Results tagged “money” from Eccentric Eclectica

I just finished rereading A Theory of Justice by John Rawls for a philosophy reading group. One of the themes I noticed is the attempt to deal with contingency in politics.

Rawls acknowledges that everyone approaches political decisions from their own point of view, with unique biases and ideas. The original position is designed to overcome these biases by acknowledging them and then rationally agreeing to make decisions while ignoring individual personal biases. For Rawls it is possible for people to use reason to overcome their prejudices. Once those prejudices are slaked then the real work of political justice can begin by the four-stage process of building just institutions based on the two principles of justice agreed upon behind the veil of ignorance.

A few days ago James Kwak at the Baseline Scenario wrote a post on whether hard working people deserve to make more money. Kwak acknowledges that contingency is as important to financial success as hard work. Sometimes people just get lucky and get very rich as a result. Is Bill Gates really work so much harder than any other software CEO that he deserves a financial result that is orders of magnitude greater than other CEOs?

My recent trawls around the internet have brought up some interesting finds that seem to cross ideological lines. A week ago David Brooks fired off a column linking the recent recession to a decline in America’s financial values. Brooks decries the growth of debt and consumption as a falling away from our previous virtues of hard work and thrift. I put on my very skeptical hat whenever I hear someone talking about decline from a previous golden age, but I think that Brooks may have something.

Our current cultural politics are organized by the obsolete culture war, which has put secular liberals on one side and religious conservatives on the other. But the slide in economic morality afflicted Red and Blue America equally.

If there is to be a movement to restore economic values, it will have to cut across the current taxonomies. Its goal will be to make the U.S. again a producer economy, not a consumer economy. It will champion a return to financial self-restraint, large and small.

It will have to take on what you might call the lobbyist ethos — the righteous conviction held by everybody from AARP to the agribusinesses that their groups are entitled to every possible appropriation, regardless of the larger public cost. It will have to take on the self-indulgent popular demand for low taxes and high spending.

A crusade for economic self-restraint would have to rearrange the current alliances and embrace policies like energy taxes and spending cuts that are now deemed politically impossible. But this sort of moral revival is what the country actually needs.

At the same time I’ve been following some of the depressing links David Pollard has been posting on environmental decline. Pollard and the people he links to approach the problem from a liberal perspective that is different from Brooks. Sharon Astyck starts off with a piece calling for us to dream up a new life for the future.

And other analyses are equally problematic.  It does not take a rocket scientist to figure out that radical lifestyle changes are coming, whether we like them or not - whether they come from adapting to a deeply damaged climate or from addressing the crisis, whether they come from adapting to depletion or from enduring it, our lifestyle will not be the same for very long.   And the danger of telling people that they can have all the things they want - a future for their children and an affluent present now - is that when they realize (and they are realizing right now) that this is not true, that there’s not enough money, or time or alternative energy to provide it, people will be very, very angry indeed.  It is not pleasant to tell people hard truths.  It is less pleasant to deal with people facing hard truths who believe they have been lied to.  I believe we are seeing the early stages of the political unrest that will accompany this sense of being lied to, of having lost more than is being accounted for on both the left or the right, and I also believe quite strongly that unless a true and comprehensible story is offered, false ones will be taken up, and used as bludgeons….

It is a counter-intuitive, and thus difficult thought,  that after a certain critical mass of affluence, better comes from less, not more.  A better future for our children comes not from greater affluence, but less, and the preservation of resources for the future.  A better life for us in the present involves fewer hours of work, and thus, more freedom - and fewer possessions and less affluence.

Astyck and Brooks are saying the same thing: we need to curb our baser impulses and live a thriftier life. One of them sees the problem as impending environmental doom the other as an economic and moral dissolution. Both of them reach the same conclusion that we need to rein in the profligate way of life we’ve become accustomed to during the past 40 years, especially in America. If there is any common ground between conservatives and liberals I think it will be built on this ground.

Back in March there was a brief media flurry over a libertarian rant by Rick Santelli. I was struck at the time by the persistently moral language used by the right to describe economics and capitalism. Making money has become a moral obligation for the right and a reflection of the moral worth of a person. If you’re poor then you are a moral failure, if you are rich then you are an angel.

The language of morality pervades the discussion of economics and may be a cause of so much of the regular debate about economic policies that occurs. Economic decisions, for all the pontificating about rational man, are always moral decisions as much as they are rational decisions.

I recently heard an acquaintance talking about the difficulty of knowing whether the recent economic stimulus is working. Not even the putative experts can agree about whether it is working. A scientific controversy, like global warming or dark matter, is much easier to adjudicate because the moral dimension is reduced or non-existent.

At the New Republic Jonathan Chait reviewed two books on Ayn Rand and found her writings to be a major source for the moralistic tone of right-wing capitalists.

