November 27, 2008

On hiatus

Time for vacation.

Posted by scott at 08:06 AM

November 26, 2008

The Free Market

A lot of contemporary political wrangling revolves around whether the free market should be unfettered and allowed to determine what lives and dies in the economy. The alternative is typically posed as "regulation," whether in the extreme form of soviet-style state control of industry, Japanese-style industry-government cooperation, or the European style of state-supported industries that are occasionally nationalized. The argument centers around the power of the invisible hand of mass action to make better choices than government bureaucrats, who are inevitably portrayed as less competent.

The power of the free market methodology in turn relies not on the supposed omniscience or wisdom of the individuals participating in the marketplace, but rather in the notion that masses of individuals, each acting rationally in their own best interest will add up to the whole acting in the best interest of the greater society that the market is embedded in. There turn out to be two significant problems with this whole idea. The second issue is that there is no proof of the belief that the mass of individual actions does actually add up to the best interest of the society as a whole. This is a concept that needs to be taken on faith, if it is taken at all.

More interesting, to me, and more important, is that work in the new field of neuroeconomics, and its companion field, behavioral economics, is undermining the other underlying premise of free market capitalism. This new breed of economists is demonstrating, definitively in many cases, that individuals almost never act rationally in their own best interest. A very simple case in point is that for almost everyone, now is a good time to buy stocks. It has been shown time and again that over the long term, dollar-cost averaging (buying stocks low and high, on a timed program) provides results better than all but the very best stock picker, and that the typical stock picker (i.e., 95%+) performs worse than random chance by trying to time market ups and downs. Unless you are 60+ and planning to retire in five years to ten years, you should be staying in the market, but that's not what's happening.

Another interesting result from this new field are some studies recently reported in the NY Times regarding performance when bonuses were at risk. Contrary to conventional wisdom, performance of cognitive (that is, non-mechanical) tasks degraded with higher levels of bonus pay, and were at their worst when the bonus pay was at around 30% of annual compensation - the highest level tested in the study.

These two things, taken together, put a significant stick through the spokes of the free market wheel. Not only do market actors fail to act rationally, increasing their risk-based (bonus) compensation worsens performance. This explains an awful lot about Wall Street. In effect, the entire basis of the free market system is a myth, and as a society we need to do something about it. I'm not personally in favor of centralization and five-year plans, but I think it's pretty fair to say that risk-based compensation needs to be capped, and the behavior of actors in the free market needs to be regulated so that these irrational excursions are kept under control.

Posted by scott at 04:41 PM

November 25, 2008

Who Framed Rick Wagoner?

The City of Los Angeles - indeed, many American cities - once had an extensive surface rail system - the Pacific Electric Railway. Common lore holds that the Pacific Railway was destroyed by collusion amongst the oil, automobile and rubber interests, a story that was memorialized in part in Who Framed Roger Rabbit. As it happens, on the day that the railway shut down, there was a fire at one of the refineries in Long Beach. On that day, one of the men who ran the railway took some pictures, which he developed and made into slides, and those slides made it into one of the books of Americana published by Charles Phoenix. Curiously, when I introduced my wife, the artist Phoenix-Smith, to Charles, she was very taken by the art his slide collections represented, and got permission to make paintings from those works, and so hanging over my workspace at this particular moment are two paintings of the day the Pacific Electric Railway shut down, and it was truly a dark day.

I have always been a fan of rail, and these days I have the luxury of living in one of Northern NJ's train towns. New Jersey has an extensive system of commuter railroads running into New York City, and I have one of those railways literally in my back yard. I can leave my kitchen and be on the platform in just three minutes. And, on those occasions when I do drive, I have a hybrid Toyota Camry to do my driving in, and I take great joy in seeing just how few gallons I can use. I do indeed love visiting the gas station so infrequently that I forget where the fuel door release is.

So, you might think that I'm taking great joy at the spectacle of the modern descendants of the companies that drove the Pacific Electric Railway, the Key System in San Francisco, and other municipal railways out of business. After all, it has taken long enough for what went around to come back around.

