nguyen dinh huynh's bookshelf

Mike Moreno - The 17 Day Diet: A Doctor's Plan Designed for Rapid Results

2012-01-19T19:51:00.001-08:00

http://ifile.it/te2dpx/__The_17_Day_Diet__A_Doctor__039_s_Plan_Designed_for_Rapid_Results.l_75x2j0tt9x3x42.pdf

Walter Isaacson - Einstein: His Life and Universe

2012-01-19T19:49:00.000-08:00

http://mediafire.com/?5fsqqa59v453e08
password: ebooksclub.org

Sheena Iyengar - The Art of Choosing

2012-01-19T19:47:00.001-08:00

http://mediafire.com/?zo590dd9p7e67gx
password: ebooksclub.org

Craig Shirley - December 1941: 31 Days That Changed America and Saved the World

2012-01-19T19:25:00.001-08:00

http://mediafire.com/?vny1b63sj46dna2

Chris Kyle, Scott McEwen, Jim DeFelice - American Sniper: The Autobiography of the Most Lethal Sniper in U.S. Military History

2012-01-19T19:18:00.001-08:00

http://mediafire.com/?7ccoc3466zbkszy

2012-01-19T17:21:00.000-08:00

In 5-4-3, Jack and Todd chose four books from each year since completing The 100 Best that are worthy of your time and suggest three ways you can experience each of them.

The 100 Best and 5-4-3 are the perfect pairing to inspire yourself and others in the new year

1 The Dream Manager

2 Growing Great Employees

http://ifile.it/bj2ng6/__Growing_Great_Employees__Turning_Ordinary_People_into_Extraordinary_Performers.l_75x2j0tt9x3x42.mobi

3 No Man’s Land

4StrengthsFinder 2.0

2008

1 The Adventures of Johnny Bunko

2 The Back of the Napkin

3 The Knack

4 Tribes

2009

1 The Art of the Idea

2 The Four Conversations

http://ifile.it/rowb82/__The_Four_Conversations__Daily_Communication_That_Gets_Results.l_75x2j0tt9x3x42.pdf

3 The Match King

http://ifile.it/o24rgc/__The_Match_King__Ivar_Kreuger__The_Financial_Genius_Behind_a_Century_of_Wall_Street_Scandals.l_75x2j0tt9x3x42.pdf

4 Too Big to Fail

2010

1 The Big Short

2 Rework

3 Switch

4 Where Good Ideas Come From

http://ifile.it/fw0tsg/__Where_Good_Ideas_Come_From__The_Natural_History_of_Innovation.l_75x2j0tt9x3x42.epub

PDF

http://mediafire.com/?6hiim376vv4czvh

password: ebooksclub.org

2011

1 Great by Choice

2 The Lean Startup

3 I Moved Your Cheese

4 The Quest

R. Glenn Hubbard, Anthony P. O'Brien, Matthew Rafferty - Macroeconomics

2012-01-17T23:45:00.000-08:00

http://mediafire.com/?t0h2xg4rhoul3ju
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Mark Goulston M.D. - Just Listen: Discover the Secret to Getting Through to Absolutely Anyone

2012-01-17T23:04:00.001-08:00

http://mediafire.com/?52vg1rsj4dhc6er
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Bethany McLean, Joe Nocera - All the Devils Are Here: The Hidden History of the Financial Crisis

2012-01-17T22:59:00.001-08:00

http://mediafire.com/?6d43rjwgg1g4kx7

Paul Pierson, Jacob S. Hacker - Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class

2012-01-17T22:55:00.000-08:00

http://mediafire.com/?pg3zm8rv2mjcx2o
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Jeffrey D. Sachs - The Price of Civilization: Reawakening American Virtue and Prosperity

2012-01-12T17:23:00.000-08:00

http://mediafire.com/?7ttd10648v6chw8
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Jeffrey Sachs - Common Wealth: Economics for a Crowded Planet

2012-01-12T17:22:00.000-08:00

http://mediafire.com/?2etzp34fcsa1brk

Joseph E. Stiglitz - The Perils of 2012

2012-01-12T17:12:00.000-08:00

The Perils of 2012

Joseph E. Stiglitz

KOLKATA – The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labor force – meant little to the 50 year olds with little hope of ever holding a job again.

Indeed, middle-aged people who thought that they would be unemployed for a few months have now realized that they were, in fact, forcibly retired. Young people who graduated from college with tens of thousands of dollars of education debt cannot find any jobs at all. People who moved in with friends and relatives have become homeless. Houses bought during the property boom are still on the market or have been sold at a loss. More than seven million American families have lost their homes.

The dark underbelly of the previous decade’s financial boom has been fully exposed in Europe as well. Dithering over Greece and key national governments’ devotion to austerity began to exact a heavy toll last year. Contagion spread to Italy. Spain’s unemployment, which had been near 20% since the beginning of the recession, crept even higher. The unthinkable – the end of the euro – began to seem like a real possibility.

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. On the contrary, austerity will only exacerbate the economic slowdown. Without growth, the debt crisis – and the euro crisis – will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue.

Moreover, the major emerging-market countries, which steered successfully through the storms of 2008 and 2009, may not cope as well with the problems looming on the horizon. Brazil’s growth has already stalled, fueling anxiety among its neighbors in Latin America.

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. For example, high unemployment has depressed wages and increased poverty.

The good news is that addressing these long-term problems would actually help to solve the short-term problems. Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth, and job creation. More progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand. Higher taxes at the top could generate revenues to finance needed public investment, and to provide some social protection for those at the bottom, including the unemployed.

Even without widening the fiscal deficit, such “balanced budget” increases in taxes and spending would lower unemployment and increase output. The worry, however, is that politics and ideology on both sides of the Atlantic, but especially in the US, will not allow any of this to occur. Fixation on the deficit will induce cutbacks in social spending, worsening inequality. Likewise, the enduring attraction of supply-side economics, despite all of the evidence against it (especially in a period in which there is high unemployment), will prevent raising taxes at the top.

Even before the crisis, there was a rebalancing of economic power – in fact, a correction of a 200-year historical anomaly, in which Asia’s share of global GDP fell from nearly 50% to, at one point, below 10%. The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by a combination of ideology and vested interests, almost seem to reflect a commitment not to grow.

As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions. With all of the problems confronting the global economy, we will be lucky if these strains do not begin to manifest themselves within the next twelve months.

Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.

Nouriel Roubini - Fragile and Unbalanced in 2012

2012-01-12T17:08:00.000-08:00

Fragile and Unbalanced in 2012

Nouriel Roubini

NEW YORK – The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth.

At this point, a eurozone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn.

The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the eurozone crisis. It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock.

Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and eurozone exposure undermine growth. In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.

Meanwhile, flaws in China’s growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.

They are not alone. On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth.

Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. Only the high-grade corporate sector has improved. But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted.

Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners. Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance.

At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the eurozone between the core and the periphery – remain large. Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.

But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.

Finally, policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.

Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”

Nouriel Roubini is Chairman of Roubini Global Economics and professor at the Stern School of Business, New York University. His detailed 2012 global growth outlook is available at www.roubini.com

Robert Skidelsky - The Keynes-Hayek Rematch

2012-01-12T17:02:00.000-08:00

The Keynes-Hayek Rematch

Robert Skidelsky

LONDON – The Austrian economist Friedrich von Hayek, who died in 1992 at the age of 93, once remarked that to have the last word requires only outliving your opponents. His great good fortune was to outlive Keynes by almost 50 years, and thus to claim a posthumous victory over a rival who had savaged him intellectually while he was alive.

Hayek’s apotheosis came in the 1980’s, when British Prime Minister Margaret Thatcher took to quoting from The Road to Serfdom (1944), his classic attack on central planning. But in economics there are never any final verdicts. While Hayek’s defense of the market system against the gross inefficiency of central planning won increasing assent, Keynes’s view that market systems require continuous stabilization lingered on in finance ministries and central banks.

Both traditions, though, were eclipsed by the Chicago school of “rational expectations,” which has dominated mainstream economics for the last twenty-five years. With economic agents supposedly possessing perfect information about all possible contingencies, systemic crises could never happen except as a result of accidents and surprises beyond the reach of economic theory.

The global economic collapse of 2007-2008 discredited “rational expectations” economics (though its high priests have yet to recognize this) and brought both Keynes and Hayek back into posthumous contention. The issues have not changed much since their argument began in the Great Depression of the 1930’s. What causes market economies to collapse? What is the right response to a collapse? What is the best way to prevent future collapses?

For Hayek in the early 1930’s, and for Hayek’s followers today, the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.

But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available. They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects. At that point, boom turns to bust.

Every artificial boom thus carries the seeds of its own destruction. Recovery consists of liquidating the misallocations, reducing consumption, and increasing saving.

Keynes (and Keynesians today) would think of the crisis as resulting from the opposite cause: under-investment relative to the supply of saving – that is, too little consumption or aggregate demand to maintain a full-employment level of investment – which is bound to lead to a collapse of profit expectations.

Again, the situation can be kept going for a time by resorting to consumer-debt finance, but eventually consumers become over-leveraged and curtail their purchases. Indeed, the Keynesian and Hayekian explanations of the origins of the crisis are actually not very different, with over-indebtedness playing the key role in both accounts. But the conclusions to which the two theories point are very different.

Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations. Hayek demands more austerity, Keynes more spending.

We have here a clue as to why Hayek lost his great battle with Keynes in the 1930’s. It was not just that the policy of liquidating excesses was politically catastrophic: in Germany, it brought Hitler to power. As Keynes pointed out, if everyone – households, firms, and governments – all started trying to increase their saving simultaneously, there would be no way to stop the economy from running down until people became too poor to save.

It was this flaw in Hayek’s reasoning that caused most economists to desert the Hayekian camp and embrace Keynesian “stimulus” policies. As the economist Lionel Robbins recalled: “Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and…fostering the disposition to save was…as unsuitable as denying blankets and stimulus to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.”

Except to Hayekian fanatics, it seems obvious that the coordinated global stimulus of 2009 stopped the slide into another Great Depression. To be sure, the cost to many governments of rescuing their banks and keeping their economies afloat in the face of business collapse damaged or destroyed their creditworthiness. But it is increasingly recognized that public-sector austerity at a time of weak private-sector spending guarantees years of stagnation, if not further collapse.

So policy will have to change. Little can be hoped for in Europe; the real question is whether President Barack Obama has it in him to don the mantle of President Franklin Roosevelt.

To prevent further crises of equal severity in the future, Keynesians would argue for strengthening the tools of macroeconomic management. Hayekians have nothing sensible to contribute. It is far too late for one of their favorite remedies – abolition of central banks, supposedly the source of excessive credit creation. Even an economy without central banks will be subject to errors of optimism and pessimism. And an attitude of indifference to the fallout of these mistakes is bad politics and bad morals.

So, for all his distinction as a philosopher of freedom, Hayek deserved to lose his battle with Keynes in the 1930’s. He deserves to lose today’s rematch as well.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University.

