecessary – except to prevent outright fraud or theft. To Greenspan and others like him, the global financial market represented the almost perfect form of the free market, because buyers and sellers were could gather almost unlimited information about one another, at almost instantaneous speed, at very low cost. Not only would the financial market be self-correcting, but it would automatically give us everything we might reasonably wish from it.

On the corruption of politics and the role of Congress:

During the same years Greenspan called for deregulation of financial markets, Wall Street was accelerating its bankrolling of the U.S. Congress. Securities and investment firms contributed larger and larger amounts of money – not just to conservative Republicans who might expect such support but also to Democrats who had never been so graced before. According to Center for Responsive Politics, Wall Street firms dramatically increased their contributions to both parties during these years. Their share of total donations to the Democratic Senatorial Campaign Committee, for example, rose continuously, from 5 percent during the 1999-2000 election cycle to 15 percent by the 2007-2008 cycle.

The money was accompanied, and often raised, by Wall Street lobbyists who pushed Congress in the same direction Greenspan urged – blocking regulation of derivatives, weakening oversight of subprime mortgage lending, and preventing the Securities and Exchange Commission from doing its job.

On the choice confronting Americans:

The real choice ahead is between democratic capitalism and authoritarian capitalism. China is perfecting the latter. But unless we are careful we – the citizens of democratic capitalist nations – will discover that our form of capitalism has become more authoritarian than democratic.

The Right Marches off into the Political Re-Education Gulag

Greg Anrig at TPM Cafe has discovered the right wing signing up for self-criticism and political re-education. He has a dozen excellent quotes. Here my favourite:

P.J. O' Rourke, The Weekly Standard

An entire generation has been born, grown up, and had families of its own since Ronald Reagan was elected. And where is the world we promised these children of the Conservative Age? Where is this land of freedom and responsibility, knowledge, opportunity, accomplishment, honor, truth, trust, and one boring hour each week spent in itchy clothes at church, synagogue, or mosque? It lies in ruins at our feet, as well it might, since we ourselves kicked the shining city upon a hill into dust and rubble.

Each of these pundits should hang their essays around their necks and wear them as a ritual of self-mortification, a kind of Right Wing cilice.

Krugman Skewers Wall Street

Paul Krugman has an excellent op-ed in the NY Times this week. He looks at the corruption of the Madoff ponzi scheme and then goes for the jugular:

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.

Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Read the whole article. It is well worth your time.

Tom Friedman's "Hot, Flat, and Crowded"

I used to be a big fan of Thomas L. Friedman, but lately I've decided I got him wrong. At one time I thought he was insightful and enjoyed his bombastic statements. But now I've watched him hop from topic to topic rattling off some "sound bytes" and pontificating then running off to another topic before his mistakes catch up to him.

I don't mind somebody being a "personality" or using "sound bytes". What bothers me is getting analysis wrong and never going back to figure out what made you mistaken. I don't like guys who are instant experts on topics but when reality starts to pop through the busted seams they quickly decamp to set up their soapbox in another fertile field. I've decided that Thomas L. Friedman isn't selling ideas. He's selling himself as selling ideas. Having ideas and selling them doesn't bother me, but recklessly selling ideas which -- when they go bad -- you don't take the time to examine and learn but instead run off and expostulate in a new field and ignore the mistakes. Well, that downright puts me off. I'm tired of Thomas L. Friedman. I gave him his 10 minutes of fame. He needs to get off the stage and stay off the stage because his unwillingness to self reflect and self correct means he isn't worth paying attention to anymore.

This latest book is full of "flash analysis" that I no longer trust. He says silly things like:

Indeed, I believe history will record that it was Chinese capitalism that put the last nail into the coffin of the postwar European welfare state. France can no longer sustain a thirty-five-hour workweek or Europe its lavish social safety nets, because of the rising competition from low-wage high-aspiration China and India. It is hard for France to maintain a thirty-five-hour workweek when China and India have invented a thirty-five hour workday. (pp. 57-58)

This is wrong for so many reasons:

• It creates a false dichotomy: either you recklessly pursue wealth and qualify as a "real capitalist" or you will be crushed. That's not true. Europe has never followed the US's rampant consumerism-based capitalism but it hasn't been crushed. They have successfully built a capitalism within a social democratic political system.
  