And yet...and yet, maybe not so much. It's true that commuter rail is incredibly efficient at moving large numbers of people over moderate to large distances. Most of the systems that were destroyed, though, weren't commuter rail systems. They were trolleys, what we now call light rail, and in fact they were only as efficient as buses. Moreover, all it takes to change a bus route is a few signs and benches, some new schedules, maybe a new bus or two if the route is much longer. Trolley systems are great in downtowns where the geography is fairly fixed, such as tourist areas, but in areas where commerce, industry and residential zones ebb and flow, buses do in fact make a lot of sense. So, it may be that the old urban railways were on the way out anyway, and we don't need to invoke a conspiracy to explain what could have just been about efficiency, flexibility and cost-effectiveness.

Still, the Big 3 have done some awfully inane stuff. While other companies made it their business to figure out what people wanted and to make that, and to make it well and make it cheaply, the Big 3 decided that what they wanted to do was build big cars and trucks with big profit margins, and run lots of ads to convince the gullible that what they wanted was big cars and trucks that use lots of gasoline. I'm sure that the oil companies were very grateful, but apparently not grateful enough to rescue the car companies now that things have gotten tough.

Really, the question is, have they been bad enough to deserve to die. My answer is, well, probably. I think that the upper management, such as Rick Wagoner, GM's CEO, needs to be shown the door sooner rather than later. I think that if the US is going to buy GM for its $2 billion market capitalization - and we could probably buy it cheaper in bankruptcy court - we need to throw the bums out. Letting the companies die might be emotionally satisfying, and it might satisfy a few rabid right-wingers who think that the free market demands it, but it would throw an awful lot of havoc into an already-fragile economy.

After all, look what happened when Henry Paulson gave in to this "let 'em fail" impulse. Lehman collapsed and the waves swamped AIG, WAMU, and how many others? GM was the largest industrial company in the world at one point, and we already know that its supplier network is fragile. If GM goes, companies collapse downstream, dealers collapse upstream, pension and health benefits collapse and the Pension Benefit Guarantee Corporation - which is us, the taxpayers - has to clean up billions of dollars of mess anyway. We just need to be sensible about it, admit the economy can't afford another Lehman, and take the car companies over.

Goodbye, Mr. Wagoner.

Posted by scott at 09:11 PM

November 24, 2008

Oil and Gas

There's something almost primally satisfying about the merry whistle of steam heat coming up, a feel of moist heat pervading the space. It's sort of like the sauna, only not nearly as hot and a lot more whistly. It's pleasant to come home and say to myself, "Hey, I can afford the $3 to run the heat to warm the house up this evening," and the resulting heat is very pleasant.

See, the thing about living in the Northeast is that it gets cold. NJ is fairly mild by comparison to places like Vermont or Maine, but it's getting down in the 20s this week, and the coldest nights last year were in the teens. So, to one degree or another, you have to have heat, and the computers in the study don't exactly throw off enough heat to warm the house. Now, one of the nice things about living in a multifamily dwelling is that you can mooch heat off the neighbors, but if everyone does that, everyone freezes. So, even if you can get away with not running the heat some of the time, you have to give in and run it occasionally.

Even so, I run the heat as little as I can, as we heat with good old-fashioned fuel oil here in this house, and not only is it not particularly cheap, there's a tendency for it to arrive in truckloads in scary quantities with frightening prices tags. Still, I'm lucky - I didn't prepay an oil contract this past summer, when crude oil was $143 a barrel, so with any reasonable luck I'll be paying much lower prices as the winter wears on. However, fuel oil demand is somewhat inelastic - it doesn't change much with price, because it's a bit of a must-have - and my supplier may well be locked into high-price contracts, bought when it looked like the price would go nowhere but up.