Ian Morris - Why the West Rules--for Now: The Patterns of History, and What They Reveal About the Future

2012-01-10T23:49:00.001-08:00

http://ifile.it/a3f9h7/__Why_the_West_Rules__for_Now__The_Patterns_of_History__and_What_They_Reveal_About_the_Future.l_75x2j0tt9x3x42.epub

Nigel Cliff - Holy War: How Vasco Da Gama's Epic Voyages Turned the Tide in a Centuries-Old Clash of Civilizations

2012-01-10T23:37:00.000-08:00

http://ifile.it/qtez7o/__Holy_War__How_Vasco_Da_Gama__039_s_Epic_Voyages_Turned_the_Tide_in_a_Centuries_Old_Clash_of_Civilizations.l_75x2j0tt9x3x42.epub

James Gleick - The Inforhttp://www.blogger.com/img/blank.gifmation: A History, a Theory, a Flood

2012-01-10T23:15:00.000-08:00

http://mediafire.com/?trbl8ncfv4rbgi2
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Simon Sebag Montefiore- Jerusalem: The Biography

2012-01-10T23:11:00.000-08:00

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Andrew Roberts - The Storm of War. A New History of the Second World War

2012-01-10T23:07:00.001-08:00

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Stephen Greenblatt - The Swerve: How the World Became Modern

2012-01-10T20:19:00.000-08:00

http://ifile.it/790ecq/__The_Swerve__How_the_World_Became_Modern.l_75x2j0tt9x3x42.epub

Darren Rovell - First in Thirst: How Gatorade Turned the Science of Sweat Into a Cultural Phenomenon

2012-01-10T20:14:00.000-08:00

http://mediafire.com/?np7mj2e94m90u98
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Ben Fine, Dimitris Milonakis - From Economics Imperialism to Freakonomics: The Shifting Boundaries Between Economics and Other Social Sciences

2012-01-10T20:01:00.001-08:00

http://ifile.it/i0zsbq/__From_Economics_Imperialism_to_Freakonomics__The_Shifting_Boundaries_Between_Economics_and_Other_Social_Sciences__Economics_As_Social_Theory_.l_75x2j0tt9x3x42.pdf

Harvard Business Review - HBR's Must Reads Boxed Set (6 Books) (HBR's 10 Must Reads)

2012-01-10T19:05:00.000-08:00

http://mediafire.com/?5en779l05pj3re4
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Steven Naifeh, Gregory White Smith - Van Gogh: The Life

2012-01-01T21:29:00.001-08:00

http://ifile.it/xc046b/__Van_Gogh__The_Life.l_71x2j0tt9xn5x15.epub
http://megaupload.com/?d=4R81ULHX
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The 10 Best Books of 2011

2012-01-01T19:30:00.000-08:00

November 30, 2011
The 10 Best Books of 2011

Choosing our 10 Best Books of the Year was not an arbitrary process, but neither was it a scientific one. How could it be, when the editors here, like all readers, respond subjectively to any work of fiction or nonfiction? The one guideline for the 10 was that they had to have been reviewed in our pages sometime in the past 12 months.

Our 100 Notable Books of the Year were narrowed down to this final list, which contains a contingent of four first novels, Stephen King’s 52nd novel (by our count), and nonfiction books that are models of their various forms — biography, memoir, history, argument and scientific analysis.

FICTION

THE ART OF FIELDING

By Chad Harbach. Little, Brown & Company, $25.99.

At a small college on the Wisconsin side of Lake Michigan, the baseball team sees its fortunes rise and then rise some more with the arrival of a supremely gifted shortstop. Harbach’s expansive, allusive first novel combines the pleasures of an old-fashioned baseball story with a stately, self-reflective meditation on talent and the limits of ambition, played out on a field where every hesitation is amplified and every error judged by an exacting, bloodthirsty audience.

11/22/63

By Stephen King. Scribner, $35.

Throughout his career, King has explored fresh ways to blend the ordinary and the supernatural. His new novel imagines a time portal in a Maine diner that lets an English teacher go back to 1958 in an effort to stop Lee Harvey Oswald and — rewardingly for readers — also allows King to reflect on questions of memory, fate and free will as he richly evokes midcentury America. The past guards its secrets, this novel reminds us, and the horror behind the quotidian is time itself.

SWAMPLANDIA!

By Karen Russell. Alfred A. Knopf, cloth, $24.95; Vintage Contemporaries, paper, $14.95.

An alligator theme park, a ghost lover, a Styx-like journey through an Everglades mangrove jungle: Russell’s first novel, about a girl’s bold effort to preserve her grieving family’s way of life, is suffused with humor and gothic whimsy. But the real wonders here are the author’s exuberantly inventive language and her vivid portrait of a heroine who is wise beyond her years.

TEN THOUSAND SAINTS

By Eleanor Henderson. Ecco/HarperCollins Publishers, $26.99.

Henderson’s fierce, elegiac novel, her first, follows a group of friends, lovers, parents and children through the straight-edge music scene and the early days of the AIDS epidemic. By delving deeply into the lives of her characters, tracing their long relationships not only to one another but also to various substances, Henderson catches something of the dark, apocalyptic quality of the ’80s.

THE TIGER’S WIFE

By Téa Obreht. Random House, cloth, $25; paper, $15.

As war returns to the Balkans, a young doctor inflects her grandfather’s folk tales with stories of her own coming of age, creating a vibrant collage of historical testimony that has neither date nor dateline. Obreht, who was born in Belgrade in 1985 but left at the age of 7, has recreated, with startling immediacy and presence, a conflict she herself did not experience.

NONFICTION

ARGUABLY

Essays.

By Christopher Hitchens. Twelve, $30.

Our intellectual omnivore’s latest collection could be his last (he’s dying of esophageal cancer). The book is almost 800 pages, contains more than 100 essays and addresses a ridiculously wide range of topics, including Afghanistan, Harry Potter, Thomas Jefferson, waterboarding, Henry VIII, Saul Bellow and the Ten Commandments, which Hitchens helpfully revises.

THE BOY IN THE MOON

A Father’s Journey to Understand His Extraordinary Son.

By Ian Brown. St. Martin’s Press, $24.99.

A feature writer at The Globe and Mail in Toronto, Brown combines a reporter’s curiosity with a novelist’s instinctive feel for the unknowable in this exquisite book, an account — at once tender, pained and unexpectedly funny — of his son, Walker, who was born with a rare genetic mutation that has deprived him of even the most rudimentary capacities.

MALCOLM X

A Life of Reinvention.

By Manning Marable. Viking, $30.

From petty criminal to drug user to prisoner to minister to separatist to humanist to martyr. Marable, who worked for more than a decade on the book and died earlier this year, offers a more complete and unvarnished portrait of Malcolm X than the one found in his autobiography. The story remains inspiring.

THINKING, FAST AND SLOW

By Daniel Kahneman. Farrar, Straus & Giroux, $30.

We overestimate the importance of whatever it is we’re thinking about. We misremember the past and misjudge what will make us happy. In this comprehensive presentation of a life’s work, the world’s most influential psychologist demonstrates that irrationality is in our bones, and we are not necessarily the worse for it.

A WORLD ON FIRE

Britain’s Crucial Role in the American Civil War.

By Amanda Foreman. Random House, $35.

Which side would Great Britain support during the Civil War? Foreman gives us an enormous cast of characters and a wealth of vivid description in her lavish examination of a second battle between North and South, the trans-Atlantic one waged for British hearts and minds.

Caroline Kennedy; Michael Beschloss - Jacqueline Kennedy: Historic Conversations on Life with John F. Kennedy

2012-01-01T18:46:00.001-08:00

http://ifile.it/3sr0fb/__Jacqueline_Kennedy__Historic_Conversations_on_Life_with_John_F__Kennedy.l_75x2j0tt9x3x42.epub

Robert K. Massie - Catherine the Great: Portrait of a Woman

2012-01-01T18:36:00.001-08:00

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Stacy Schiff - Cleopatra: A Life

2012-01-01T18:29:00.001-08:00

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Joseph E. Stiglitz - The Book of Jobs

2011-12-15T02:20:00.000-08:00

The Book of Jobs

Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago.

By Joseph E. Stiglitz Illustration by Stephen Doyle

DOMINO THEORY The financial meltdown is the Depression parallel everyone notices. The more frightening parallel is everything else.

It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.

We knew the crisis was serious back in 2008. And we thought we knew who the “bad guys” were—the nation’s big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn’t do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.

The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing.

Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.

The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.

Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.

Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.

The Agriculture Adjustment Act, F.D.R.’s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.

Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like “industrial policy,” but that’s what war spending was—a policy that permanently changed the nature of the economy. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.

Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.

Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.

Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America’s conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.

Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.

Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.

The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.

That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading. Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.

Andrew Gelman, Kaiser Fung - Freakonomics: What Went Wrong?

2011-12-15T02:18:00.000-08:00

Freakonomics: What Went Wrong?

Examination of a very popular popular-statistics series reveals avoidable errors

Andrew Gelman, Kaiser Fung

The nonfiction publishing phenomenon known as Freakonomics has passed its sixth anniversary. The original book, which used ideas from statistics and economics to explore real-world problems, was an instant bestseller. By 2011, it had sold more than four million copies worldwide, and it has sprouted a franchise, which includes a bestselling sequel, SuperFreakonomics; an occasional column in the New York Times Magazine; a popular blog; and a documentary film. The word “freakonomics” has come to stand for a light-hearted and contrarian, yet rigorous and quantitative, way of looking at the world.

The faces of Freakonomics are Steven D. Levitt, an award-winning professor of economics at the University of Chicago, and Stephen J. Dubner, a widely published New York–based journalist. Levitt is celebrated for using data and statistics to solve an array of problems not typically associated with economics. Dubner has perfected the formula for conveying the excitement of Levitt’s research—and of the growing body of work by his collaborators and followers. On the heels of Freakonomics, the pop-economics or pop-statistics genre has attracted a surge of interest, with more authors adopting an anecdotal, narrative style.

As the authors of statistics-themed books for general audiences, we can attest that Levitt and Dubner’s success is not easily attained. And as teachers of statistics, we recognize the challenge of creating interest in the subject without resorting to clichéd examples such as baseball averages, movie grosses and political polls. The other side of this challenge, though, is presenting ideas in interesting ways without oversimplifying them or misleading readers. We and others have noted a discouraging tendency in the Freakonomics body of work to present speculative or even erroneous claims with an air of certainty. Considering such problems yields useful lessons for those who wish to popularize statistical ideas.

On a Case-by-case Basis

In our analysis of the Freakonomics approach, we encountered a range of avoidable mistakes, from back-of-the-envelope analyses gone wrong to unexamined assumptions to an uncritical reliance on the work of Levitt’s friends and colleagues. This turns accessibility on its head: Readers must work to discern which conclusions are fully quantitative, which are somewhat data driven and which are purely speculative.

The case of the missing girls: Monica Das Gupta is a World Bank researcher who, along with others in her field, has attributed the abnormally high ratio of boy-to-girl births in Asian countries to a preference for sons, which manifests in selective abortion and, possibly, infanticide. As a graduate student in economics, Emily Oster (now a professor at the University of Chicago) attacked this conventional wisdom. In an essay in Slate, Dubner and Levitt praised Oster and her study, which was published in the Journal of Political Economy during Levitt’s tenure as editor:

[Oster] measured the incidence of hepatitis B in the populations of China, India, Pakistan, Egypt, Bangladesh, and other countries where mothers gave birth to an unnaturally high number of boys. Sure enough, the regions with the most hepatitis B were the regions with the most “missing” women. Except the women weren’t really missing at all, for they had never been born.

Oster’s work stirred debate for a few years in the epidemiological literature, but eventually she admitted that the subject-matter experts had been right all along. One of Das Gupta’s many convincing counterpoints was a graph showing that in Taiwan, the ratio of boys to girls was near the natural rate for first and second babies (106:100) but not for third babies (112:100); this pattern held up with or without hepatitis B.

