I’ll get back to more traditional economics stuff in the next one.
I watched a couple of movies the other night. A few of us play the “double feature game.” The idea is to pick two movies that fit really well together and then watch them both. So we watched Death Race 2000 and the original Roller Ball. At the end we were chatting about the movies and watching some of the commentary. The commentary was pretty predictable. “I was trying to show how violent society is becoming and how sports are really violence condoned.” The basic idea they seemed to be trying to put across in the interviews was the violence in sports is abhorrent and should immediately be stopped. The spectacle of sport is morally wrong seemed to be the basis of the argument.
Those who know me know that I enjoy sports, playing more than watching, but both. Some I was somewhat puzzled by these movie makers decrying sports.
Here’s what I see as the problem. Sport is the purest and most honest form of drama. The required element of drama is conflict. Without conflict there is no drama. Try to imagine a movie in which everybody got along and everything was ok. There’d be no drama. It would also be the most boring movie ever created. Now think about the best movie you’ve ever seen. The centre of the movie was a conflict, either between two or more people, between a person and a system, or between people and nature. Drama requires that people or things be seen to be trying to achieve different and often mutually exclusive goals. This sounds like a perfect description of sport to me. Two players or teams are trying to achieve mutually exclusive goals – winning.
The thing about drama, as we think of plays and movies, is that it often involves hidden agendas, betrayal, and emotional manipulation. In many cases there is extreme violence, except that it is entirely emotional rather than physical. Graphical portrayals of this type of violence are seen as high art rather than the grotesque spectacle that sport delivers. Interesting; fake and deceptive equates to high art while open and honest equates to gross spectacle.
What complete and utter nonsense. In sports we all know who’s on what team, there are clear rules defining acceptable behaviour, there are well defined penalties for deviating from that behaviour, and the conflict is open and honest. The only real difference is that the violence manifests as physical in sport and emotional in “high art”.
In an era in which we have virtually destroyed all conflict resolution mechanisms short of capitulation or extreme violence (war) we should be celebrating the one remaining honest representation of drama, sport.
Monday, May 28, 2007
Sunday, May 13, 2007
General Specialist
This comes from a comment left recently and it ties in with NB’s review of post secondary education that’s going on right now.
I’m hearing more and more about whether or not the target of education should be generalists or specialists. This is going to be one of those cases in which I think both sides of the argument are stunned and the only way to snap them out of it will be judicious use of a 2x4. I’ll proceed by trying to sum up the positive arguments on both sides and then try and explain the way I think it should be done.
Generalists:
The basic premise of this argument is we can’t predict what skills or knowledge a person is going to need later in life so everybody is better off, if education gives everybody a little flavour of everything. If you have a little bit of exposure to all kinds of different topics you can apply the knowledge and skills that you do have to a very wide variety of problems. Essentially you won’t be tied into just one way of thinking or looking at the world. The positive side of this argument has some merit.
Here are the catches (plural).
1) You almost always end up giving generalists just enough knowledge to be dangerous. We’ve seen this with people on the left running around screaming about how markets are everywhere and always evil. We’ve seen this with people on the right running around trying to privatize everything because the market is perfect. They’ve both received just enough knowledge to do a lot of damage to society. They think they understand but really don’t have a clue. What’s worse, they tend not to listen to “experts” because they have been indoctrinated to believe a general education is always better than a specialized one.
2) The information that tends to be disseminated in a lower level university course is about 40 to 60 years out of date, depending on the discipline. The basic understanding is far from complete and important parts are likely missing. This is unlikely to change in any but the purely linguist driven disciplines. Our high school system simply isn’t delivering enough or appropriate math. There may be hope for the future in other provinces, but not in NB yet.
3) At lower or generalist levels, what is taught can be very instructor specific – so you don’t get a sense of the breadth of the discipline.
Specialists
The basic idea here is that we need as many people as possible working at the cutting edge of their discipline. This is the message of Adam Smith taken to the extreme. There is so much to know in virtually every discipline it is impossible for each person to know more than one discipline. Developments are made at the boundary of disciplines. We are thus better off if we specialize as much and as soon as possible. The argument can be summed as; we need as many experts as we can get. There’s truth here too.
