Saturday, November 29, 2014

Why the Great Recession was Unnecessary

I believe the Great Recession of 2007-2009 was unnecessary, even given the bursting of the housing bubble. I said so at the time. Almost everybody is a critic of the government's policy during that recession, but most of the criticisms fit into standard ideological frameworks. As a result economists, politicians and bureaucrats, business people and ordinary people learned little useful from the experience. They simply had their own previous ideas confirmed.

I am not calling the recession unnecessary simply because I believe policies leading up to 2007 could have prevented it, though they could have. I believe that government policies enacted in the Clinton administration, notably deregulation of banking, combined with actions or inaction by the Bush administration and the Federal Reserve did lead to the housing bubble, and then to the crash of the economy. But in this essay I will explain why the collapse of the housing bubble did not need to lead to the Great Recession.

This is largely a critique of Capitalism, the real world capitalism of 2007. This is about how business people who control capital act, individually and together. As far as government policy goes, it is about how policy should have been used to prevent capitalists from harming themselves and practically everyone else in the nation. Like mental patients, capitalists sometimes need external restraint, for their own good.

First a bit of a test, a warm up exercise for atrophied minds: in which nation did the economy grow fastest between 1922 and 1932, communist Russia or capitalist America?

Before answering, keep in mind that Americans are constantly trained to believe that capitalism always trumps communism, and that America is exceptional even for a capitalist nation. Also think about the particular years chosen.

Between 1922 and 1932 the American economy shrank, as 1932 was the worst year of the Great Depression. The Russian economy, in contrast, grew quite a bit in that period if only because its economy hit bottom in 1922 or so, in the aftermath of its civil war. Among the world's nations, Russia was likely the least affected by the stock market crash of 1929 and ensuing economic mayhem. That should not be surprising, since Russia did not have a stock market, but a (brutal) command economy hell bent on catching up with capitalist industrialization.

What does that have to do with 2008? Only a pointer: the capitalist boom bust cycle is what you get when no one regulates it, or it if is poorly regulated. By picking different points in a boom bust cycle, you can get different growth (or shrinkage) rates for an economy. By picking particular nations and time intervals you can make capitalism or socialism or command economies like fascism and communism look good, or not. In other words, as they say about investing in mutual funds, past performance is not a guarantee of future performance. Economies are complex. There is no guaranteed winning policy, except perhaps being pragmatic, which is no policy whatsoever.

While the housing market was way overpriced in 2006, driven by foolish lending policies and foolish home buyers, the overall economy was not. The stock market was not. True, the building of new homes had become a driver of the economy, but it was hardly the only industry going on in the United States.

So what could have been done different in 2007 and 2008, aside from using taxpayer money to prop up banks, and in 2009, rather than using taxpayer money to fund greatly expanded welfare and "shovel ready projects?"

I just happened to be watching a representative section of the capitalist class in that period. I call what happened the "capitalist firing squad." In case you don't know the joke, a "leftist firing squad" is a group of people who form a circle to, presumably, execute a capitalist, and instead end up shooting each other. This speaks to the tendency of leftists to focus on being the new Lenin, using their energies to discredit rivals rather than uniting to win over the nation to socialism (or communism, or environmentalism, or whatever).

The capitalist firing squad was literally firing people, laying off round after round of workers. In the house building industry this was necessary. There was no point to building new houses; no one wanted them. And the secondary effects of that were hard to avoid too: much lower demand for plywood, 2x4s, appliances, and etc. That alone would have slowe the growth rate of the economy. But the economy could have kepts growing around the new housing market.

At previous times in history one sector or another took a hit without taking the whole economy down with it.Why didn't it in 2008? The firing squad was the crucial difference.

Could we just admit that for the most part our capitalist class in America is a bunch of degenerates? Of economic cowards? Instead of figuring out how to sell more of their stuff, perhaps even taking advantage of the end of the housing frenzy, pretty much every CEO, in line with the fears of the major shareholders, decided to fire employees even before demand actually shrank. Each rationalized it the same way: they believed demand would drop, and wanted to get ahead of the curve to keep up profitability.

Worse still, each of the CEOs saw a chance to squeeze the remaining workers. They made the remaining workers work harder. This included middle management in particular. 2008 to 2009 was a reign of terror for middle management. Had they been working 50 hour weeks? 70 hour weeks were the new norm. And management is not paid by the hour. Often managers found themselves spending a considerable portion of their week doing jobs their subordinates used to do, before they were laid. Off. And middle management was supposed to be happy about this; "Thank you, master, for not laying me off."