• It disrespects his own culture in favour of an illusion: Friedman has written off the Europeans in the past because they didn't emulate the Americans. Now Friedman writes off his own culture because it hasn't embraced a mindless desperate capitalism of China. He is setting up the frenzied two-tier capitalism of China as an ideal, but most working class and middle class American would not embrace the Chinese system as a better future. Sure the US is in tatters and bankrupt because of the crony capitalism rampant in the US under Bush and the ideologues of the Republican party, but most Americans wouldn't give up their present for the idiotic belief that China is a glimpse of a "glorious future". Friedman overlooks the fact that China is a Communist state, a police state where there are no real rights and where the elite that is in charge has no concept of democracy or any vision of a political system that accepts social justice or human rights.
  
• His bombast is insulting: No Chinese or Indian is working a "thirty-five-hour day". This kind of Stakhanovite theory of economic development is ridiculous. Stalin pushed this on his credulous (and imprisioned) people. Friedman wants to do the same to Americans?
  

His graphs on pages 97-100 represent his "analysis" of how "freedom" is inversely related to the price of oil. First, he uses the notorious Canadian Fraser Institute for his measure of "freedom". First, this is a right wing think tank that is fast and loose with the truth. Second, these graphs purportedly show the price of "oil" from graph to graph, but the scales differ and when you try to line up the rises and falls you come away thinking Friedman is playing fast and loose with facts. On page 97 oil from 1995-2003 rises, falls a bit, then rises again. But on page 98 oil from 1998-2005 rises with no slump in price. On page 99 oil from 1986-2005 wiggles up and down with no clear trend until 2003 when it starts a stratospheric rise. On page 100 oil from 1980-2003 shows a dramatic drop in price until 1995 when it start a straight upward rise. Whoa! How can oil dance these different dances to different beats of the drum to satisfy Friedman's desire to show a nice inverse relationship with "freedom". The only freedom I see here is the freedom to invent facts to support an argument.

Stay away from this book. Stay away from Friedman. He takes himself far too seriously and he no longer practices responsible journalism, a kind of journalism that respects truth and which admits errors and honestly tries to dig into the truth to get at the real story.

One thing I dislike about the class of people who tell you what you need and what you should do and what you are, they sneer at their followers. Jim Jones had his followers drink Kool-Aid. Friedman wants to tell his followers that if they don't follow his jet set lifestyle, then they aren't fully human:

To go through life without being able to smell a flower, swim a river, pluck the apple off a tree, or behold a mountain valley in spring is to be less than fully alive. Yes, one supposes, we would find substitues, but nothing that could compare with the pristine bounty, beauty, colors, and complexity of nature, without which we are literally less human. (p. 142)

If you want to be a true devotee of "green energy" you need to jet set. Yes, that is the formula that Friedman has followed:

Over the past decade, I have traveled with Glenn to some of the world's biodiversity hot spots and other endangered regions where CI [Conservation International] is working -- from the Pantanal wetlands in southwestern Brazil to the Atlantic rain forest on Brazil's coast, from Guyana Shield forest wilderness in southern Venezuela to the Rio Tambopata macaw research station in the heart of the Peruvian jungle, from the exotic-sounding highland of Shangri-La in Chinese-controlled Tibet to the tropical forests of Sumatra and the coral-ringed islands off Bali, in Indonesia. For me, these trips have been master classes in biodiversity, as were my own travels tothe Masai Mara in Kenya and the Ngorongoro Crater in Tanzania and the vast Empty Quarter of the Saudi Arabian Desert and -- before I had kids -- a rappelling trip inside the salt domes of the Dead Sea. (pp. 145-6)

If we all bought tickets and did this trek, there would be no biodiversity left. We would choke the planet. But it is nice that Friedman has taken time from his travels to tell us how much carbon he has expended in "learning" the lesson that we should not waste carbon because it will overheat the planet. I put Friedman up there with hypocrites like Tim Flannery, author of The Weather Makers, who had his epiphany that we need to cut down on consumption and carbon emission while jetting over the Indian subcontinent and seeing all the twinkling lights from the tens of thousands of Indian villages. He took this "insight" on the road and jetted around the world -- and wrote a book -- telling us all to not do as he does, but to do as he says: stop consuming, cut back, use less carbon. I'm always amazed how the rich and powerful love to lecture the little guy about "cleaninug up your act". The utter hypocrisy galls me. Friedman is a charter member of this group of elect.