There are catches with this as well.
1) Specialization can go too far. This is starting to happen in fields like physics and chemistry. Definitely has already happened in biology. You get people how know all there is to know about algae, but no clue about the basic physical or chemical processes involved in the life processes they’re trying to describe. We won’t even mention dealing with people.
2) Expertise is in and of itself without context. We always need a way to explain why we should care.
3) A mediocre economist might make a good sociologist. If we specialize too early it is more likely that the match between innate skills and profession will be less than ideal.
What’s the solution? A combination of the two, of course! Everyone should start off as a generalist and learn the strengths and weaknesses of different ways of thinking. There should be a single common first year or first 2 years of university. No BBA’s, no BA’s, no BSc’s. Everybody should have to take some English (lit) and some math. Some natural science and some social science should also be required. Everybody should have to take a little conversational second language training. The first year or two would be what provides the breadth and context for specialization. The key here is that every student should walk away with an understanding of what a field of study does and does not do well. This means prof’s will have to get their shit together. You can choose to end you’re education here with a “Generalist’s” degree. And a final point, marking would only be pass/fail here.
Specialization will only be allowed to occur after you’ve done the generalist’s degree. At this point you don’t have to take any electives. You can take only courses in your chosen field of study if you want. Once we’re sure you’ve got the foundation and context we can begin to have you become a specialist.
Why isn’t university already organized this way? It seems that context and breadth is the role of the elective? There are 2 answers. First, the kind of basic education that I’m talking about is supposed to have occurred in high school. Seeing as how it no longer does, it falls to the university. Second, we can blame Sputnik. With the launch of Sputnik all the NATO powers went a little crazy. We decided that the only way we were going to survive the situation was to out invent and out science the soviets. The entire focus of the education system changed. Get them into science and engineering as quickly as possible. Thus began the shift in education to hyper-specialization. We're now seeing the pendulm start to swing too far in the other direction.
I’m hearing more and more about whether or not the target of education should be generalists or specialists. This is going to be one of those cases in which I think both sides of the argument are stunned and the only way to snap them out of it will be judicious use of a 2x4. I’ll proceed by trying to sum up the positive arguments on both sides and then try and explain the way I think it should be done.
Generalists:
The basic premise of this argument is we can’t predict what skills or knowledge a person is going to need later in life so everybody is better off, if education gives everybody a little flavour of everything. If you have a little bit of exposure to all kinds of different topics you can apply the knowledge and skills that you do have to a very wide variety of problems. Essentially you won’t be tied into just one way of thinking or looking at the world. The positive side of this argument has some merit.
Here are the catches (plural).
1) You almost always end up giving generalists just enough knowledge to be dangerous. We’ve seen this with people on the left running around screaming about how markets are everywhere and always evil. We’ve seen this with people on the right running around trying to privatize everything because the market is perfect. They’ve both received just enough knowledge to do a lot of damage to society. They think they understand but really don’t have a clue. What’s worse, they tend not to listen to “experts” because they have been indoctrinated to believe a general education is always better than a specialized one.
2) The information that tends to be disseminated in a lower level university course is about 40 to 60 years out of date, depending on the discipline. The basic understanding is far from complete and important parts are likely missing. This is unlikely to change in any but the purely linguist driven disciplines. Our high school system simply isn’t delivering enough or appropriate math. There may be hope for the future in other provinces, but not in NB yet.
3) At lower or generalist levels, what is taught can be very instructor specific – so you don’t get a sense of the breadth of the discipline.
Specialists
The basic idea here is that we need as many people as possible working at the cutting edge of their discipline. This is the message of Adam Smith taken to the extreme. There is so much to know in virtually every discipline it is impossible for each person to know more than one discipline. Developments are made at the boundary of disciplines. We are thus better off if we specialize as much and as soon as possible. The argument can be summed as; we need as many experts as we can get. There’s truth here too.
There are catches with this as well.
1) Specialization can go too far. This is starting to happen in fields like physics and chemistry. Definitely has already happened in biology. You get people how know all there is to know about algae, but no clue about the basic physical or chemical processes involved in the life processes they’re trying to describe. We won’t even mention dealing with people.
2) Expertise is in and of itself without context. We always need a way to explain why we should care.