In a follow-up blog post, Levitt applauded Oster for bravery in admitting her mistake, but he never credited Das Gupta for her superior work. Our point is not that Das Gupta had to be right and Oster wrong, but that Levitt and Dubner, in their celebration of economics and economists, suspended their critical thinking.

The risks of driving a car: In SuperFreakonomics, Levitt and Dubner use a back-of-the-envelope calculation to make the contrarian claim that driving drunk is safer than walking drunk, an oversimplified argument that was picked apart by bloggers. The problem with this argument, and others like it, lies in the assumption that the driver and the walker are the same type of person, making the same kinds of choices, except for their choice of transportation. Such all-else-equal thinking is a common statistical fallacy. In fact, driver and walker are likely to differ in many ways other than their mode of travel. What seem like natural calculations are stymied by the impracticality, in real life, of changing one variable while leaving all other variables constant.

Stars are made, not born—except when they are born: In 2006, Levitt and Dubner wrote a column for the New York Times Magazine titled “A Star Is Made,” relying on the research of Florida State University psychologist K. Anders Ericsson, who believes that experts arise from practice rather than innate talent. It begins with the startling observation that elite soccer players in Europe are much more likely to be born in the first three months of the year. The theory: Since youth soccer leagues are organized into age groups with a cutoff birth date of December 31, coaches naturally favor the older kids within each age group, who have had more playing time. So far, so good. But this leads to an eye-catching piece of wisdom: The fact that so many World Cup players have early birthdays, the authors write,

may be bad news if you are a rabid soccer mom or dad whose child was born in the wrong month. But keep practicing: a child conceived on this Sunday in early May would probably be born by next February, giving you a considerably better chance of watching the 2030 World Cup from the family section.

Perhaps readers are not meant to take these statements seriously. But when we do, we find that they violate some basic statistical concepts. Despite its implied statistical significance, the size of the birthday effect is very small. The authors acknowledge as much three years later when they revisit the subject in SuperFreakonomics. They consider the chances that a boy in the United States will make baseball’s major leagues, noting that July 31 is the cutoff birth date for most U.S. youth leagues and that a boy born in the United States in August has better chances than one born in July. But, they go on to mention, being born male is “infinitely more important than timing an August delivery date.” What’s more, having a major-league player as a father makes a boy “eight hundred times more likely to play in the majors than a random boy,” they write. If these factors are such crucial determinants of future stardom, what does this say about their theory that a star is made, not born? Practice may indeed be a more important factor than innate talent, but in opting for cute flourishes like these, the authors venture so far from the original studies that they lose the plot.

Making the majors and hitting a curveball: In the same discussion in SuperFreakonomics, Levitt and Dubner write:

A U.S.-born boy is roughly 50 percent more likely to make the majors if he is born in August instead of July. Unless you are a big, big believer in astrology, it is hard to argue that someone is 50 percent better at hitting a big-league curveball simply because he is a Leo rather than a Cancer.

But you don’t need to believe in astrology to realize that the two cited probabilities are not the same. A .300 batting average is 50 percent better than a .200 average. In such a competitive field, the difference in batting averages between a kid who makes the majors and one who narrowly misses out is likely to be a matter of hundredths or even thousandths of a percent. Such errors could easily be avoided.

Predicting terrorists: In SuperFreakonomics, Levitt and Dubner introduce a British man, pseudonym Ian Horsley, who created an algorithm that used people’s banking activities to sniff out suspected terrorists. They rely on a napkin-simple computation to show the algorithm’s “great predictive power”:

Starting with a database of millions of bank customers, Horsley was able to generate a list of about 30 highly suspicious individuals. According to his rather conservative estimate, at least 5 of those 30 are almost certainly involved in terrorist activities. Five out of 30 isn’t perfect—the algorithm misses many terrorists and still falsely identified some innocents—but it sure beats 495 out of 500,495.

The straw man they employ—a hypothetical algorithm boasting 99-percent accuracy—would indeed, if it exists, wrongfully accuse half a million people out of the 50 million adults in the United Kingdom. So the conventional wisdom that 99-percent accuracy is sufficient for terrorist prediction is folly, as has been pointed out by others such as security expert Bruce Schneier.

But in the course of this absorbing narrative, readers may well miss the spot where Horsley’s algorithm also strikes out. The casual computation keeps under wraps the rate at which it fails at catching terrorists: With 500 terrorists at large (the authors’ supposition), the “great” algorithm finds only five of them. Levitt and Dubner acknowledge that “five out of 30 isn’t perfect,” but had they noticed the magnitude of false negatives generated by Horsley’s secret recipe, and the grave consequences of such errors, they might have stopped short of hailing his story. The maligned straw-man algorithm, by contrast, would have correctly identified 495 of 500 terrorists.

This unavoidable tradeoff between false positive and false negative errors is a well-known property of all statistical-prediction applications. Circling back to check all the factors involved in the problem might have helped the authors avoid this mistake.

The climate-change dustup: Rendering research conducted by others is much more challenging than explaining your own work, especially if the topic lies outside your domain of expertise. The climate-change chapter in SuperFreakonomics is a case in point. In it, Levitt and Dubner throw their weight behind geoengineering, a climate-remediation concept championed at the time by Nathan Myhrvold, a billionaire and former chief technology officer of Microsoft. Unfortunately, having moved outside the comfort zone of his own research, Levitt is in no better a position to evaluate Myhrvold’s proposal than we are.

When an actual expert, University of Chicago climate scientist Raymond Pierrehumbert, questioned the claims in Levitt and Dubner’s writing on climate, Levitt retorted that he enjoyed Pierrehumbert’s “intentional misreading” of the chapter. Referring to his own writings on the subject, Levitt wrote, “I’m not sure why that is blasphemy.” We’re not sure on this point either—we could not find a place where Pierrehumbert described Levitt’s writings in those terms. It is easy to be preemptively defensive of one’s own work, or of researchers whose work one has covered. Viewing alternative points of view as useful rather than threatening can help take the sting out of critiques. And if you’re covering subject matter outside your expertise, it pays to get second—and third and fourth—opinions.

Problems—and Solutions

How could an experienced journalist and a widely respected researcher slip up in so many ways? Some possible answers to this question offer insights for the would-be pop-statistics writer.

Leave friendship at the door: We attribute many of these errors to the structure of the authors’ collaboration, which, from what we can tell, relies on an informal social network that has many potential failure points. In the original Freakonomics, much of whose content appeared originally in columns for the New York Times Magazine, the network seems to have been more straightforward: Levitt did the research, Dubner trusted Levitt, the Times trusted Dubner, and we the readers trusted the Times’s endorsement. In SuperFreakonomics and the authors’ blog, it becomes less clear: Levitt trusts brilliant stars such as Myhrvold or Oster, Dubner trusts Levitt, and we the readers trust the Freakonomics brand. A more ideal process for science writing (as shown in the illustration above) will likely look much messier—but it offers the promise of better results.

Don’t sell yourself short: Perhaps Levitt’s admirable modesty—he has repeatedly attributed his success to luck and hard work rather than genius—has led him astray. If he feels he is surrounded by economists more exceptional and brilliant than he is, he may let their assertions stand without challenge. Here it might be good to remember the outsider’s perspective so prized by Levitt: If you find yourself hesitant to ask questions that seem “stupid,” or if you feel intimidated, think of yourself as a “rogue.” Just don’t take it so far that you value your own rogueness over empirical evidence.

Maintain checks and balances: A solid collaboration requires each side to check and balance the other side. Although there’s no way we can be sure, perhaps, in some of the cases described above, there was a breakdown in the division of labor when it came to investigating technical points. The most controversial statements are the most likely to be mistaken; if such assertions go unchallenged, you will have little more than a series of press releases linked by gung-ho commentary and eye-popping headlines. Hiring a meticulous editor who can evaluate the technical arguments is another way to avoid embarrassing mistakes.

Take your time: Success comes at a cost: The constraints of producing continuous content for a blog or website and meeting publisher’s deadlines may have adverse effects on accuracy. The strongest parts of the original Freakonomics book revolved around Levitt’s own peer-reviewed research. In contrast, the Freakonomics blog features the work of Levitt’s friends, and SuperFreakonomics relies heavily on anecdotes, gee-whiz technology reporting and work by Levitt’s friends and colleagues. Just like good science, good writing takes time. Remembering this can help hedge against the temptation to streamline arguments or narrow the pool of sources, even in the face of deadlines.

Be clear about where you’re coming from: Levitt’s publishers, along with Dubner, characterize him as a “rogue economist.” We find this odd: He received his Ph.D. from the Massachusetts Institue of Technology, holds the title of Alvin H. Baum Professor of Economics at the University of Chicago and has served as editor of the mainstream Journal of Political Economy. He is a research fellow with the American Bar Foundation and a member of the Harvard Society of Fellows, and has worked as a consultant for Corporate Decisions, Inc. One can be an outsider within such institutions, of course. But much of his economics is mainstream. And his statistical methods are conventional (which, we hasten to add, is not a bad thing at all!). One of the pleasures of reading Freakonomics is Levitt’s knack for finding interesting quantitative questions in obscure corners, such as the traveling bagel salesman and cheating sumo wrestlers. Often such problems have not been extensively studied or even been noticed by others, and in these cases one is hard-pressed to identify any consensus or conventional wisdom. Often, in the authors’ writing, the “conventional” and the “rogue” live side by side. Chapter one of SuperFreakonomics, for instance, can be viewed either as a clear-eyed quantitative examination of the economics of prostitution, or as an unquestioning acceptance of conventional wisdom about gender roles. In exploring new territory, it’s especially important to be plainspoken about where your assumptions come from and what your primary ideas are.

Use latitude responsibly: When a statistician criticizes a claim on technical grounds, he or she is declaring not that the original finding is wrong but that it has not been convincingly proven. Researchers—even economists endorsed by Steven Levitt—can make mistakes. It may be okay to overlook the occasional mistake in the pursuit of the larger goal of understanding the world. But once one accepts this lower standard—science as plausible stories or data-supported reasoning, rather than the more carefully tested demonstrations that are characteristic of Levitt’s peer-reviewed research articles—one really has to take extra care, consider all sides of an issue, and look out for false positive results.

The landscape of pop-statistics books grows more varied by the year, and Levitt and Dubner’s bestsellers have introduced several new ingredients to the genre. One of the delights of the books and the blog is the authors’ willingness to play with ideas and consider alternative explanations. But unquestioning trust in friends and colleagues combined with the desire to be counterintuitive appear in several cases to have undermined their work. They—and anyone who wishes to convey economics and statistics to a popular audience—just need to take the next step and avoid, in any given example, privileging one story over all other possibilities. This may require Levitt to be more skeptical of the research of his friends and colleagues, and Dubner to be more skeptical of Levitt. “Easy read” should not mean “easy write.”

And it doesn’t even always mean “easy read”: Readers should apply the same skepticism to the claims of Freakonomics as they would to the much-derided conventional wisdom. We encourage them to revisit these modern-day classics with a skeptical and inquiring mind. And we hope that future works in the pop-statistics genre will continue to impart a sense of the fun and importance of statistical reasoning, while more clearly recognizing the uncertainty and complexity inherent in scientific study of the world.