In these disparate comments we can see the outlines of a coherent view of society. It expresses its opposition to redistribution not in practical terms—that taking from the rich harms the economy—but in moral absolutes, that taking from the rich is wrong. It likewise glorifies selfishness as a virtue. It denies any basis, other than raw force, for using government to reduce economic inequality. It holds people completely responsible for their own success or failure, and thus concludes that when government helps the disadvantaged, it consequently punishes virtue and rewards sloth. And it indulges the hopeful prospect that the rich will revolt against their ill treatment by going on strike, simultaneously punishing the inferiors who have exploited them while teaching them the folly of their ways.

There is another way to describe this conservative idea. It is the ideology of Ayn Rand. Some, though not all, of the conservatives protesting against redistribution and conferring the highest moral prestige upon material success explicitly identify themselves as acolytes of Rand. (As Santelli later explained, “I know this may not sound very humanitarian, but at the end of the day I’m an Ayn Rand-er.”) Rand is everywhere in this right-wing mood. Her novels are enjoying a huge boost in sales. Popular conservative talk show hosts such as Rush Limbaugh and Glenn Beck have touted her vision as a prophetic analysis of the present crisis…..

Rand’s most enduring accomplishment was to infuse laissez-faire economics with the sort of moralistic passion that had once been found only on the left. Prior to Rand’s time, two theories undergirded economic conservatism. The first was Social Darwinism, the notion that the advancement of the human race, like other natural species, relied on the propagation of successful traits from one generation to the next, and that the free market served as the equivalent of natural selection, in which government interference would retard progress. The second was neoclassical economics, which, in its most simplistic form, described the marketplace as a perfectly self-correcting
instrument. These two theories had in common a practical quality. They described a laissez-faire system that worked to the benefit of all, and warned that intervention would bring harmful consequences. But Rand, by contrast, argued for laissez-faire capitalism as an ethical system. She did believe that the rich pulled forward society for the benefit of one and all, but beyond that, she portrayed the act of taxing the rich to aid the poor as a moral offense.

Countless conservatives and libertarians have adopted this premise as an ideological foundation for the promotion of their own interests. They may believe the consequentialist arguments against redistribution—that Bill Clinton’s move to render the tax code slightly more progressive would induce economic calamity, or that George W. Bush’s making the tax code somewhat less progressive would usher in a boom; but the utter failure of those predictions to come to pass provoked no re-thinking whatever on the economic right. For it harbored a deeper belief in the immorality of redistribution, a righteous sense that the federal tax code and budget represent a form of organized looting aimed at society’s most virtuous—and this sense, which remains unshakeable, was owed in good measure to Ayn Rand.

I started a series on language and money last spring which I should return to. Once you start listening you realize that all of our talk about money is filled with moral judgments. My first post of the series talked about the difference between borrowing and leveraging, two terms for the same action but one used by the poor and the other by the rich. Some other terms that need pondering: angel investor, consume/invest, save/debt. Accounting also has a rich vocabulary for examination: asset, liability, appreciation, depreciation, balance sheet, double-entry, etc.

A few weeks ago I wrote a bit about the immense amount of talent that gets wasted or ignored in the world today. I claimed that the problem was based on a winner-take-all morality that has infused Western society. CEO salaries are just the most recent example. I think any argument that can be made against oversize CEO salaries can also be made against celebrity salaries in sports or entertainment.

A few days ago I came across this news item on employers squandering the talents of workers at the Work Foundation.

So far in this recession employers have been reluctant to lose the skills, talents and experience of their workforces. Yet at the same time they seem to be failing to make the most of them. Many people could be doing more, but are denied the chance to do so.

It’s nice to have some data and surveys to back up my intuition.

But it’s not just a matter of squandering talent. There’s also a matter of justice. Income disparities are not only a result of a winner-take-all society they also feedback into the system and cause further problems. Over the last 40 years the rich have gotten richer and have been on the hunt for a place to invest their money. They put it into the financial sector and that sector of the economy was overwhelmed and forced to chase after too many bad investments just to keep up. A point Helena Cobban makes at Just World News.

But the richest people and the hundreds of thousands somewhat less rich, could not invest the money themselves. They needed intermediaries, the financial sector. Overwhelmed with such an amount of funds, and short of good opportunities to invest the capital, as well as enticed by large fees attending each transaction, the financial sector became more and more reckless, basically throwing money at anyone who would take it. Eventually, as we know, the bubble exploded.

Recent research about stress and poverty reaffirms the link between opportunity and wasting talent. Money may not be the only way to intervene but it is important.

So what do we do about all this?

There are a lot of imbalances that we need to work out and they cover a lot of different scales.