3) A mediocre economist might make a good sociologist. If we specialize too early it is more likely that the match between innate skills and profession will be less than ideal.
What’s the solution? A combination of the two, of course! Everyone should start off as a generalist and learn the strengths and weaknesses of different ways of thinking. There should be a single common first year or first 2 years of university. No BBA’s, no BA’s, no BSc’s. Everybody should have to take some English (lit) and some math. Some natural science and some social science should also be required. Everybody should have to take a little conversational second language training. The first year or two would be what provides the breadth and context for specialization. The key here is that every student should walk away with an understanding of what a field of study does and does not do well. This means prof’s will have to get their shit together. You can choose to end you’re education here with a “Generalist’s” degree. And a final point, marking would only be pass/fail here.
Specialization will only be allowed to occur after you’ve done the generalist’s degree. At this point you don’t have to take any electives. You can take only courses in your chosen field of study if you want. Once we’re sure you’ve got the foundation and context we can begin to have you become a specialist.
Why isn’t university already organized this way? It seems that context and breadth is the role of the elective? There are 2 answers. First, the kind of basic education that I’m talking about is supposed to have occurred in high school. Seeing as how it no longer does, it falls to the university. Second, we can blame Sputnik. With the launch of Sputnik all the NATO powers went a little crazy. We decided that the only way we were going to survive the situation was to out invent and out science the soviets. The entire focus of the education system changed. Get them into science and engineering as quickly as possible. Thus began the shift in education to hyper-specialization. We're now seeing the pendulm start to swing too far in the other direction.
Sunday, May 6, 2007
Charter of Responsibilities and Obligations
Once again we’re hearing a lot about the Charter of Rights and Freedoms. Most recently, it’s about a dip-stick teenager who refused to stand for O Canada. Even a severely brain damaged 16 year old ought be able to show a modicum of respect. The reply that he has the right to freedom of expression doesn’t wash. If freedom of expression is so important to him – he should be showing some respect for the organization that grants him that freedom. If he doesn’t respect it – he shouldn’t claim it. If he really does want to show disrespect, he should be willing to accept the consequences.
My objection to the situation is this; the charter of rights and freedoms grants all Canadian citizens rights for simply breathing. We’re talking all kinds of rights, rights out the wazoo. This creates a real problem. The rights come at no cost to most of the population, thus they tend to be exploited too often. This is essentially a common pool resource problem. We currently have some "groups" of people that have been granted the right to go to the well a lot more than others.
I think we need to break the Charter of Rights and Freedoms into two distinct parts. One part we intend everybody to have just for breathing. This would include things like life, opportunity for improvement, etc. We should take a number of the other “rights” and couple them to responsibilities. You can only have these rights if you can demonstrate that you’ve met your responsibilities as outline in the charter. These rights would include things like freedom of expression. You only get to voice an obnoxious opinion if you’ve earned it. This used to be the way academic freedom worked. You had to prove you were a thinking responsible individual before you were accepted into the academic club and granted the right of academic freedom. It worked pretty well that way. Now with the expansion of the academy to border line academic disciplines, we’ve got a lot of half-wits hiding behind academic freedom in order to be offensive to no real propose. This makes it really hard for profs to use academic freedom when they've really got something useful to say, but that for another time.
What sort of things would be in the Charter of Responsibilities and Obligations? This is wear things are likely to get tricky. I want the document to be as short and simply worded as possible. The basic idea is that anybody can satisfy the Responsibilities and Obligations contained herein, with a minimal level of effort.
Some Examples I would include;
1. All citizens past the age of majority are responsible for contributing 10 hours of volunteer work per year.
This would be easy to meet. It would be up to the courts do decide what volunteer work was. Basically, this amounts to - "Get off the couch!"
2. All citizens must cast a ballot in municipal, provincial, and federal elections in that year.
If you don’t vote that year – no cookie for you. Spoiling your ballot would be promoted as a legitimate protest.
3. All citizens make an effort to pay the appropriate level of taxes.
I’m not talking about the honest I forgot to check that box stuff. I’m talking about out and out fraud. Not only should there be a financial penalty (which there is) but you should lose some of the rights afforded to you if you don’t pay the appropriate taxes.