Bibliography

Das Gupta, M. 2005. Explaining Asia’s “missing women”: A new look at the data. Population and Development Review 31:529–535.
DiNardo, J. E. 2006. Freakonomics: Scholarship in the service of storytelling. American Law and Economics Review 8:615–626.
Dubner, S. J., and S. Levitt. 2006. A star is made: The birth-month soccer anomaly. The New York Times Magazine, May 7. http://www.nytimes.com/2006/05/07/magazine/07wwln_freak.html.
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John Lanchester - How We Were All Misled

2011-11-19T22:10:00.000-08:00

How We Were All Misled

December 8, 2011

Boomerang: Travels in the New Third World
by Michael Lewis
Norton, 213 pp., $25.95

Steffen Kugler/The New York Times/Redux

French President Nicolas Sarkozy, former Greek Prime Minister George Papandreou, and German Chancellor Angela Merkel, Brussels, July 2011

Most people with a special interest in the events of the credit crunch and the Great Recession that followed it have a private benchmark for the excesses that led up to the crash. These benchmarks are a rule of thumb, a rough measure of how far out of control things got; they are phenomena that at the time seemed normal but that in retrospect were a brightly flashing warning light. I came across mine in Iceland, talking to a waitress in a café in the summer of 2009, about eight months after the króna collapsed and the whole country effectively went bankrupt under the debts incurred by its overextended banks. I asked her what had changed about her life since the crash.

“Well,” she said, “if I’m going to spend some time with friends at the weekend we go camping in the countryside.”

“How is that different from what you did before?” I asked.

“We used to take a plane to Milan and go shopping on the via Linate.”

Since that conversation, I’ve privately graded transparently absurd pre-crunch phenomena on a scale from 0 to 10, with 0 being complete financial prudence, and 10 being a Reykjavik waitress thinking it normal to be able to afford weekend shopping trips to Milan.

Many people all over the world went nuts on cheap credit in the years of the boom—a boom that was in large part built on an unsustainable spike in personal and governmental debt. Michael Lewis has already written a very good book, The Big Short, about the mechanics of the crash, by casting around for people who didn’t just foresee it, but who made huge bets that it would happen, and profited vastly when it did.¹

Boomerang is about what he has come to see as the larger phenomenon behind the credit crunch: the increase in total worldwide debt from $84 trillion in 2002 to $195 trillion now. The thesis is that “the subprime mortgage crisis was more symptom than cause. The deeper social and economic problems that gave rise to it remained.” It is these deeper problems that are dominating economic news at the moment, and led to the desperate measures announced at the European summit on October 27 and to the aborted Greek plan to hold a referendum that followed. The G20 Economic Summit of November 3–4 was dominated by discussion of the Eurozone crisis, but ended with no coherent plan in view, and none has emerged since. Boomerang tells the story of how we got here, and in the course of doing so gathers together an extensive arsenal of data at the top end of my 0–10 Reykjavik waitress scale: the fact that Greek railways have €300 million in other costs; the fact that the Californian city of Vallejo spent 80 percent of its budget on the pension and pay of police, firemen, and other “public safety” workers; the fact that between 2003 and 2007, Iceland’s stock market went up ninefold; the fact that in Ireland, a developer paid €412 million in 2006 for a city dump that is now, because of cleanup costs, valued at negative €30 million.

Lewis has noticed something important about these excesses: that the precise details of how people ran amok varied from culture to culture. Cultural and historical faultlines were exposed by the boom, and behavior varied accordingly.

The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.” What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded to it in its own peculiar way.

Lewis is an unmatched nonfiction storyteller, and a large part of his talent is the way he attaches his stories to the people who help him tell them. Nonfiction has a payload and a delivery system. In Lewis’s work, the delivery system is usually a man, a forthright contrarian who thinks clearly and talks vividly and whose dissent from the mainstream is not a matter of theory but of practice: Lewis likes people who don’t just speak against the conventional wisdom, but who bet against it, and whose bets come off. His first interlocutor, Kyle Bass, is a classic example. Bass is a fund manager who made a fortune “shorting” toxic mortgage assets, and then became preoccupied by the subject of global debt levels. Bass is, to put it very mildly, a pessimist on the subject of sovereign debt:

Spain and France had accumulated debts of more than ten times their annual revenues. Historically, such levels of government indebtedness had led to government default. “Here’s the only way I think things can work out for these countries,” Bass said. “If they start running real budget surpluses. Yeah, and that will happen right after monkeys fly out of your ass.”

The prognostications that ensue from Bass’s analysis are gloomy, and form the basis of Boomerang‘s big-picture overview. “The financial crisis of 2008 was suspended only because investors believed that governments could borrow whatever they needed to rescue their banks. What happened when the governments themselves ceased to be credible?”

Bass thinks that the only reliable investments are guns and gold, and has just bought twenty million nickels, because the metal in a five-cent nickel is worth 6.8 cents, and they are going to be a stable source of value when things go wrong. (If you’re wondering how easy it is to get hold of 20 million nickels, the answer is, not very.) There are many equally vivid pen portraits in Boomerang, usually of forthright contrarians: a super-frank German ex-banker, a doomsaying Irish economist, two Greek tax collectors who hate each other, and the former governor of California.

Schwarzenegger gives an interview while he and Lewis and several advisers go zooming through Los Angeles on their bicycles, part of the governor’s cardio routine:

He wears no bike helmet, runs red lights, and rips past DO NOT ENTER signs without seeming to notice them, and up one-way streets. When he wants to cross three lanes of fast traffic he doesn’t so much as glance over his shoulder but just sticks out his hand and follows suit, assuming that whatever is behind him will stop. His bike has ten speeds but he uses just two: zero, and pedalling as fast as he can….

It isn’t until he is forced to stop at a red light that he makes meaningful contact with the public. A woman pushing a baby stroller and talking on a cell phone crosses the street right in front of him, and does a double take. “Oh…my…God,” she gasps into her phone. “It’s Bill Clinton!” She’s not ten feet away and she keeps talking to the phone, as if the man is unreal. “I’m here with Bill Clinton.”

“It’s one of those guys who has had a sex scandal,” says Arnold, smiling.

Schwarzenegger’s economic adviser gave Lewis some of the facts of the economic scandal:

This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past ten years. Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.

Lewis writes that

the same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education…. Everywhere you turned, the long-term future of the state was being sacrificed.

By and large, Lewis’s contrarians tend to be monomaniacs: they are people who have The Answer. It is a feature of the financial world, much remarked by Warren Buffett, that people would rather be wrong in a group than right on their own; the people who insist on being right on their own tend to have the psychological equipment to match. They are hedgehogs rather than foxes, eyes firmly on one big thing. There are times when Lewis himself is a little like that. Boomerang is unlike his previous books, in that it is a series of portraits of whole societies. A writer making society-wide generalizations is picking up a big and very full bag by a single handle; in that position, it’s easy to end up writing about the handle, because it’s the thing on which you have a secure grip.

For the most part, Lewis’s handles are fitted to the heavy lifting he makes them do, with the possible exception of his approach to Germany via the not-at-all unfamiliar idea that the country has a national obsession with excrement. He quotes the American anthropologist Alan Dundes: “Clean exterior–dirty interior, or clean form and dirty content—is very much a part of the German national character.”

That otherwise telling essay is about the state of the euro, a subject of immense importance at the moment for the entire global economy. Since its creation in 1999, the euro has accumulated enormous imbalances between the economies of its member states, with Germany in particular running a big trade surplus and the “peripheral” countries, mainly in Southern Europe, building up an ever bigger mountain of private and individual debt. “There was no credit boom in Germany,” an official told Lewis. “Real estate prices were completely flat. There was no borrowing for consumption. Because this behavior is totally unacceptable in Germany.”

It is, or should be, self-evident that this situation can’t continue forever, but the problem is that the Germans are showing no appetite either for becoming less German—i.e., paying themselves more, consuming more, and importing more—or for open-endedly bailing out the Southern Europeans. “The German people all know at least one fact about the euro: that before they agreed to trade in their deutsche marks their leaders promised them, explicitly, that they would never be required to bail out other countries.” That promise has already been broken, and is set to be broken many times more—though let’s not forget that these “bailouts” are actually loans that in principle must be repaid.

Unfortunately, the bailouts are only the beginning of what is needed to stabilize the euro. The Eurozone summit of October 27 saw the first three steps: a “haircut” imposing losses of 50 percent on creditors who own Greek government debt; a recapitalization of Europe’s banks, to the tune of €106 billion; and an extension of the European Financial Stability Facility (EFSF). Further down the road, some sort of federalization of European debt is surely inevitable. The likely step involves the creation of a eurobond, so that governments can borrow on a continent-wide basis, with continent-wide guarantees of security. Many consequences follow from that, not least, as George Soros has argued in these pages, the need for some sort of Europe-wide treasury to guarantee it.² That in turn implies the creation of something like a new European ministry of finance, which must surely also have powers of collection and enforcement in relation to taxation.

Tabitha Soren

Michael Lewis

Say that to Germans, however, and what they hear is that they will be required to pay other countries’ debts—and the painful truth is that yes, they will. The only way of reconciling the economic necessities and political requirements is for Europe to grow closer in its fiscal governance, a process that will involve painful losses of sovereignty and years of difficult adjustment in national habits. The Treaty of Rome, which founded the European Economic Community in 1951, plainly states that its goal was the “ever closer union” of European peoples—but nobody actually believed that would mean anything difficult or costly. That “ever closer union” has now become an economic requirement, one that is likely to bring with it many years of political and fiscal discomfort. In the meantime, “the only economically plausible scenario,” Lewis writes, “is that the Germans, with a bit of help from a rapidly shrinking population of solvent European countries, suck it up, work harder, and pay for everyone else.”

This might sound like a harsh truth, but it’s pretty mild by the standards of Boomerang, because Germany’s economy is in better condition than any other place Lewis visits. It will need to be, because the need for the Germans to pay for the Euro’s failings is only going to grow. The measures announced on October 27 all showed movement in the correct direction, but the sums involved were nowhere near big enough and the mechanism to extend the EFSF looked short on detail. When the steps were announced, attention immediately focused on one number: the price which the Italian government must pay when it borrows money. Italy has to roll over €330 billion of debt next year. The cost of that debt is of huge consequence for the Euro, because if it is too high, Italy won’t be able to pay it back, and if Italy can’t pay it back, then the whole Euro project is in big, potentially terminal trouble.

Unfortunately, the new plan got the thumbs-down: markets nudged the yield on Italian debt dangerously close to 6.5 percent, a number generally regarded as unsustainable. So the October 27 deal, generally seen as an attempt to buy time while more comprehensive plans are made, may not even do that. I don’t think Lewis would be surprised at the way this is playing out, and the fact that the full extent of the debt problems are still not being faced. Some of his targets in Boomerang date from the boom years, but many are firmly located in the present. The angriest of these essays is about Greece, which he sees as a country in the grip of “total moral collapse.”

Corruption and tax evasion are endemic, and successive governments have created a state in which citizens see themselves as deserving beneficiaries of state patronage; they expect to live cushioned from economic realities, and to retire at fifty-five for men and fifty for women if they do something “arduous,” a definition that includes “hairdressers, radio announcers, waiters, musicians, and on and on and on.” Lewis finds Greece seething at the moment, full of outrage at the demands for “austerity” imposed on it from outside: “a nation of people looking for anyone to blame but themselves.”

Even if it is technically possible for these people to repay their debts, live within their means, and return to good standing inside the European Union, do they have the inner resources to do it? Or have they so lost their ability to feel connected to anything outside their small worlds that they would rather just shed their obligations? On the face of it, defaulting on their debts and walking away would seem a mad act: all Greek banks would instantly go bankrupt, the country would have no ability to pay for the many necessities it imports (oil, for instance), and the government would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again. But the place does not behave as a collective…. It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good. There’s no question that the government is resolved to at least try to re-create Greek civic life. The only question is: Can such a thing, once lost, ever be re-created?