Here's an example of his jet-set "green" revolution:
Once you've seen a tropical rain forest in Sumatra framed by lush green rice paddies and garlanded by trumpet flowers, which look just like their name -- pink flowers shaped like trumpets hanging down from every branch of a large bush -- you'll want to save it. Once you've seen the sun rise on the Masai Mara in Kenya and a parade of giraffes walking single file by your camp at dawn, as you shave in the mirror, you'll want to save it. Once you've tramped through the Amazonian rain forests of Peru, dodged by wild boar, and fed macaws from your shoulder at your breakfast table, you'll want to save it. (pp. 315-6)

This is nutty beyond belief. Currently there are maybe 40 million cultural "wanna be" tourists who tramp through museums, palaces, and churchs in Europe. Friedman is calling for 7 billion green "wanna be" tourists to tramp through the wild places. Nutty! First, what's the point of getting 50 mpg on your subcompact car if you are going to jet off to the far corners of the planet and burn more carbon in one trip than you expend a whole year living you disgraced "non-green" suburban life? Friedman is a fool. Sure, things have got to change, but I suggest the first thing to change is the hypocrisy of the elite telling the poor to "cut back" while they jet set around to shed tears over the eco destruction of the world spewing greenhouses gases on their grand tour. Nutty!

Here is another example of the idiocy that Friedman is selling. He reminds me of the hippies of Esalen selling their vision of laid back meditation as the "cure" for modern ills. Nice concept, but for the bottom half of the population struggling to put food on the table it was a slap in the face:

When your mind-set shifts to outgreening, said Dov Seidman, "you stop thinking about accumulating more than someone else and you start thinking about innovation." (p. 326)

First, most people I know are not into "accumulating more than others". They are into "accumulating enough to have a comfortable, secure life". It is the yuppies like Friedman who are big on accumulating more than others. And this philosophy he is pushing is just one more example of thumbing his nose at others to say "see, I'm one step ahead of you" and "if only you were as enlightened as me, then you could be as green as I am". Second, you will never have more than 1% or 2% of the population seriously into "innovation". It takes special skills and a certain level of wealth to have the leisure and resources to "invent". This paragraph, like a lot of the book, is just pure malarky.

Howlers & typos: Authors & publishers don't proof-read or fact-check books these days:

• Page 135: "...unprecedentedly heavy rains in Iowa caused the Cedar River to flood and overwhelm downtown Cedar Rapids, rising well above thirty feet over sea level -- far, far above whe anybody had ever seen or expected." Odd. Cedar Rapids is 810 feet above sea level according to Wikipedia.
  

Update 2009jan12: Here is an excellent -- and viciously critical -- review of Friedman's writing by Matt Taibbi. Here's a tidbit where he talks about the previous book The World is Flat:

The book's genesis is conversation Friedman has with Nandan Nilekani, the CEO of Infosys. Nilekani causally mutters to Friedman: "Tom, the playing field is being leveled." To you and me, an innocent throwaway phrase level the playing field being, after all, one of the most oft-repeated stock ideas in the history of human interaction. Not to Friedman. Ten minutes after his talk with Nilekani, he is pitching a tent in his company van on the road back from the Infosys campus in Bangalore:

As I left the Infosys campus that evening along the road back to Bangalore, I kept chewing on that phrase: "The playing field is being leveled."

What Nandan is saying, I thought, is that the playing field is being flattened... Flattened? Flattened? My God, he's telling me the world is flat!

This is like three pages into the book, and already the premise is totally fucked. Nilekani said level, not flat. The two concepts are completely different. Level is a qualitative idea that implies equality and competitive balance; flat is a physical, geographic concept that Friedman, remember, is openly contrasting ironically, as it were with Columbus's discovery that the world is round.

Except for one thing. The significance of Columbus's discovery was that on a round earth, humanity is more interconnected than on a flat one. On a round earth, the two most distant points are closer together than they are on a flat earth. But Friedman is going to spend the next 470 pages turning the "flat world" into a metaphor for global interconnectedness. Furthermore, he is specifically going to use the word round to describe the old, geographically isolated, unconnected world.