4. All citizens must make an effort not to be a burden on the social support system.
This is a mirror of number 3. If you’re on EI and you’re not trying to get off – you’re not meeting your responsibilities as a citizen. If you’re on welfare and you’re trying to get off, the same thing applies. We’d have to fix the welfare system to get rid of the welfare trap. This would be dropped if we went to a guaranteed annual income scheme.
There are a few others that we might want to add (I'm open to suggestions), but I think its best to keep it short and simple. I think these few identify the ideas I’m trying to get across. 1 and 2 amount to being involved in the governance process, it is a democracy after all. 3 and 4 amount to, well, not being a total jerk with respect to the services provided by government.
I guess the best way to describe the sentiment is, you must make a contribution to the system to get more than the minimal benefits from the system.
My objection to the situation is this; the charter of rights and freedoms grants all Canadian citizens rights for simply breathing. We’re talking all kinds of rights, rights out the wazoo. This creates a real problem. The rights come at no cost to most of the population, thus they tend to be exploited too often. This is essentially a common pool resource problem. We currently have some "groups" of people that have been granted the right to go to the well a lot more than others.
I think we need to break the Charter of Rights and Freedoms into two distinct parts. One part we intend everybody to have just for breathing. This would include things like life, opportunity for improvement, etc. We should take a number of the other “rights” and couple them to responsibilities. You can only have these rights if you can demonstrate that you’ve met your responsibilities as outline in the charter. These rights would include things like freedom of expression. You only get to voice an obnoxious opinion if you’ve earned it. This used to be the way academic freedom worked. You had to prove you were a thinking responsible individual before you were accepted into the academic club and granted the right of academic freedom. It worked pretty well that way. Now with the expansion of the academy to border line academic disciplines, we’ve got a lot of half-wits hiding behind academic freedom in order to be offensive to no real propose. This makes it really hard for profs to use academic freedom when they've really got something useful to say, but that for another time.
What sort of things would be in the Charter of Responsibilities and Obligations? This is wear things are likely to get tricky. I want the document to be as short and simply worded as possible. The basic idea is that anybody can satisfy the Responsibilities and Obligations contained herein, with a minimal level of effort.
Some Examples I would include;
1. All citizens past the age of majority are responsible for contributing 10 hours of volunteer work per year.
This would be easy to meet. It would be up to the courts do decide what volunteer work was. Basically, this amounts to - "Get off the couch!"
2. All citizens must cast a ballot in municipal, provincial, and federal elections in that year.
If you don’t vote that year – no cookie for you. Spoiling your ballot would be promoted as a legitimate protest.
3. All citizens make an effort to pay the appropriate level of taxes.
I’m not talking about the honest I forgot to check that box stuff. I’m talking about out and out fraud. Not only should there be a financial penalty (which there is) but you should lose some of the rights afforded to you if you don’t pay the appropriate taxes.
4. All citizens must make an effort not to be a burden on the social support system.
This is a mirror of number 3. If you’re on EI and you’re not trying to get off – you’re not meeting your responsibilities as a citizen. If you’re on welfare and you’re trying to get off, the same thing applies. We’d have to fix the welfare system to get rid of the welfare trap. This would be dropped if we went to a guaranteed annual income scheme.
There are a few others that we might want to add (I'm open to suggestions), but I think its best to keep it short and simple. I think these few identify the ideas I’m trying to get across. 1 and 2 amount to being involved in the governance process, it is a democracy after all. 3 and 4 amount to, well, not being a total jerk with respect to the services provided by government.
I guess the best way to describe the sentiment is, you must make a contribution to the system to get more than the minimal benefits from the system.
Tuesday, May 1, 2007
Update on Literacy
I was listening to the radio this morning and it seemed like somebody out there had read my blog. More and more people are beginning to decry the state of the education system in the maritimes and having the courage to stand up and say that it isn't working.
Here's the most scary stat from the whole bit. It comes from News 88.9 in Saint John, by way of AIMS. Approximately 50% of those applying for jobs in the Michelin plant can't pass the written exam to work on the factory floor. These people can't read well enough to follow basic instructions or read warning labels on machinery. I'd bet way more than 50% of the applicants have got a high school diploma.