To Lewis, Greece marks a limit case for just how far a developed society can go off the rails. The other case studies, of Iceland, Ireland, and California, involve a great deal of folly, but those societies don’t refuse to admit the realities quite as absolutely. That’s not to say that Lewis is sparing about the behavior he describes, much of it at the top end of my 0–10 scale. Some of it verges on black comedy, especially in Iceland:

Yet another hedge fund manager explained Icelandic banking to me this way: you have a dog, and I have a cat. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge fund manager. “This was how the banks and investment companies grew and grew.”

When the value of those assets collapsed, the banks immediately followed, leaving debts equivalent to $330,000 for every Icelander.

The flavor of the mania in Ireland was different again. There, it was a classic property bubble, one that followed a remarkable period of genuine and sustained economic growth. From the late 1980s, Ireland had a number of good years, during which the economy grew rapidly (hitting an annual high of 11.8 percent), prosperity was widely shared, and the country rocketed up to fifth place in the UN’s Human Development Index. This was succeeded by a crazy excess of speculation in land values, beginning in the early years of the new century and ending with the biggest economic contraction seen in any country since the Great Depression.

The widely shared analysis in Ireland is that the disaster was caused by an unholy trinity of bankers, politicians, and house-builders, and involved a great deal of systematic corruption on the part of all three (especially over issues such as rezoning land). Lewis is gentler on the bankers at the heart of the crash than the Irish themselves are: he thinks that the bubble “wasn’t as cynical” as in other countries. The people indulging in the speculation genuinely believed that they were going to get rich. It was a bubble of greed and stupidity and excess, but not one in which the rich systematically stole from the poor. Perhaps the numbers are so bad that no more grimness needs to be troweled on:

A single bank, Anglo Irish, which, two years before, the Irish government claimed was suffering from a “liquidity problem,” confessed to losses of 34 billion euros. To get a sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish Bank, most of it to property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

When the Irish banks collapsed, the state stepped in and guaranteed not just the deposits of their customers, but all the banks’ liabilities. Nobody knows quite why they covered the losses of the bondholders who had lent money to these fundamentally broken companies: but they did, and the promise in turn bankrupted Ireland, leading directly to a European Union and International Monetary Fund bailout. The fallout is going to dominate life in Ireland for years.

It’s a sad story; Boomerang is a sad book, as well as a vivid and funny and enlightening one. Lewis ends it with a tentative glimpse of optimism in the formerly bankrupt Californian town of Vallejo, where a new city manager and a new head of the fire department are finally trying to get the municipality functioning again. In a city of 112,000 people, the fire department was cut from 121 to 67; it handles 13,000 calls a year, most of them pointless. The new fire chief, Lewis writes,

sat down and made a list of ways to improve the department…. He began, in short, to rethink firefighting.

When people pile up debts they will find it difficult and perhaps even impossible to repay, they are saying several things at once. They are obviously saying that they want more than they can immediately afford. They are saying, less obviously, that their present wants are so important that, to satisfy them, it is worth some future difficulty. But in making that bargain they are implying that when the future difficulty arrives, they’ll figure it out. They don’t always do that. But you can never rule out the possibility that they will. As idiotic as optimism can sometimes seem, it has a weird habit of paying off.

Outside the pages of Boomerang, there are glimpses of optimism in both Iceland and Ireland—though the countries have taken interestingly opposite routes to their longed-for recoveries. Iceland defaulted and effectively told financial markets where to stick themselves, administering severe “haircuts” to investors in the process, and let its banks collapse rather than pour government money in to prop them up. (Iceland had no choice: the banks were many times bigger than its entire economy.) The currency crashed, thus boosting exports and cutting imports, and now the economy is growing and unemployment is falling.

Ireland did the opposite: it ruinously stood by its bankrupt banks, stayed inside the euro, and took the medicine of austerity packages; it too is now showing signs of tentative return to growth. Both countries should be able to recover, absent a full European meltdown. A crucial component of both countries’ nascent turnaround has been a willingness to look the severity of their predicament straight in the eye, and tell themselves the truth about it.

That doesn’t mean that Boomerang leaves the reader feeling optimistic; an honest book about the current economic condition of the Western world couldn’t do that. One of the lasting feelings I took away from my own experiences of “financial disaster tourism,” as Lewis calls it, was one of sadness. I went to the same countries and met different people who told very similar stories. It is easy to diagnose a basic failure of responsibility as one of the causes of the debt crisis; and there’s no denying that such failures took place on the widest imaginable scale, from individuals up to governments.

I think, though, that the failure of responsibility was linked to a failure of agency—the individual’s ability to affect the course of events. An enormous number of people today feel as if they have very little economic agency in their own lives: often, they are right to feel that. The decisions that affect their fates are taken far above their heads, and often aren’t conscious decisions at all, so much as they are the operation of large economic forces over which they have no control—impersonal forces whose effects are felt in directly personal ways.

It is difficult to feel responsible when you have no agency. Many of the people who did stupid things—who did things on that 0–10 scale—did so because everyone around them was doing them too, and because loud voices were telling them to carry on. The Icelanders who bought cars with foreign currency loans were sold them by financiers who promised that it was a good idea; the Irish who bought now-unsellable houses on empty estates were told, by builders and bankers and the state, that this was a once-in-a-generation opportunity; the Greeks who are, at the time of writing, furiously rebelling against austerity measures were falsely told that the state could afford to look after them, and arranged their lives accordingly.

The collective momentum of a culture is, for more or less everybody more or less all of the time, overwhelming. This is especially true for anything to do with economics. The evidence is clear: it is easy to mislead people about money, and easy to lead members of the public astray both individually and en masse, because when it comes to money, most of us, most of the time, don’t know what we’re doing. The corollary is also clear: the whole Western world misled itself over debt, and the road back from where we are goes only uphill.

—November 10, 2011

1
Norton, 2010; see Jeff Madrick, "At the Heart of the Crash," The New York Review , June 10, 2010. ↩
2
"Does the Euro Have a Future?," The New York Review , October 13, 2011. ↩

Oliver Burkeman - Daniel Kahneman: 'We're beautiful devices'

2011-11-17T16:07:00.000-08:00

Daniel Kahneman: 'We're beautiful devices'

Called the world's most important psychologist, Daniel Kahneman inspired the trend for pop-psychology books, won a Nobel in economics and has devoted his life to studying the logic of irrationality

Daniel Kahneman: 'When the mechanism fails, those failures can tell you a lot about how the mind works.' Photograph: Andreas Rentz/Getty Images for Burda Media

The Nobel prize-winning psychologist Daniel Kahneman lives in an airy penthouse on the 14th floor of an apartment block in downtown Manhattan, not far from the Eighth Street subway station. But never mind that for a moment. Instead, without thinking too hard about it, try answering the following question: roughly what percentage of the member states of the United Nations are in Africa? (I'll wait.)

The correct figure isn't what's important here. What matters is that your answer is likely to be lower than if you had first been informed that Kahneman is 77 years old, or if I had claimed his apartment – where he lives with his wife, the British-born psychologist Ann Triesman – was 60 floors up, and near the 86th Street station. This is the phenomenon known as the "anchoring effect", and it is typical of Kahneman's contributions to psychology in that it suggests something rather disturbing about the human mind: not just that we're susceptible to making skewed judgments, but that we're influenced by factors more subtle and preposterous than we could ever imagine.

Kahneman's new book, Thinking, Fast and Slow, is a meaty memoir of his life's work that describes countless such cognitive quirks – but don't imagine that reading it will cure your irrationality. "It's not a case of: 'Read this book and then you'll think differently,'" he says. "I've written this book, and I don't think differently." Kahneman, whom Steven Pinker calls "the most important psychologist alive", is twinkly and energetic. But beneath the surface, he is a pessimist. And he is allergic to the notion that his book might be mistaken for self-help. It's his first work aimed at a mass audience, and he hated writing it: "I really did not want to disgrace myself in front of my colleagues, and I worried the public wouldn't like it if it read like a textbook. Also, I really don't like old men's books, and I felt I was writing an old man's book." Eventually, in despair, he arranged to pay four younger psychologists $2,000 each to review his manuscript anonymously, and to tell him the brutal truth: should he bother finishing?

They liked it. So did I. It's hard not to: Kahneman's approach to psychology spurns heart-sinking tables and formulae in favour of short, intriguing questions that elegantly illustrate the ways our intuitions mislead us.

Take the famous "Linda question": Linda is a single 31-year-old, who is very bright and deeply concerned with issues of social justice. Which of the following statements is more probable: a) that Linda works in a bank, or b) that Linda works in a bank and is active in the feminist movement? The overwhelming majority of respondents go for b), even though that's logically impossible. (It can't be more likely that both things are true than that just one of them is.) This is the "conjunctive fallacy", whereby our judgment is warped by the persuasive combination of plausible details. We are much better storytellers than we are logicians.

If any of this sounds familiar, it's because Kahneman and his collaborator Amos Tversky, who died in 1999, are the primary inspiration for many of the past decade's pop-psychology books – the publishing phenomenon that brought you tipping points and freakonomics, the wisdom of crowds, black swans, and "predictable irrationality". It is a trend that one unimpressed reviewer of Kahneman's book labelled "the effect effect". In the early days, academics took a similarly sniffy view of Kahneman and Tversky's research: Kahneman recalls one well-known American philosopher turning his back on him at a party with the disdainful words: "I am not really interested in the psychology of stupidity." That soon changed, though, as the pair's influence spread rapidly throughout the social sciences, culminating in 2002, when Kahneman became one of a handful of non-economists to win the Nobel prize in economics.

"The psychology of stupidity" is not, in any case, a very apt summary. Kahneman's point isn't that we're all wildly bizarre or idiotic, but that our mental apparatus, which works so well most of the time, sometimes leads us astray in predictable ways. "We're beautiful devices," he says. "The devices work well; we're all experts in what we do. But when the mechanism fails, those failures can tell you a lot about how the mind works."

In Thinking, Fast and Slow, he presents this as a drama with two "characters": System One, which is the domain of intuitive responses, and System Two, the domain of conscious, effortful thought. System One – the kind of mental ability celebrated in Malcolm Gladwell's book Blink – kicks in without our needing to think about it. The problem is that it always tries to help, even when it shouldn't, and that it works with whatever it's got, which isn't always the most sensible information.

The biggest challenge this posed was to economists, most of whom assumed that people were basically rational and selfish and acted in their own best interests. The work that won Kahneman the Nobel showed otherwise. For example, we hate losing things more than we like gaining them, which is why people refuse to sell their home for less than they paid, even if it makes financial sense to do so. Similar biases make us behave strangely where risk is involved, too: if forced to choose between being given £500 for certain, or a 50% chance of winning £1,000, most of us will opt for the sure thing. But if the choice is between losing £500 for sure, or a 50% chance of losing £1,000, most of us will take the gamble.

Then there's the much-cited thought experiment involving tickets to the theatre. Suppose a woman plans to buy a ticket for a play costing £40, but en route to the theatre she realises she has lost two £20 notes in the street: would she still buy the ticket? Most people, when asked this question, assume that she would. But what if she bought the ticket in advance, then arrived at the theatre to find she'd lost it? In that case, people assume she'd go home without buying another ticket – even though the scenarios are financially identical. As Richard Thaler, another leading light in the revolution that became known as behavioural economics, told an interviewer, Kahneman and Tversky's research meant that "rationality was fucked". Kahneman, on the other hand, likes to say that you'd need to study economics for years before you'd find his research surprising: it didn't surprise his mother at all.