The macroeconomic effects of one bad CEO's decisions are usually minimal. But when the 3000 or so CEOs of the nation's largest companies all did the same stupid thing, the macroeconomic effects multiplied. A small hole in the economy, new house construction, with the attendant banking fiasco, turned into a giant vortice of unemployment. With 5% of the workers laid off, the same craven CEO's decided they had to lay off another 5%. Lemmings would make better CEOs.

Government policy, which was to spend vast sums of taxpayer money and borrow vast sums of money, saved our collective ass. Despite CEO behavior the economy ran on food stamps, unemployment checks, Social Security and Medicare, and infrastructure investment. Eventually CEOs regained confidence, stopped laying off people, and even started rehiring as burnt-our middle managers and workers died of heart attacks, strokes, or just melted into unusable jelly.

Free market ideologues and tax-and-spend liberals are both in denial of what happened and why. The Free Market guys say private enterprise saved the day, ignoring the beneficial effects of what little New Deal and Great Society legislation had not been dismantled. The Liberals deny that there was any downside to a vast expansion of the national debt, and act like the layoffs were natural, not a result of bad decision making.

On the whole, I would say we were lucky the Great Recession did not turn into another Great Depression, or worse. And if we do not make some fundamental reforms, the next time we may not be so lucky. In particular, the next time around the world's investors may not chose to fund our national debt.

CEO's do fine when times are good. A few do fine when times are bad. But at certain times they clearly need supervision. Unfortunately their usual supervisors, stockholders, are often as even more inclined to making bad, panicky decisions than CEOs.

There are two obvious sources for supervision. It should be discrete supervision, exercised only in times when CEOs have a collectively bad history of decision making. But it should be in place to be used the next time it would help. The two sources of supervision are the government or the employees of the businesses. I am hesitant to go with an NRA type of supervision, which seems too much like the fascist program for supervising industry. I'd prefer the workers to have some supervisory power, perhaps by being guaranteed board seats on all publicly listed (in stock markets) corporations.

Given the known cyclical nature of free market capitalism, I would make the corporations pay the real long term costs of labor. If an industry or a particular corporation goes into decline, I don't see layoffs as a problem. Workers can be rehired by other corporations and industries. But if a decline in demand for labor is just cyclical, then corporations should just keep cash on hand to keep workers employed until the down cycle ends. That in itself would minimize recessions and should prevent depressions.

Friday, November 14, 2014

Attention to Detail

A lot of things sound good as generalizations, but when you start applying them to the real world, it gets complicated.

Consider paying attention to detail. Being a detail-oriented person is usually a plus when applying for a job. When there are flaws in products we buy, or when a service is inadequate, we fault a lack of attention to detail. We don't like sloppy. Most of us try to not be sloppy. The point is most of us have to try to pay attention to detail. In repetitive jobs that can become mind-numbing.

There are people who just naturally pay a lot of attention to detail. But if they go too far in that direction, we label them as obsessive-compulsive. These people may be good or not so good at doing things, depending on exactly what kinds of things need that level of detail.

Consider the practice of retail stores known as "fronting." If you are one of the rare citizens who has never worked retail, fronting is the process of lining up the products, cans or boxes or whatever, in neat rows at the front of the shelf. Apparently this encourages people to buy things. When an item, or store aisle, is not fronted, it gives a store a run-down look. So clerks spend considerable time fronting the products, in addition to restocking.

For fronting purposes there are three types of employees: messy employees who front badly (and often nevertheless slowly), good employees who front well and reasonably rapidly, and employees who pay too much attention to detail.

Perfect fronting is the natural goal of those obsessing on details. Have the items been lined up to within a millimeter of perfection? Well, why not shoot for a tenth of a millimeter? Why not a hundredth? Are they perfect? Why not start the whole process all over again, just to be sure? In the meantime, all the other things needing to be done in a store, including fronting all the other shelves, don't get done.

At some point in the real world you have to decide on an acceptable error rate. Otherwise everything takes too long to be practical. Acceptable error rates vary greatly across and within industries, and even within items. No one wants an obvious scratch on the exterior paint or glass of a new car. But no one cares if the muffler got scratched when it was installed.