The scary part isn't the Michelin has a hard time finding employees. Pay more you'll find more. The problem is that these people have invested 12 years of their lives in "education" and have been ripped off. I think they should be able to charge whoever let them graduate with fraud.
And people wonder why the maritimes still lags behind other parts of the country.
Here's the most scary stat from the whole bit. It comes from News 88.9 in Saint John, by way of AIMS. Approximately 50% of those applying for jobs in the Michelin plant can't pass the written exam to work on the factory floor. These people can't read well enough to follow basic instructions or read warning labels on machinery. I'd bet way more than 50% of the applicants have got a high school diploma.
The scary part isn't the Michelin has a hard time finding employees. Pay more you'll find more. The problem is that these people have invested 12 years of their lives in "education" and have been ripped off. I think they should be able to charge whoever let them graduate with fraud.
And people wonder why the maritimes still lags behind other parts of the country.
Monday, April 30, 2007
Religion: Making the Impossible Possible
In 1950 Kenneth Arrow published an article in the Journal of Political Economy titled, “A Difficulty in the Concept of Social Welfare”. This and related work led him to a Nobel Prize in Economics. Arrow had set out to establish a method for aggregating individual preferences to come up with some sort of intelligent social welfare function. He couldn’t do it. So, like a good economist, he set about trying figure out why he couldn’t do it. He managed to prove it was impossible. The result is generally called, “Arrow’s Impossibility Theorem”. The theorem amounts to a relatively simple statement; any consistent well behaved aggregate preference ranking must be the preference ranking of a single individual, and that’s not very aggregate. There is no way to aggregate preferences and retain many of the properties we think preference structures should have. There are 5 or 6 properties a well behaved preference structure should have, depending on how you count. These properties include things like reflexivity, completeness, transitivity, etc. Most of these properties seem pretty mundane. The problem comes when we try to come up with a method for combining them.
What does all this have to do with religion? Consider a situation in which you have to get a large group of people (more than 3) to agree on a fairly complete set of principles to live by. This set of rules should be reflective of the preferences of the group, otherwise they won’t be followed. But Arrow’s impossibility theorem tells us that we can’t incorporate everybody’s preference or the set of rules will internally inconsistent. Any set of rules that is grossly illogical probably won’t last very long. This problem would tend to make large scale society impossible.
One solution is to impose one preference structure on the group. This is, of course, going to create resentment. This is one reason why dictators tend to have to use a “secret police” to rule. There is another way to pull this off. HereThis is religion is a solution to a secular problem. If the preference structure comes from outside the system – particularly from a divine being – there’s likely to be a lot less resentment and resistance. This is why the divine right of kings worked as well as it did in Europe.
With the loss of religion as a method of defining an appropriate social welfare function we’re kind of left at lose ends. It’s getting harder and harder to get large groups of people to agree on anything positive – negative is easy. We’re seeing politics and social movements become increasingly fractious. The result is going to be a movement toward ever smaller political units. We’re seeing this in a lot of the world already, and the trend is only going to continue.
I’m not saying God does or does not exist. Simply that society could not exist without such a concept.
What does all this have to do with religion? Consider a situation in which you have to get a large group of people (more than 3) to agree on a fairly complete set of principles to live by. This set of rules should be reflective of the preferences of the group, otherwise they won’t be followed. But Arrow’s impossibility theorem tells us that we can’t incorporate everybody’s preference or the set of rules will internally inconsistent. Any set of rules that is grossly illogical probably won’t last very long. This problem would tend to make large scale society impossible.
One solution is to impose one preference structure on the group. This is, of course, going to create resentment. This is one reason why dictators tend to have to use a “secret police” to rule. There is another way to pull this off. HereThis is religion is a solution to a secular problem. If the preference structure comes from outside the system – particularly from a divine being – there’s likely to be a lot less resentment and resistance. This is why the divine right of kings worked as well as it did in Europe.
With the loss of religion as a method of defining an appropriate social welfare function we’re kind of left at lose ends. It’s getting harder and harder to get large groups of people to agree on anything positive – negative is easy. We’re seeing politics and social movements become increasingly fractious. The result is going to be a movement toward ever smaller political units. We’re seeing this in a lot of the world already, and the trend is only going to continue.