1. At a world level we need to work on the distribution of resources between countries. America cannot be the consumer of last resort. Other countries need to take up the slack.
2. But replicating Western consumer culture will hurt as much as help. So at the national level we need to prioritize differently. Perhaps a consumption tax or a carbon tax will help America move forward.
3. At a community level we need to rethink work and corporations. The Work Foundation hints at this when it calls for greater flexibility for knowledge workers. Coworking could also help with this.
4. At an individual level we need to live humbly. For me this is easy, perhaps too easy, because of my family and my attitude. For now I’ll declare my solidarity with my friends over at Not An Employee

Sources for this post: Jack Vinson and Jon Husband

Listen to the way rich people and poor people describe the same thing and you will start to understand some of the divides in this country. The financial apocalypse has brought different ways of speaking to the forefront of our media and our attention.

There are many examples of linguistic difference between rich and poor. For example consider the way we use the words “leverage” and “borrow.” Let’s go the dictionary first to read the definitions.

Borrow: to take or obtain with the promise to return the same or an equivalent: Our neighbor borrowed my lawn mower.

Leverage: the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one’s investment, to control a much larger investment, or to reduce one’s own liability for any loss.

To find out how the word is used I looked up both using ProQuest Newstand. I limited the results to the Star Tribune newspaper over the last 30 days.

I got 9 results for leverage. Here are two examples related to money.

1. “In an interview Monday, Cooper said the demands of TARP began to conflict with the government’s own policies. For instance, the federal government was pressuring banks to use the funds as leverage to make more loans and to buy other banks. But such moves would reduce a bank’s tangible common equity, which has become a major focus of bank regulators and is considered a key measure of bank health.” — Star Tribune March 3, p. D1
2. “Investment banks “raced like lemmings over the cliff by abandoning the usual principles of sound risk management both by increasing their leverage dramatically after 2004 and abandoning diversification in pursuit of obsessive focus on high-profit securitizations.” — Star Tribune, March 17 p. D1

Notice the actors in these reports are banks, not people. Banks leverage, people don’t.

Next I looked up borrow in the same paper and same time frame. Again there were 9 results. Here are three money related examples.

1. “We help (customers) get on a plan for their financial success in order to buy (insurance and investments) through Thrivent in the future,” she said. Harvey’s top idea for employed folks without emergency savings: Open up a line of credit just in case. “It’s always easier to borrow money when you don’t need it. When you’re unemployed, there’s not a loan out there for you,” she said. — Star Tribune, March 15, pD3
2. Toby Madden, a regional economist with the Federal Reserve Bank in Minneapolis, said the seeds of the rising default rate were sown earlier in the decade when credit eased so people could borrow more. — Star Tribune, March 8, p D1
3. Last week, Gov. Tim Pawlenty tossed another $27 million on the table in his bid to boost K-12 spending about 2 percent in 2010-11, even in the face of a steep, recession-driven revenue slide. He’s willing to gamble with the state’s credit rating and borrow against future state revenues to do it. He said he’s also willing to up his K-12 ante another 2.8 percent in 2012-13, while freezing every other item in the state budget at his recommended 2010 level. — Star Tribune, Mach 22, p OP-1

Individuals and governments borrow, not banks.

Leverage connotes power and movement. The dictionary defines leverage as “power or ability to act or to influence people, events, decisions, etc.” before it mentions money. Borrowing is a sign of weakness, a lack that needs to be filled, which creates an obligation to repay. Borrowers repay their loans. What do leveragers do?

People and governments borrow, which puts all of us at risk. Think about the national debt discussion. I haven’t heard anyone tell us that we need to leverage our wonder-working American economy in order to save our asses from disaster. Instead the fiscal scolds tell us not to “borrow from our kids.” Strange that these people didn’t seem to have any complaints about leveraging the financial power of Wall Street.

Wall Street gets the linguistic benefit while people and government get the linguistic punishment. Haven’t we heard this tune before?

I’m struggling to understand and explain a spectrum of opinions about the recession that I see exhibited by conservatives. I have three examples that seem to form a gradient around the idea of self-reliance and group action.

At the extreme is Charles Murray who recently delivered a lecture at the American Enterprise Institute entitled The Europe Syndrome and the Challenge to American Exceptionalism. I found the lecture via a link at Matthew Yglesias weblog.

The central core of Murray’s argument is that happiness requires struggle and that government policies that make happiness easier are fundamentally unfair because they take away the struggle for happiness that we all have a right to. If we don’t work hard for our rewards then our victories will taste sour.