Kahneman was born in 1934, the son of Lithuanian Jews, and grew up in France. Life was generally good until 1940, when German forces swept in. He recalls drawing, around that time, "what was probably the first graph I ever drew", showing his family's fortunes over time – "and around 1940 the curve crossed into the negative domain." His father was captured during a large-scale sweep of Jews in France, but somehow escaped being sent to a concentration camp and was let go instead. ("The story of my father's release, which I never fully understood, also involved a beautiful woman and a German general who loved her," he wrote.) The family kept moving across France. "The feeling was of being hunted," Kahneman recalls. At one point their home was a chicken coop at the back of a pub. In 1944 his father died of insufficiently treated diabetes, six weeks short of D-day. As soon as the war ended, his mother took the family to live in Palestine, in what would soon become Israel.

Kahneman was drafted into the Israeli army in 1955, where he served as an infantryman for a year – "it was a very tense time, but I never fired a shot in anger" – then worked as a military psychologist. One of his roles was to evaluate new recruits by watching them perform the "leaderless group challenge", in which teams of eight men had to transfer themselves, and a large log, over a 6ft-high wall, without anybody, or the log, touching the wall. The task was designed to reveal the participants' true character, and thus demonstrate who had the making of a future leader. As a method of psychological evaluation, it wasn't much good: Kahneman made predictions, but follow-up research revealed them to be little better than guesses. What the experience taught him, in the end, wasn't how to spot a future hero, but rather how hard it was to expunge his own confidence in his predictions. "We knew as a general fact that our predictions were little better than random guesses," he writes. "But we continued to feel and act as if each particular prediction was valid." Confidence is a feeling, not a logical conclusion reached after analysing statistics. Kahneman would later encounter the same phenomenon among investment advisers, who clung to their belief in their abilities even after it was demonstrated that their stock-picking skills left their clients no better off than rolling dice.

The intellectual relationship that defined his career began in the late 1960s at Hebrew University in Jerusalem, when he met Tversky, a young colleague. Kahneman describes their bond as "magical", and it sounds much more like a loving friendship than a scholarly collaboration. For several years, the two spent hours every afternoon in freewheeling conversations, examining their own hunches and intuitions, gradually developing the list of biases and fallacies for which they became famous. "He got up late, and I was a morning person, so we started with lunch, and took it from there," Kahneman remembers. "This kind of collaboration is very unusual in science. We were just extraordinarily lucky, and we knew it." The editor of the journal to which they submitted their first major paper rejected it; their work seemed too frivolous for the academic establishment. "Psychologists really aim to be scientists, white-coat stuff, with elaborate statistics, running experiments," Kahneman says. "The idea that you can ask one question and it makes the point ... well, that wasn't how psychology was done at the time."

With hindsight, however, those single questions seem anything but frivolous. The irrational traits they uncovered are, to pick one notable example, hugely important in understanding the causes of the current economic crisis, which has its roots in (among others) the overconfidence bias and the illusion of skill. If we can't hope to correct such biases in any lasting way, we can perhaps seek to cultivate some humility about the limits of our mental powers. Being the puppet of subtle psychological influences we cannot even recognise is annoying. But at least we can try to remember that that's what's likely to be happening. Well, it's a start.

“The Quest: Energy, Security, and the Remaking of the Modern World,” by Daniel Yergin

2011-11-14T00:26:00.001-08:00

“The Quest: Energy, Security, and the Remaking of the Modern World,” by Daniel Yergin

By Bill McKibben, Published: November 12

Daniel Yergin is the closest thing we have to an energy seer. He runs Cambridge Energy Research Associates, and his contacts in the industry are prodigious. His book “The Prize” was a No. 1 bestseller and the basis for a PBS series. It was magisterial in its account of the rise of the oil industry, and some of that power carries over into this new book, which includes a remarkable chronicle of the rise of the Russian oil industry and of its fate in the post-Soviet free-for-all. (See, for instance, his account of Sparmurat Niyazov, the former ruler of Turkmenistan, who not only renamed the months of the year after his mother but also managed to sell the same natural gas to several foreign companies.) Yergin also tells the story of the mergers that produced the super-major oil companies and of the political calculations that have left even them small compared to the national oil and gas companies that now dominate supplies.

He covers a wide range of other fuels — there’s a particularly fine account of Adm.Hyman Rickover and the birth of America’s nuclear program — but it’s fossil fuels that mostly power both our planet and this narrative. Oil is so central to the story of our time that everything — especially our Mideast wars — is fair game. Yergin routinely moves from macro to micro: One moment you’re reading about Saddam Hussein and the next about developments in computer-aided design for oil-rig designers. It’s not the kind of book that has to labor to tell the story of the planet through some marginal commodity — say, pepper. Oil, by comparison, truly is the story of modernity.

And it’s the story of the moment, too. The most crucial part of this account comes when Yergin steps away from history and addresses the very pressing and immediate challenges that threaten to end the fossil-fuel age that has shaped our economic life for more than a century.

One key issue is peak oil, the idea that we’re running out of petroleum. The notion, now many decades old, originated with the geologist M. King Hubbert, who used a series of mathematical models to show that U.S. oil production would peak in the late 1960s. He was right in this prediction (though Yergin points out that he dramatically underestimated how much oil would be extracted by the time production peaked), which has led many to adapt his curves to global oil supplies. You’ve heard the predictions, some of them echoed by some of the most prominent energy economists and leaders: The supply of oil has reached its zenith and will now decline. Yergin says this won’t happen, for two reasons. One is that as prices rise and technologies improve, it becomes profitable to drain more oil from existing wells. The other, more important, is that with higher prices we’re able to go after brand-new sources of oil and gas, which would have been economically off-limits in earlier times. We call these new sources “unconventional” — super-deep-water drilling, the fracking of huge swaths of the countryside and the exploiting of deposits like Alberta’s tar sands. “With the passage of time,” Yergin says, “the unconventionals become, in all of their variety, one of the pillars of the world’s future petroleum supply. And they help explain why the plateau continues to recede into the horizon.”

Yergin may well be right on this point. There’s been a huge boom in gas production from shale deposits in the Northeast, for instance (though a series of newspaper stories indicates that the drilling companies may be grossly overstating the size of their reserves). If Yergin is correct, it is all the more important that he tackle the implications for global warming. But he goes lightly on this. If we took declining supplies of conventional fossil fuel as a signal to make the rapid transition to renewable energy, we might be able to slow the onset of climate change. If, instead, we take them as a signal to seek out these unconventional supplies, then we may have very little chance. As NASA’s James Hansen, our foremost climate scientist, said earlier this year, if emissions from coal are phased out over the next few decades and “if unconventional fossil fuels are left in the ground, it is conceivable to stabilize climate.” If instead we pursue the rapid development of, say, Canadian tar sands, it’s “essentially game over for the climate.” (Hansen demonstrated the conviction with which he holds the latter view by getting arrested outside the White House in August while taking part in mass civil disobedience aimed at blocking a major new pipeline to those tar sands, a protest in which I also participated.)

Yergin provides a book-within-a-book history of the development of global-warming science, going back to 1856 and British physicist John Tyndall examining the glaciers of Switzerland. This has been done many times, and it is here that Yergin’s volume proves disappointing. Yergin implies that Hansen and others have been alarmist about climate change, but in fact they and others have, if anything, understated how fast change has come. In early autumn of 2011, surveying a nation where the Southwest is in the deepest drought it’s ever experienced and the Middle Atlantic and Northeast have just recorded the greatest rainfalls in their history, it’s easy to understand why the world’s largest insurance company, Munich Re, said last December that the planetary rise in catastrophes “cannot be explained without global warming.” By contrast, Yergin doesn’t seem to have a strong opinion. He sums up his endless climate history with a page-long summary titled “The Legacy of the Glaciers,” in which he says that some people are really worried, while “others say the bounds of uncertainty are wider, the knowledge of how climate works is less developed, and that fluctuations have always characterized the weather.” That’s essentially the stand of Texas governor and presidential candidate Rick Perry, but it’s not at all what the science says.

Because he refuses to come to a conclusion one way or another on the central question, Yergin’s book ultimately doesn’t matter as much as it could have. It drifts on for another couple of hundred pages, describing what’s likely to happen if we stick to our current economic trajectory. That trajectory is likely, of course — the power of the fossil fuel industry to delay real change is large. At least through 2030, Yergin says, the energy system will look as it does right now, only bigger. If that’s true, and the scientists are right, the next set of historians will be considerably more judgmental in their big books.

bookworld@washpost.com

Bill McKibben is the author, most recently, of “Eaarth: Making a Life on a Tough New Planet.” He is Schumann Distinguished Scholar at Middlebury College.

IAN BREMMER and NOURIEL ROUBINI - Whose Economy Has It Worst?

2011-11-14T00:21:00.000-08:00

Whose Economy Has It Worst?

With Europe, China and the U.S. in crisis, the real question is which of them will stumble first

By IAN BREMMER and NOURIEL ROUBINI

It's no wonder that global markets are so jittery. The world's three largest economies can't continue along their current paths, and everybody knows it. Investors watch nervously for signs that China is headed toward a hard landing, that America will sink back into recession, and that the euro zone will simply implode.

Edel Rodriguez

'In all three cases, kicking the can down the road has staved off disaster so far -- but the cans are getting bigger and heavier.'

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier. Which economy will be the first to stumble on its problems?

An improved political picture in Italy together with a new prime minister in Greece, is helping to patch up fragile investor sentiment, but some analyst say it could be short-lived. Stacy Meichtry joins Paul Vigna and Jonathan Shipman on Markets Hub.

In Europe, the tough decisions have been put off because the principal players don't agree on how or why the trouble began. Germany and the other better-off countries blame the profligacy of Greece, Portugal and Italy and fear that an early bailout would relieve pressure on them to mend their ways. For their part, the debtor nations believe that the entire euro zone is out of balance and that more prosperous countries like Germany should export less and consume more to set things right.

Other Europeans say that a shared currency cannot survive indefinitely when monetary policy is centrally managed but each government decides how much to tax and spend. Still others warn that access to market capital requires a form of collective insurance, preferably in the form of a euro bond. Not surprisingly, Germany resists this solution because it implies a gradual transfer of wealth from the core economies to the periphery, a "transfer union" from rich to poorer states.

The market continues to pin its hope on massive intervention by the European Central Bank to restore market confidence once the new Greek and Italian governments are in place. But that may be wishful thinking. Simon Nixon joins The Markets Hub.

Yet another European view holds that the austerity plans now envisioned by Germany and the European Central Bank are worse than the disease. The Continent needs growth, not just reform and belt-tightening, they argue, and only a surge of stimulus across the entire euro area can achieve it.

The 17 countries and four European institutions now entangled in the euro zone crisis will continue trying to muddle through, but their dawdling can't be sustained. Markets are already losing confidence in piecemeal reform. Doubts about Italy, an economy too big to bail, will only add to the volatility.

Europe will be the first to drop out of the game of kick the can: Expect a disorderly debt default in Greece, more trouble for European banks and a sharp recession across the continent.

Associated Press

A salesperson talks to a woman visiting a housing fair in Nanjing in eastern China's Jiangsu province on Oct. 13.