I’m not saying God does or does not exist. Simply that society could not exist without such a concept.
Wednesday, April 25, 2007
The American Nightmare
or "How To Spend Yourself to Death".
This if for Anon - who needs a real handle.
Ever increasing attention is focused on the state of the American economy. The general agreement seems to be the down turn is nigh, the only question most people are still asking how bad will it be?
One of the most commonly cited concerns is the US government budget deficit. The Bush lead spending programs – particularly military – are one of the main focuses. The key concern is the run up of the deficit and debt. The implication seems to be the American government is now over extended in its spending and cannot engage in any further stabilization or stimulation policy. Basically, people are arguing that the US can’t afford its current spending practices.
This isn’t entirely the case, not on government front. The US deficit peaked in the late 1970’s and early 1980’s. It finally returned to surplus under Clinton. Clinton managed to ride personal tax increases and increasing transfers to a surplus. The Bush administration has, however, reversed both these trends and started running deficits again. My objection to the spending is what the population is getting in return. Bush has also been enjoying relatively low debt service costs. The bottom line is that budget situation in the US has been worse in recent memory, and is only a cause for small worries - right now.
The real terror is not government spending at all. What gives me the sweats is the personal savings rate. For the first time since WWII the US personal savings rate is negative. This is the continuation of a trend for an extended period of time. The average American’s net worth is declining rather than growing. Americans are consuming more than they earn. This is a definite cause for alarm, particularly when combined with the government debt.
How can the average American consume more than they earn? There are essentially two ways.
1) Draw down savings and assets. This is partially driven by demographics. As people move from work to retirement they tend to dis-save. That is, they spend their accumulated wealth. To do this they generally sell financial assets.
Selling something means that somebody else must be buying. But if the average American is selling, who’s buying? It can’t be other Americans,l it has to be foreign citizens. The US citizenry is selling off its assets, both domestic and foreign, at an alarming rate. This has dramatic implications for future consumption possibilities.
This has been going on for years. The US has been running a Current Account deficit for decades. This has meant a draw down of American assets. What makes the current situation a cause for worry is the speed at which its happening and the nature of the spending that’s taking place. It won’t take long for the US to hit a capital ownership crisis at this pace. What happens when they run out of assets to sell?
2) The other method of financing consumption beyond income is to borrow. Due to current monetary policy in the US, borrowing is cheaper than it has been in generations. Automotive manufacturers are offering financing at 0%. It was not uncommon to see mortgage rates advertised below 4% a couple of years ago. The low interest rates were in large part driven by the policies of the Federal Reserve after 9/11. The goal was stimulate the economy to avoid a recession. Largely it worked, for now.
Here’s the problem with lose monetary policy. If you run it for too long you get high inflation – which nobody wants right now. This means that lose monetary policy must be temporary. People, businesses, and governments tend not to realize it is temporary when considering borrowing. As a result they tend to borrow more than is reasonable. The problem arises when the interest rates do rise and the loan becomes unaffordable.
The other question is who are they borrowing from? A lot of the money that was lent to the sub-prime mortgage market was new money – part of the monetary expansion designed to keep interest rates low. The remainder of the funds have to be coming from outside the country. Again the US is transferring wealth abroad. The difference here is the payment will take place in the future, rather than today.
So why does all this mean the Americans are in real trouble? Simple, the sale of assets and borrowing is financing consumption not investment. Very little of the spending is going toward things that are going to expand consumption opportunities in the future. All they’re doing is transferring consumption between time periods, not generating more of it. The real problem will come when the younger American population figures out that they are going to have to reduce consumption to pay back what has been spent. I’m not sure what the response is going to be.
The best case scenario is this; with the US unable to consume a number of countries will be lead into recession, not just the US.
How hard the recession depends on how quickly lenders go after real assets and the response of the American consumer. My guess is it will be worse the ’91.
This if for Anon - who needs a real handle.
Ever increasing attention is focused on the state of the American economy. The general agreement seems to be the down turn is nigh, the only question most people are still asking how bad will it be?