Damon Linker at the New Republic calls this Donner Party Conservatism, a term he borrows from John Holbo.

it refers to the brand of conservative thinking that defends America’s relatively minimal welfare state and anemic economic regulations on the grounds that it’s good for people to have to struggle and suffer to get by — just like those plucky, entrepreneurial pioneers who resorted to cannibalism to avoid starvation while trapped in the Sierra Nevada mountains back in the winter of 1846-1847. For some Donner Party Conservatives, struggle and suffering are good because they call forth and demand great acts of virtue, which serves to replenish the ever-diminishing stockpile of “moral capital” that our nation has inherited from its (pre-liberal) past. Murray himself argues this point at length. But he also claims that struggle and suffering are good because they are a necessary condition of human happiness.

Michael Gerson made a similar call to virtue in the Washington Post last month in a column on Recession’s Hidden Virtues

Recessions and depressions are brutal beasts that stalk the stragglers, especially retirees and the poor. There is too much inherent suffering during a recession to ever welcome it. But times of economic stress, it appears, can also be times of cultural renewal. “One reasonable hypothesis,” argues James Q. Wilson, “is that the Depression pulled families together, and this cohesion inhibited crime.” Many Americans who struggled through the Depression adopted a set of moral and economic habits such as thrift, family commitment, savings and modest consumption that lasted through their lifetimes — and that have decayed in our own.

My third example is from last month by David Brooks at the New York Times. He starts his column in the same individualistic place that Murray begins at:

Our moral and economic system is based on individual responsibility. It’s based on the idea that people have to live with the consequences of their decisions. This makes them more careful deciders. This means that society tends toward justice — people get what they deserve as much as possible

But he ends at a different place, much closer to my own political views.

And they seem to understand the big thing. The nation’s economy is not just the sum of its individuals. It is an interwoven context that we all share. To stabilize that communal landscape, sometimes you have to shower money upon those who have been foolish or self-indulgent. The greedy idiots may be greedy idiots, but they are our countrymen. And at some level, we’re all in this together. If their lives don’t stabilize, then our lives don’t stabilize.

My tentative explanation for these three variations on the theme of individual responsibility and group actions is the fundamental attribution error from psychology. “When we are trying to understand and explain what happens in social settings, we tend to view behavior as a particularly significant factor. We then tend to explain behavior in terms of internal disposition, such as personality traits, abilities, motives, etc. as opposed to external situational factors.”

Murray is completely captured by the fundamental attribution error. Happiness comes from the individual and institutions, especially the government, are barriers to the achievement of “deep satisfaction.” Gerson is in the middle and Brooks starts with the standard conservative appeal to individualism but then concludes by holding his nose and acknowledging the need stabilize the group even if it means rewarding the foolish.

Two articles of note about the stock market came to mind today. The first is "Beyond Value Investing: How I Realized the Internet Bubble was a Pyramid Scheme" by Bob Hiler. Hiler's argument is that the internet bubble is a new form of the pyramid scheme - a distributed pyramid scheme in which no one person or group can be blamed, instead a bunch of individual actors, acting in their perceived best interest, created a pyramid which eventually came crashing down. Hiler suggest the following 4 characteristics of a pyramid and then demonstrates how each one of them worked in the internet bubble.

1. Pyramids Tout A Revolutionary High-Return Strategy.


2. Pyramids Have New Investors Transfer Money to Old Investors.


3. All "Levels" Of The Pyramid Sell The Same Stuff To Each Other.


4. Pyramids Make Competition a Good Thing.

Finally he concludes that we were all duped into thinking that the internet was selling opportunity instead of an actual product. Based on how many Time cover stories I remember reading from just a few years ago I have to agree that opportunity was in the air.

Could this have been avoided? We all like to believe that we are immune to the hype of commercialism, whether it be ignoring the latest ad for cola or deciding for ourselves what is a good investment. Unfortunately there is too much information for any of us to digest. Even the so-called experts aren't always right. For that I cite an excellent piece by Malcolm Gladwell from the New Yorker "Blowing Up: How Nassim Taleb turned the inevitability of disaster into an investment strategy"
Taleb is an investor in options. He buys stock options on both sides of the fence, betting that the market will go up or it will go down, and eventually it will go so far that his options will make a lot of money.

What Empirica has done is to invert the traditional psychology of investing. You and I, if we invest conventionally in the market, have a fairly large chance of making a small amount of money in a given day from dividends or interest or the general upward trend of the market. We have almost no chance of making a large amount of money in one day, and there is a very small, but real, possibility that if the market collapses we could blow up. We accept that distribution of risks because, for fundamental reasons, it feels right.

For Taleb there will be a day when everything moves dramatically or unthinkably and that will be the day he makes his money. On normal days nothing much happens or he loses money. But he knows that someday the unthinkable will happen and the other "rational" people who invest in the stock market will cause a bust or a boom that can't be justified and he will be waiting to cash in.

I'm thinking to myself that this is a strategy I need to use. Maybe I should have become a broker. But fundamentally it undermines our notion of rationality. Sometimes the unthinkable happens and it cannot be avoided.