And, truth be told, in the long term, the price of oil will do nothing but go up. We've used up all of the cheap oil, starting in the days when oil was just lying on top of the ground in Pennsylvania (why do you think the motor oil brand is Penn?) and now we're working on the moderately hard to get oil. It's deeper, spread around further, under the North Pole(!) and of course in the wilderness in Alaska. In Canada, they're mining the oil sands, where they basically have to boil oil out of the sand in order to get something usable, and in Colorado they want to tear apart mountains that are made of oil shale, which is porous rocks with oil in the pores. This is not cheap, people.

It gets worse. Right now, demand is dropping because people have finally noticed that we're in a recession - which really started around the beginning of the year - and so the price of oil is headed down. This is nice in the short term - gas in NJ is the cheapest in the country and I just saw $1.799 on a sign - but we'll have to pay for it in the long term if we want to keep using oil. If we need the oil to lubricate our economy, we need to start developing those expensive reserves now, but the problem is that it costs about $70 a barrel to do so. With oil under $50 a barrel, nobody is going to do all of that expensive work. That means that when the recession end and demand comes back, the price is going to shoot up like a skyrocket.

Aside from the problems that will cause for people on a personal basis, that kind of rise in energy prices - since oil substitutes like natural gas will rise along with oil - is going to put a big crimp in recovery. Just as people start feeling a little flush, get a little confident in the economy, here come more record-breaking oil industry profits, gasoline at $5, $6, $10 a gallon, food prices shooting up again. Right now, we have so much structural damage that the oil price spike over the summer just kind of tipped things over the edge. In a year or two, during a modest recovery, a shot of that same medicine could be enough to stop the recovery dead.

Is there a cure? Well, yes and no. Oil prices are going to go up even if we magically make the US independent of oil, because the rest of the world is still highly dependent on oil, and China and India are industrializing and building consumer economies that are using more gasoline. However, we can certainly make it either worse or better with the decisions we make over the next 6-12 months, and I certainly hope that our new President and Congress make the right decisions. We need more sources of energy and we need them soon. As for me, I hope that by the time oil prices head back up, I'm living someplace where I can put in something a little more modern than oil.

Posted by scott at 08:07 PM

November 21, 2008


I recently moved back to the East Coast from California, and for the first year or so I saw the world with a curious sort of double vision, as my childhood memories were a sort of layer over the world I was seeing as an adult. As a child, I took a lot for granted, so seeing the same thing at the same time with adult eyes and my eyes as a child created an odd sort of perspective in which I not only saw things, but really began to think about them in a different way. The thoughts were not just different from those of the child, but also different from the way I had thought about the world in California. One of the things I started to see here in the Northeast was that favorite of wonks everywhere, infrastructure.

Infrastructure refers to all of those made things that make our world possible - not just the visible like roads and bridges and buildings, but the unnoticed like power lines and sign posts, and the hidden like buried water lines and sewer pipes. In the Northeast, much of the infrastructure was built around 100 years ago, and it shows its age. Also, by contrast with California, where the car is paramount, there is a relatively high density of public transit - bus and rail - even outside of New York City proper, as well as the enormous public transit system in the city. In part, these transit systems are made possible by the population density, but it also works the other way - the transit systems make a higher population density feasible here. In fact, even with the high density and transit, the area I live in, in Northern NJ, does not feel dense at all. It isn't until you pay attention to the housing infrastructure that you realize just how many people live around here.

One of the things about infrastructure is that if you look at it with the long perspective, the perspective of history, you can begin to see that we humans have been building stuff for a long time. If you look at it with the perspective of biology, especially the biology of social animals, you think, gee, that's nothing special. After all, termites build cities, and bees build hives and so on. On the other hand, bower birds build nests to attract mates.

And I find that an interesting thoughts. We tend to focus on infrastructure because of its social utility, but if building cities were all about social utility, they would be uniform, drab, and dare I say it, socialist. They would be the dreaded socialist worker housing - a long-gone trend in architecture, thankfully. Instead, if you look at the buildings from the heyday of the American skyscraper - the Empire State Building and the Chrysler Building - they are ornamental, playful displays of power and capability. Each city, when it builds a new World's Tallest Building, tries to come up with something showy - something with a personality.