One of the most commonly cited concerns is the US government budget deficit. The Bush lead spending programs – particularly military – are one of the main focuses. The key concern is the run up of the deficit and debt. The implication seems to be the American government is now over extended in its spending and cannot engage in any further stabilization or stimulation policy. Basically, people are arguing that the US can’t afford its current spending practices.
This isn’t entirely the case, not on government front. The US deficit peaked in the late 1970’s and early 1980’s. It finally returned to surplus under Clinton. Clinton managed to ride personal tax increases and increasing transfers to a surplus. The Bush administration has, however, reversed both these trends and started running deficits again. My objection to the spending is what the population is getting in return. Bush has also been enjoying relatively low debt service costs. The bottom line is that budget situation in the US has been worse in recent memory, and is only a cause for small worries - right now.
The real terror is not government spending at all. What gives me the sweats is the personal savings rate. For the first time since WWII the US personal savings rate is negative. This is the continuation of a trend for an extended period of time. The average American’s net worth is declining rather than growing. Americans are consuming more than they earn. This is a definite cause for alarm, particularly when combined with the government debt.
How can the average American consume more than they earn? There are essentially two ways.
1) Draw down savings and assets. This is partially driven by demographics. As people move from work to retirement they tend to dis-save. That is, they spend their accumulated wealth. To do this they generally sell financial assets.
Selling something means that somebody else must be buying. But if the average American is selling, who’s buying? It can’t be other Americans,l it has to be foreign citizens. The US citizenry is selling off its assets, both domestic and foreign, at an alarming rate. This has dramatic implications for future consumption possibilities.
This has been going on for years. The US has been running a Current Account deficit for decades. This has meant a draw down of American assets. What makes the current situation a cause for worry is the speed at which its happening and the nature of the spending that’s taking place. It won’t take long for the US to hit a capital ownership crisis at this pace. What happens when they run out of assets to sell?
2) The other method of financing consumption beyond income is to borrow. Due to current monetary policy in the US, borrowing is cheaper than it has been in generations. Automotive manufacturers are offering financing at 0%. It was not uncommon to see mortgage rates advertised below 4% a couple of years ago. The low interest rates were in large part driven by the policies of the Federal Reserve after 9/11. The goal was stimulate the economy to avoid a recession. Largely it worked, for now.
Here’s the problem with lose monetary policy. If you run it for too long you get high inflation – which nobody wants right now. This means that lose monetary policy must be temporary. People, businesses, and governments tend not to realize it is temporary when considering borrowing. As a result they tend to borrow more than is reasonable. The problem arises when the interest rates do rise and the loan becomes unaffordable.
The other question is who are they borrowing from? A lot of the money that was lent to the sub-prime mortgage market was new money – part of the monetary expansion designed to keep interest rates low. The remainder of the funds have to be coming from outside the country. Again the US is transferring wealth abroad. The difference here is the payment will take place in the future, rather than today.
So why does all this mean the Americans are in real trouble? Simple, the sale of assets and borrowing is financing consumption not investment. Very little of the spending is going toward things that are going to expand consumption opportunities in the future. All they’re doing is transferring consumption between time periods, not generating more of it. The real problem will come when the younger American population figures out that they are going to have to reduce consumption to pay back what has been spent. I’m not sure what the response is going to be.
The best case scenario is this; with the US unable to consume a number of countries will be lead into recession, not just the US.
How hard the recession depends on how quickly lenders go after real assets and the response of the American consumer. My guess is it will be worse the ’91.
Friday, April 20, 2007
Losing the Frontier
For the last couple of days all you hear about on the news is the Virginia Tech shootings. Before we knew that the person had pre-existing psychological issues, it seemed like an excellent example of something I’ve been worrying about on and off for a while.
There are no more frontiers left in our society. We have both poles and a few other areas that we’re poking around in, but we’re currently (wisely) trying to limit their exploitation. This has huge implications for a society. There have been very few societies that have been able to survive without a frontier. Moreover, none come to mind that enjoyed much in the way of growth or personal freedom.