Most kids get this intuitively when struggling with parental expectations for school grades. Spend all your time studying and you might get an A+, but by dropping down to an A- or a B or C, you can have time for other things.

Failure to pay attention to detail can have dire consequences. In the rush to provide medical care, failure to review records can lead to tragic consequences. In cars we know that failure to get the details right on ignition keys, brakes and airbag systems can lead to deaths. On highways we are highly dependent on everyone else paying attention, at least enough to stay within the lines when hurling past us at combined speeds of 120 mph and more.

Business experience, of workers, managers, and owners, is largely a matter of learning how much attention to detail need to be paid to different aspects of the business.

There is another thing to worry about, even when paying attention to detail is in the helpful to harmless range. It should not impinge too much on attention to strategy, priorities, and the bigger questions of life. The obsessive-compulsive computer programmer may be working on a project, or an aspect of a project, that is useless. The big picture is important. The resources of the world are limited.

Also, while you are just following orders, trying to pay enough attention to detail and yet work fast enough to keep your job, someone else is plotting to grab your share of the pie, if they have not already.

In our highly class stratified society workers are told to pay attention to detail and let the bosses (political and economic) worry about the big picture.That is why we are in such trouble today. During the heyday of American imperialism (roughly 1940 to 1970) most workers who did what they were told for 8 hours a day, five days a week, had enough money to enjoy the rest of their time. That is no longer true. So after perhaps a hundred years of struggle before 1940, and 30 years of prosperity, we now live in an era of precarious existence.

In this era the circus never stops, so the owners don't even have to throw more than crumbs of bread to the working class. The intellectual worker has become an increasingly rare thing in the 21st century. Enough propaganda is thrown into the Internet &TV entertainment mix to keep most workers from seeing the big picture.

Details can add up to big pictures. Charles Darwin was a detail-oriented guy, and the details pointed him to the fact that life is ancient and evolved over time. But in America apparently half the population wants to engage in wishful thinking, and ignores the vast store of details that prove evolution by natural selection is the right big picture to work within.

So do pay attention to detail, to the degree appropriate to the task at hand. But also use some free time to make sure you are not living your life based on false big-picture ideas.

Monday, November 10, 2014

Gone Girl Politics and Politicians

Last night I did my usual volunteer stint at the community-operated Arena Theater and then watched Gone Girl, starring Ben Affleck and Rosamund Pike. Because my wife Jan had read the novel by Gillian Flynn, I knew the gist, which only detracted a little from empathizing alternately with the main characters, Nick Dunne and Amazing Amy.

Naturally it reminded me of the current state of political affairs in the United States. Nick Dunne could represent the Democratic Party, and Amazing Amy could represent the Republican Party. Or maybe a better fit is Nick Dunne represents the Republican Party, and Amy represents the Democratic Party.

The citizens and voters of the United States are represented by the people of the smallish town in Missouri where the happy married couple has moved after losing their respective high-powered writing jobs in New York City. At times they sympathize with Nick, when they think his wife Amy was kidnapped. At times they hate Nick, when they think he killed Amy.

This is a story of multiple levels of deception. That is pretty much politics in a nutshell. Many Democrats believe their party has been hijacked. They voted for Nick (not Hillary), peace and prosperity in 2006, got a Democratic Party controlled Congress starting in 2007 and had full control of Congress and the Executive Branch after Barack Obama won the election of 2008. But instead of peace and prosperity, by then the nation was in the Great Recession, and Obama kept finding reasons to keep killing people in the Middle East and even extended the war to much of Africa.

Obama and Democratic politicians may have made a vow of marriage to Democratic voters, but marriage is not so easy. With the Pentagon waving its tits about, no wonder the boys (and the girls too, Pelosi and Feinstein et al) got distracted. No money! Just run up the credit cards and hope that sooner or later something will come up to keep the nation's head above water. And if a few million, well tens of millions, of Americans lose their jobs and life savings before things get straightened out, that is not because Nick was not trying to be a good husband.

Amy could also represent the Democrats, waving her Ivy League degrees around and refusing to get pregnant, but she is from a rich, cunning family that reminds me of the Bush clan. She was all sex and laughter and wit when her money was mostly inherited, but she turns vicious when she has little to do but play MacHousewife in a MacMansion in the kind of boring small city that breeds your typical Republican voter.