In China, the need for economic reform also has become obvious. It has been four years since Premier Wen Jiabao first warned that the country's economic model is "unstable, unbalanced, uncoordinated and ultimately unsustainable" and three years since the financial crisis made clear that China's growth remains dangerously dependent on exports to Europe, America and Japan.

To ensure long-term economic expansion (and political stability), Beijing must figure out a way to encourage Chinese consumers to buy more of the products that local manufacturers make. This will demand a massive transfer of wealth from the state and China's state-owned companies to Chinese households.

European markets may have calmed down but with the future of the euro still unresolved, interest in the dollar should be on the rise. If not the dollar, then where should the hunt for a safe haven turn to next? Dow Jones's Alen Mattich discusses.

But Beijing is moving in the opposite direction. The leadership responded to Western market turmoil not by boosting consumption but by increasing state and private spending on fixed investment, which now accounts for nearly half of China's growth. The result has been an explosion in residential and commercial real estate, more state spending on infrastructure and more cheap loans from state-owned banks to state-owned enterprises.

In an interview with WSJ's Rebecca Blumenstein, former U.S. Secretary of State Condoleezza Rice says she is very concerned about Europe's future as it confronts a political crisis that threatens to destroy its unity.

Indeed, a key obstacle to reform is that China remains so heavily invested in its state-managed model of capitalism. Of the 42 Chinese companies listed in the 2010 edition of the Fortune 500, 39 were state-owned enterprises, and three quarters of China's 100 largest publicly traded companies are government controlled. Party officials with a stake in the success of state-owned enterprises have amassed considerable power within the leadership, and they ferociously resist efforts to transfer away their wealth to private enterprises and ordinary citizens.

China has the cash and foreign reserves to postpone a crisis. But growth is slowing, financial stresses are rising, and there is good reason to fear that China's days of can-kicking are numbered as well.

Which leaves the U.S. No one can restore confidence in America's long-term fiscal health without a credible plan to cut spending on entitlements and defense while raising revenues, which are now at a 60-year low as a share of GDP. But don't expect any immediate solutions from Washington. The campaign season will only exacerbate petty partisanship and political gridlock, which means that the structural problems of the U.S. economy are likely to persist.

But the longer-term future appears much brighter for the U.S. than for either Europe or China. America is still the leader in the kind of cutting-edge technology that expands a nation's long-term economic potential, from renewable energy and medical devices to nanotechnology and cloud computing. Over time, these advantages will yield more robust economic growth.

The U.S. also has a demographic advantage. In Europe, declining birthrates and rising sentiment against immigration point toward a population that will shrink by as much as 100 million people by 2050. In China, thanks in part to its one-child policy, the working population has already begun to contract. By 2030, nearly 250 million Chinese will have passed the age of 65, and providing them with pensions and health care will be very costly.

Despite debate over illegal immigration, the U.S. population will likely rise from 310 million to about 420 million by midcentury. Between 2000 and 2050, according to Mark Schill of Praxis Strategy Group, the U.S. workforce is expected to grow by 37%. China's will shrink by 10%. Europe's will contract by 21%.

Finally, despite the rising exasperation of the American public, the U.S. is significantly more likely than Europe or China to quit kicking the can down the road. Nothing much will change during the election year, but 2013 offers a chance for real fiscal reform.

Next November, Republicans are likely to win both houses of Congress. If a Republican is elected president, the GOP will face enormous public pressure to deliver on its reform promises. Even if President Obama is re-elected, the outlook for a grand bargain is bright. He would be free of the most immediate demands of electoral politics, and like other second-term presidents, he could begin to consider his legacy.

Make no mistake: The challenges that the U.S. faces are formidable, and persistent political gridlock could delay badly needed fiscal and structural reforms. But everything is relative, and the best can to be kicking down the road just now is undoubtedly the one made in America.

—Mr. Bremmer is the president of Eurasia Group and the author of "The End of the Free Market." Mr. Roubini is the chairman of Roubini Global Economics and a professor at New York University's Stern School of Business.

Malcolm Gladwell - The Tweaker

2011-11-14T00:15:00.000-08:00

The Tweaker

The real genius of Steve Jobs.

by Malcolm Gladwell November 14, 2011

Jobs’s sensibility was more editorial than inventive. “I’ll know it when I see it,” he said.

Not long after Steve Jobs got married, in 1991, he moved with his wife to a nineteen-thirties, Cotswolds-style house in old Palo Alto. Jobs always found it difficult to furnish the places where he lived. His previous house had only a mattress, a table, and chairs. He needed things to be perfect, and it took time to figure out what perfect was. This time, he had a wife and family in tow, but it made little difference. “We spoke about furniture in theory for eight years,” his wife, Laurene Powell, tells Walter Isaacson, in “Steve Jobs,” Isaacson’s enthralling new biography of the Apple founder. “We spent a lot of time asking ourselves, ‘What is the purpose of a sofa?’ ”

It was the choice of a washing machine, however, that proved most vexing. European washing machines, Jobs discovered, used less detergent and less water than their American counterparts, and were easier on the clothes. But they took twice as long to complete a washing cycle. What should the family do? As Jobs explained, “We spent some time in our family talking about what’s the trade-off we want to make. We ended up talking a lot about design, but also about the values of our family. Did we care most about getting our wash done in an hour versus an hour and a half? Or did we care most about our clothes feeling really soft and lasting longer? Did we care about using a quarter of the water? We spent about two weeks talking about this every night at the dinner table.”

Steve Jobs, Isaacson’s biography makes clear, was a complicated and exhausting man. “There are parts of his life and personality that are extremely messy, and that’s the truth,” Powell tells Isaacson. “You shouldn’t whitewash it.” Isaacson, to his credit, does not. He talks to everyone in Jobs’s career, meticulously recording conversations and encounters dating back twenty and thirty years. Jobs, we learn, was a bully. “He had the uncanny capacity to know exactly what your weak point is, know what will make you feel small, to make you cringe,” a friend of his tells Isaacson. Jobs gets his girlfriend pregnant, and then denies that the child is his. He parks in handicapped spaces. He screams at subordinates. He cries like a small child when he does not get his way. He gets stopped for driving a hundred miles an hour, honks angrily at the officer for taking too long to write up the ticket, and then resumes his journey at a hundred miles an hour. He sits in a restaurant and sends his food back three times. He arrives at his hotel suite in New York for press interviews and decides, at 10 P.M., that the piano needs to be repositioned, the strawberries are inadequate, and the flowers are all wrong: he wanted calla lilies. (When his public-relations assistant returns, at midnight, with the right flowers, he tells her that her suit is “disgusting.”) “Machines and robots were painted and repainted as he compulsively revised his color scheme,” Isaacson writes, of the factory Jobs built, after founding NeXT, in the late nineteen-eighties. “The walls were museum white, as they had been at the Macintosh factory, and there were $20,000 black leather chairs and a custom-made staircase. . . . He insisted that the machinery on the 165-foot assembly line be configured to move the circuit boards from right to left as they got built, so that the process would look better to visitors who watched from the viewing gallery.”

Isaacson begins with Jobs’s humble origins in Silicon Valley, the early triumph at Apple, and the humiliating ouster from the firm he created. He then charts the even greater triumphs at Pixar and at a resurgent Apple, when Jobs returns, in the late nineteen-nineties, and our natural expectation is that Jobs will emerge wiser and gentler from his tumultuous journey. He never does. In the hospital at the end of his life, he runs through sixty-seven nurses before he finds three he likes. “At one point, the pulmonologist tried to put a mask over his face when he was deeply sedated,” Isaacson writes:

Jobs ripped it off and mumbled that he hated the design and refused to wear it. Though barely able to speak, he ordered them to bring five different options for the mask and he would pick a design he liked. . . . He also hated the oxygen monitor they put on his finger. He told them it was ugly and too complex.

One of the great puzzles of the industrial revolution is why it began in England. Why not France, or Germany? Many reasons have been offered. Britain had plentiful supplies of coal, for instance. It had a good patent system in place. It had relatively high labor costs, which encouraged the search for labor-saving innovations. In an article published earlier this year, however, the economists Ralf Meisenzahl and Joel Mokyr focus on a different explanation: the role of Britain’s human-capital advantage—in particular, on a group they call “tweakers.” They believe that Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them—refined and perfected them, and made them work.

In 1779, Samuel Crompton, a retiring genius from Lancashire, invented the spinning mule, which made possible the mechanization of cotton manufacture. Yet England’s real advantage was that it had Henry Stones, of Horwich, who added metal rollers to the mule; and James Hargreaves, of Tottington, who figured out how to smooth the acceleration and deceleration of the spinning wheel; and William Kelly, of Glasgow, who worked out how to add water power to the draw stroke; and John Kennedy, of Manchester, who adapted the wheel to turn out fine counts; and, finally, Richard Roberts, also of Manchester, a master of precision machine tooling—and the tweaker’s tweaker. He created the “automatic” spinning mule: an exacting, high-speed, reliable rethinking of Crompton’s original creation. Such men, the economists argue, provided the “micro inventions necessary to make macro inventions highly productive and remunerative.”

Was Steve Jobs a Samuel Crompton or was he a Richard Roberts? In the eulogies that followed Jobs’s death, last month, he was repeatedly referred to as a large-scale visionary and inventor. But Isaacson’s biography suggests that he was much more of a tweaker. He borrowed the characteristic features of the Macintosh—the mouse and the icons on the screen—from the engineers at Xerox PARC, after his famous visit there, in 1979. The first portable digital music players came out in 1996. Apple introduced the iPod, in 2001, because Jobs looked at the existing music players on the market and concluded that they “truly sucked.” Smart phones started coming out in the nineteen-nineties. Jobs introduced the iPhone in 2007, more than a decade later, because, Isaacson writes, “he had noticed something odd about the cell phones on the market: They all stank, just like portable music players used to.” The idea for the iPad came from an engineer at Microsoft, who was married to a friend of the Jobs family, and who invited Jobs to his fiftieth-birthday party. As Jobs tells Isaacson:

This guy badgered me about how Microsoft was going to completely change the world with this tablet PC software and eliminate all notebook computers, and Apple ought to license his Microsoft software. But he was doing the device all wrong. It had a stylus. As soon as you have a stylus, you’re dead. This dinner was like the tenth time he talked to me about it, and I was so sick of it that I came home and said, “Fuck this, let’s show him what a tablet can really be.”

Even within Apple, Jobs was known for taking credit for others’ ideas. Jonathan Ive, the designer behind the iMac, the iPod, and the iPhone, tells Isaacson, “He will go through a process of looking at my ideas and say, ‘That’s no good. That’s not very good. I like that one.’ And later I will be sitting in the audience and he will be talking about it as if it was his idea.”

Jobs’s sensibility was editorial, not inventive. His gift lay in taking what was in front of him—the tablet with stylus—and ruthlessly refining it. After looking at the first commercials for the iPad, he tracked down the copywriter, James Vincent, and told him, “Your commercials suck.”

“Well, what do you want?” Vincent shot back. “You’ve not been able to tell me what you want.”
“I don’t know,” Jobs said. “You have to bring me something new. Nothing you’ve shown me is even close.”
Vincent argued back and suddenly Jobs went ballistic. “He just started screaming at me,” Vincent recalled. Vincent could be volatile himself, and the volleys escalated.
When Vincent shouted, “You’ve got to tell me what you want,” Jobs shot back, “You’ve got to show me some stuff, and I’ll know it when I see it.”