Why is the lack of a frontier so important? It means that there are no more outside options. If you can’t make it or don’t fit, there’s only three things you can do. Accept a place in the lower rungs of society, try to over turn the whole thing, or become so frustrated that you do something incredibly destructive. The problem gets even worse when one considers the issue of religion. Consider the current American, and to a lesser extent Canadian, divide between the fundamentalist Christian rightwing wingnuts and the dogmatic pseudo-hippie-dippies on the left. A huge part of the problem is that both sides are essentially fascist. Both sides think the world will be better if everybody behaved according to the unquestionable views of the person doing the talking. So any meaningful compromise that might be reached will be viewed as selling out by both sides.
I’m convinced one of the reasons why we’ve enjoyed so much growth in the last 500 years is that there’s been an outside option. If you were really unhappy with the rules of the land, you could try and make your ideal society work someplace else. The “pilgrims” in the US are a classic example. Few resources were lost fighting pointless battles. If these puritans weren’t able to try and make a go of it in North America it likely would have been a civil war or uprising. Currently both sides (wingnuts vs hippie-dippies) are locked into what looks like its going to be a long and drawn out political fight that’s not going to solve anything. No matter what the outcome, win, lose or unlikely compromise, there is nowhere for the dissatisfied to go. So the fight will start again. If there were a frontier, one side could largely have its way and those that didn’t like could go and try the frontier. Colonization also served a lot of the same purpose for the colonizers, but not the colonized.
Now that most of the earth is populated and settled, there isn’t a place to try and make a go of it under different or no rules. This tends to be when societies and cultures collapse, when the outside option is gone. We seem to be going down that some route in North America.
I don’t see any near term way out. The only possible hope seems to be space exploration and colonization. The resources appear to be there to make possible. There are a number of problems that need to be overcome to make pay financially. But remember, North America wasn’t originally discovered or explored just for profit, but for glory too. Increased social stability at home was the real benefit.
We need to start viewing space exploration and colonization in the same way. The main benefit won’t be the resources we’re able to capture and exploit. The main benefit will be the return of an outside option.
There are no more frontiers left in our society. We have both poles and a few other areas that we’re poking around in, but we’re currently (wisely) trying to limit their exploitation. This has huge implications for a society. There have been very few societies that have been able to survive without a frontier. Moreover, none come to mind that enjoyed much in the way of growth or personal freedom.
Why is the lack of a frontier so important? It means that there are no more outside options. If you can’t make it or don’t fit, there’s only three things you can do. Accept a place in the lower rungs of society, try to over turn the whole thing, or become so frustrated that you do something incredibly destructive. The problem gets even worse when one considers the issue of religion. Consider the current American, and to a lesser extent Canadian, divide between the fundamentalist Christian rightwing wingnuts and the dogmatic pseudo-hippie-dippies on the left. A huge part of the problem is that both sides are essentially fascist. Both sides think the world will be better if everybody behaved according to the unquestionable views of the person doing the talking. So any meaningful compromise that might be reached will be viewed as selling out by both sides.
I’m convinced one of the reasons why we’ve enjoyed so much growth in the last 500 years is that there’s been an outside option. If you were really unhappy with the rules of the land, you could try and make your ideal society work someplace else. The “pilgrims” in the US are a classic example. Few resources were lost fighting pointless battles. If these puritans weren’t able to try and make a go of it in North America it likely would have been a civil war or uprising. Currently both sides (wingnuts vs hippie-dippies) are locked into what looks like its going to be a long and drawn out political fight that’s not going to solve anything. No matter what the outcome, win, lose or unlikely compromise, there is nowhere for the dissatisfied to go. So the fight will start again. If there were a frontier, one side could largely have its way and those that didn’t like could go and try the frontier. Colonization also served a lot of the same purpose for the colonizers, but not the colonized.
Now that most of the earth is populated and settled, there isn’t a place to try and make a go of it under different or no rules. This tends to be when societies and cultures collapse, when the outside option is gone. We seem to be going down that some route in North America.
I don’t see any near term way out. The only possible hope seems to be space exploration and colonization. The resources appear to be there to make possible. There are a number of problems that need to be overcome to make pay financially. But remember, North America wasn’t originally discovered or explored just for profit, but for glory too. Increased social stability at home was the real benefit.
We need to start viewing space exploration and colonization in the same way. The main benefit won’t be the resources we’re able to capture and exploit. The main benefit will be the return of an outside option.
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