In a sense, then, infrastructure can be looked at not as a social utility, but as a societal display - a shared work of art, if you will. If you look at the people who build buildings - not the promoters who finance them, or the architects that design them, but the people who actually make them, with their own hands, what are they thinking? Is it "just a job," or, as seems likely to my admittedly biased self, are they not proud of their work. Do they point to the building with their children and say, "I built that." I am sure that they do.

And really, that's something that's being missed in our post-industrial service economy. There are people who build, people who make. They don't build things and make things because they're not competent to do something else. They make things - goods and infrastructure because that's who they are. They are people who build things. When we restructure our economy so that we don't build and don't make, we aren't just depriving Americans of jobs, we are depriving them of the way that they are hard-wired to be, to actualize themselves. People are different. Not everyone is an artist or a musician - some people are, most aren't. Some people are makers, and when we talk about industries and bailouts, we need to realize that the best way to have a functioning and diverse society is to make space in it for everyone, even (and especially) those who make things.

Posted by scott at 09:52 PM

November 20, 2008


Wow, it's freezing out - literally. Last Saturday was 70 degrees, now we've got freeze warnings and a few snowflakes drifted by this morning. Global warming sure has our normal weather patterns on the run. One of the most important tasks for our society in the years ahead is to get a handle on that we're doing to heat the climate up. If we don't it's going to just get warmer, and history teaches us that when the ecology changes, species die out.

Now, I'm not implying that humans are likely to die out as a result of global warming. In fact, I think it's pretty darn unlikely. What I do think is going to happen is that people are going to start moving around more. It may be called chasing job opportunities, the country going to the city, or whatever, but by and large there's going to be a population shift from the warmer climes northward. It will get harder to grow traditional foods; crops will fail, pollinators (such as bees) which are already stressed will get even worse and may collapse, and people will adapt by moving out of the old spot and into a new one. We're already seeing a significant species shift in a food plant here in the Northeast. The sugar maple, long a staple of Vermont industry, is dying out in Vermont, and production is moving north to Canada.

The thing about migration is that on a long-term basis, no "civilized" society on record has ever successfully resisted a major migration. ("Civilized" here means that they left books and records documenting the migration(s).) The fall of the western Roman Empire didn't come about because an organized national or imperial enemy fought a military campaign and defeated Rome's legions. No, what happened was that people moved around the Asian steppes, and the losers were pushed into Europe with nowhere to go except into Roman territory, so as a result the Huns, Vandals and Goths brought a mighty empire down. And these were the losers, but it may be that they had the strength of desperation.

Now, there is one society that has some sort of record of success in dealing with incoming migrations. That is the Chinese society, which dealt with various waves of invaders by assimilating them. You could argue that they were unsuccessful in dealing with the various Europeans in the 19th century, but the Europeans weren't migratory - they were military adventurers imposing temporary outside rule. There are definitely some interesting lessons in the Chinese example for societies that are looking how to deal with incoming migrations and still maintain social cohesion, but that's not really what I'm talking about today.

Instead, it's important to consider what migration means. It doesn't just mean immigration in the conventional sense, in which mostly poor people slip across a border and try to fit in. The sort of migrations that global warming will be causing are going to include some significant clashes, simply because leaders aren't going to sit quietly while their population leaves (or starves). It's not that likely that the United States will invade Canada - Canadians are too nice, they'll just take us all in. However, the most fertile parts of China are mostly in the south of the country, and as those become more prone to drought, and as Siberia becomes more temperate, it's likely that the Chinese government of 50 to 100 years from now is going to be very interested in what is now very empty territory, and China is going to be one of the most powerful countries in the world.

Likewise with India, except that they have a very forbidding northern border. If I were to characterize the military that would make those two countries most secure and successful in the second half of the 21st century, I would expect China to be the predominant land power, and for India, in a fit of irony, to rule the sea.

Posted by scott at 09:44 PM