Amy and the Republican leaders, are all about deception. Many Republicans believe their party has been hijacked. The Tea Party types feel the Grand Old Party was hijacked by crony capitalists (it was formed in the late 1850s by a coalition that included crony capitalists). The mainstream Republicans feel the wackos in the Tea Party cause them to lose elections. Worse, if elected, Tea Party Republicans won't vote to spend the money so important to a wide variety of business men who have learned that the government market is much more profitable than the ruinous competition one sometimes encounters in the free market. In American politics everyone liked building roads until the Tea Party came along.

And who needs Al-Qaeda to cripple the economy by blowing up a bridge (in America) or two when Amazing Amy will just deny funds for its repair, until it eventually collapses?

You can't trust any politician. Or the media, or the police. Yet you have to some trust people. That is called society. Choosing who to trust, or how much to trust, is the most important skill you can develop.

"Therefore since the world has still,
Much good, but much less good than ill ...
I'd face it as a wise man would,
And train for ill and not for good"
— A. E. Housman, A Shropshire Lad

Saturday, November 1, 2014

House of Cards, 2014 Deal

Deadlock has characterized the Government of the United States since the midterm elections of 2010. Not much got done during 2009 and 2010, either, despite Democratic Party control of the Presidency and both houses of Congress. In 2009 the Great Recession was in full swing. The national deficit was unprecedented: tax receipts were low and payments for social services hit record levels.

Now the economy is back to something approaching normal, and so is politics. Armies of people who thought they were getting rich in the real estate market, and then lost their life savings, are no longer marching around with pitchforks threatening to tar and feather, or at least un-elect, incumbent politicians.

No one noticed the resilience of the system that was set up as the result of the compromise between free-market capitalism and socialism that is still known as the New Deal. The Federal Reserve probably should have done more to prevent the crisis, but in the end muddled through. Congress should have done more, but in the end muddled through. Businesses mostly muddled through. Workers got the shaft as usual, but are a tough lot and mostly muddled through.

Deadlock does not mean there is no policy. It means federal policy will remain the same as it has been since the Democratic Party, led by Bill Clinton, tried to destroy the welfare state, figuring it was no longer needed to elect Democrats to office. What choice did the welfare bums and working poor have, voting Republican?

For 2015 and 2016 we can expect business as usual. Obscene amounts of money will be spent on the War on Terror. A new federal Highway/Transportation deal will be made, because both parties get paid off by the contracting companies. Food stamps won't go away, but as employment rises less people will get them. The Affordable Care Act won't go away, because the Insurance Companies are making more money than ever, as are the doctors and hospital administrators.

The only real difference is Fracking. Complain about water pollution if you will, but Fracking has given the U.S. post-imperialist economy a second wind. The first effect of fracking was a big increase in incomes in the gas and oil states. That helped local economies and even the federal deficit. Now, after a few years of ramping production, everyone is benefiting from lower gasoline and natural gas prices.

Meanwhile, Chinese workers got big raises every year between 2008 and 2104, so now the cost of labor is not that big of an advantage for China any more. Their advantage is that almost all of the factories were moved to China in the meantime. We are not going to see many factories move back to the U.S., although new ones are already opening here to take advantage of the proximity to oil production and a huge consumer base.

After the election the Keystone Pipeline will be approved. Environmentalists will be mad, but soon they won't have Barack Obama to kick around any more. And why, really, was the Keystone different than any other pipelines? Why not demand existing pipelines be torn up, or people just move so they can huddle around North Dakota for warmth?

Immigration policy won't change much either. People will continue to come here illegally. No matter how much overpopulation hurts the environment, the Democrats will turn a blind eye to illegal immigration because they need the votes. No matter how much illegal immigration helps the rich (by creating cheap labor and increasing overall demand) the Republicans will remain anti-immigration because that is one way they keep American workers' anger focused on ethnic issues, rather than on the exploitive economic system.

And war will go on. For the time being Ultraconservative Islam seems to be willing to play the enemy, despite the consequences. But if necessary new enemies can always be found. Turning taxes into the satisfying feeling of being the biggest bully in the world is just too satisfying to too many people for us to ever Hope that situation will Change.

People talk about the Internet of Things. They should talk about the Internet of Lies. All lying, all th time, the art of politics in America.