I’ll know it when I see it. That was Jobs’s credo, and until he saw it his perfectionism kept him on edge. He looked at the title bars—the headers that run across the top of windows and documents—that his team of software developers had designed for the original Macintosh and decided he didn’t like them. He forced the developers to do another version, and then another, about twenty iterations in all, insisting on one tiny tweak after another, and when the developers protested that they had better things to do he shouted, “Can you imagine looking at that every day? It’s not just a little thing. It’s something we have to do right.”

The famous Apple “Think Different” campaign came from Jobs’s advertising team at TBWA\Chiat\Day. But it was Jobs who agonized over the slogan until it was right:

They debated the grammatical issue: If “different” was supposed to modify the verb “think,” it should be an adverb, as in “think differently.” But Jobs insisted that he wanted “different” to be used as a noun, as in “think victory” or “think beauty.” Also, it echoed colloquial use, as in “think big.” Jobs later explained, “We discussed whether it was correct before we ran it. It’s grammatical, if you think about what we’re trying to say. It’s not think the same, it’s think different. Think a little different, think a lot different, think different. ‘Think differently’ wouldn’t hit the meaning for me.”

The point of Meisenzahl and Mokyr’s argument is that this sort of tweaking is essential to progress. James Watt invented the modern steam engine, doubling the efficiency of the engines that had come before. But when the tweakers took over the efficiency of the steam engine swiftly quadrupled. Samuel Crompton was responsible for what Meisenzahl and Mokyr call “arguably the most productive invention” of the industrial revolution. But the key moment, in the history of the mule, came a few years later, when there was a strike of cotton workers. The mill owners were looking for a way to replace the workers with unskilled labor, and needed an automatic mule, which did not need to be controlled by the spinner. Who solved the problem? Not Crompton, an unambitious man who regretted only that public interest would not leave him to his seclusion, so that he might “earn undisturbed the fruits of his ingenuity and perseverance.” It was the tweaker’s tweaker, Richard Roberts, who saved the day, producing a prototype, in 1825, and then an even better solution in 1830. Before long, the number of spindles on a typical mule jumped from four hundred to a thousand. The visionary starts with a clean sheet of paper, and re-imagines the world. The tweaker inherits things as they are, and has to push and pull them toward some more nearly perfect solution. That is not a lesser task.

Jobs’s friend Larry Ellison, the founder of Oracle, had a private jet, and he designed its interior with a great deal of care. One day, Jobs decided that he wanted a private jet, too. He studied what Ellison had done. Then he set about to reproduce his friend’s design in its entirety—the same jet, the same reconfiguration, the same doors between the cabins. Actually, not in its entirety. Ellison’s jet “had a door between cabins with an open button and a close button,” Isaacson writes. “Jobs insisted that his have a single button that toggled. He didn’t like the polished stainless steel of the buttons, so he had them replaced with brushed metal ones.” Having hired Ellison’s designer, “pretty soon he was driving her crazy.” Of course he was. The great accomplishment of Jobs’s life is how effectively he put his idiosyncrasies—his petulance, his narcissism, and his rudeness—in the service of perfection. “I look at his airplane and mine,” Ellison says, “and everything he changed was better.”

The angriest Isaacson ever saw Steve Jobs was when the wave of Android phones appeared, running the operating system developed by Google. Jobs saw the Android handsets, with their touchscreens and their icons, as a copy of the iPhone. He decided to sue. As he tells Isaacson:

Our lawsuit is saying, “Google, you fucking ripped off the iPhone, wholesale ripped us off.” Grand theft. I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product. I’m willing to go to thermonuclear war on this. They are scared to death, because they know they are guilty. Outside of Search, Google’s products—Android, Google Docs—are shit.

In the nineteen-eighties, Jobs reacted the same way when Microsoft came out with Windows. It used the same graphical user interface—icons and mouse—as the Macintosh. Jobs was outraged and summoned Gates from Seattle to Apple’s Silicon Valley headquarters. “They met in Jobs’s conference room, where Gates found himself surrounded by ten Apple employees who were eager to watch their boss assail him,” Isaacson writes. “Jobs didn’t disappoint his troops. ‘You’re ripping us off!’ he shouted. ‘I trusted you, and now you’re stealing from us!’ ”

Gates looked back at Jobs calmly. Everyone knew where the windows and the icons came from. “Well, Steve,” Gates responded. “I think there’s more than one way of looking at it. I think it’s more like we both had this rich neighbor named Xerox and I broke into his house to steal the TV set and found out that you had already stolen it.”

Jobs was someone who took other people’s ideas and changed them. But he did not like it when the same thing was done to him. In his mind, what he did was special. Jobs persuaded the head of Pepsi-Cola, John Sculley, to join Apple as C.E.O., in 1983, by asking him, “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?” When Jobs approached Isaacson to write his biography, Isaacson first thought (“half jokingly”) that Jobs had noticed that his two previous books were on Benjamin Franklin and Albert Einstein, and that he “saw himself as the natural successor in that sequence.” The architecture of Apple software was always closed. Jobs did not want the iPhone and the iPod and the iPad to be opened up and fiddled with, because in his eyes they were perfect. The greatest tweaker of his generation did not care to be tweaked.

Perhaps this is why Bill Gates—of all Jobs’s contemporaries—gave him fits. Gates resisted the romance of perfectionism. Time and again, Isaacson repeatedly asks Jobs about Gates and Jobs cannot resist the gratuitous dig. “Bill is basically unimaginative,” Jobs tells Isaacson, “and has never invented anything, which I think is why he’s more comfortable now in philanthropy than technology. He just shamelessly ripped off other people’s ideas.”

After close to six hundred pages, the reader will recognize this as vintage Jobs: equal parts insightful, vicious, and delusional. It’s true that Gates is now more interested in trying to eradicate malaria than in overseeing the next iteration of Word. But this is not evidence of a lack of imagination. Philanthropy on the scale that Gates practices it represents imagination at its grandest. In contrast, Jobs’s vision, brilliant and perfect as it was, was narrow. He was a tweaker to the last, endlessly refining the same territory he had claimed as a young man.

As his life wound down, and cancer claimed his body, his great passion was designing Apple’s new, three-million-square-foot headquarters, in Cupertino. Jobs threw himself into the details. “Over and over he would come up with new concepts, sometimes entirely new shapes, and make them restart and provide more alternatives,” Isaacson writes. He was obsessed with glass, expanding on what he learned from the big panes in the Apple retail stores. “There would not be a straight piece of glass in the building,” Isaacson writes. “All would be curved and seamlessly joined. . . . The planned center courtyard was eight hundred feet across (more than three typical city blocks, or almost the length of three football fields), and he showed it to me with overlays indicating how it could surround St. Peter’s Square in Rome.” The architects wanted the windows to open. Jobs said no. He “had never liked the idea of people being able to open things. ‘That would just allow people to screw things up.’ ” ♦

ILLUSTRATION: André Carrilho

Michael Lewis - The King of Human Error

2011-11-08T23:09:00.000-08:00

http://www.vanityfair.com/business/features/2011/12/michael-lewis-201112

Billy Beane’s sports-management revolution, chronicled by the author in Moneyball, was made possible by Israeli psychologists Daniel Kahneman and Amos Tversky. At 77, with his own new book, Thinking, Fast and Slow, the Nobel Prize-winning Kahneman reveals the built-in kinks in human reasoning—and he’s Exhibit A.

Michael Lewis - Boomerang: Travels in the New Third World

2011-10-25T23:42:00.000-07:00

http://mediafire.com/?ewrhz6rbxc6yryr
password: ebooksclub.org

Ezra Klein - Financial crisis and stimulus: Could this time be different?

2011-10-25T23:36:00.001-07:00

Financial crisis and stimulus: Could this time be different?

By Ezra Klein, Published: October 8

Christina Romer had been asked to scare her new boss. It was six weeks after the 2008 election, and the incoming administration had gathered in Chicago. David Axelrod, Barack Obama’s top political adviser, couldn’t have been more clear in his instructions to Romer: The president-elect needed to know how bad the economy was going to get. No pulling punches, no softening the news.

So Romer, the preternaturally cheerful economist whose expertise on the Great Depression made her a natural choice to head the incoming president’s Council of Economic Advisers, worked up some numbers to show how quickly the economy was deteriorating and what would happen if the federal government wasn’t able to mount an effective response.

It was not a pleasant presentation to sit through. The situation was grim. Afterward, Austan Goolsbee, Obama’s friend from Chicago and Romer’s successor, remarked that “that must be the worst briefing any president-elect has ever had.”

But Romer wasn’t trying to be alarmist. Her numbers were based, at least in part, on everybody else’s numbers: There were models from forecasting firms such as Macroeconomic Advisers and Moody’s Analytics. There were preliminary data pouring in from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve. Romer’s predictions were more pessimistic than the consensus, but not by much.

By that point, the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan.

The next challenge was to persuade Congress. There had never been a stimulus that big, and there hadn’t been many financial crises this severe. So how to estimate precisely what a dollar of infrastructure spending or small-business relief would do when let loose into the economy under these unusual conditions? Romer was asked to calculate how many jobs a stimulus might create. Jared Bernstein, a labor economist who would be working out of Vice President Biden’s office, was assigned to join the effort.

Romer and Bernstein gathered data from the Federal Reserve, from Mark Zandi at Moody’s, from anywhere they could think of. The incoming administration loved their report and wanted to release it publicly. Romer took it home over Christmas to double-check, rewrite and pick over. At 6 a.m. Jan. 10, just days before Obama would be sworn in as president, his transition team lifted the embargo on “The Job Impact of the American Recovery and Reinvestment Act.” It was a smash hit.

“It will be a joy to argue policy with an administration that provides comprehensible, honest reports,” enthused columnist Paul Krugman in the New York Times.

There was only one problem: It was wrong.

The issue is the graph on Page 1. It shows two blue lines sloping gently upward and then drifting back down. The darker line — “With recovery plan” — forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010.

Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administration’s economic policies. That line lets Republicans talk about “the failed stimulus.” That line that has discredited the White House’s economic policy.

But the other line — “Without recovery plan” — is more instructive. It shows unemployment peaking at 9 percent in 2010 and falling below 7 percent by the end of this year. That’s the line the administration used to scare Congress into passing the single largest economic recovery package in American history. That line is the nightmare scenario.

And yet this is the cold, hard fact of the past three years: The reality has been worse than the administration’s nightmare scenario. Even with the stimulus, unemployment shot past 10 percent in 2009.

To understand how the administration got it so wrong, we need to look at the data it was looking at.

The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; t hey didn’t know that it had been run over by a truck.

There were certainly economists who argued that the recession was going to be worse than the forecasts. Nobel laureates Krugman and Joe Stiglitz were among the most vocal, but they were by no means alone. In December 2008, Bernstein, who had been named Biden’s chief economist, told the Times, “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”

The Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish “This Time Is Different,” their fantastically well-timed study of nine centuries of financial crises. In their view, the administration wasn’t being just a bit optimistic. It was being wildly, tragically optimistic.

That was the dark joke of the book’s title. Everyone always thinks this time will be different: The bubble won’t burst because this time, tulips won’t lose their value, or housing is a unique asset, or sophisticated derivatives really do eliminate risk. Once it bursts, they think their economy will quickly clamber out of the ditch because their workers are smarter and tougher, and their policymakers are wiser and more experienced. But it almost never does.

In March 2009, Reinhart and Rogoff took to Newsweek to critique the “chirpy forecasts coming from policymakers around the globe.” The historical record, they said, showed that “the recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11 to 12 percent in 2011.”

It seems unlikely that unemployment will return to 11 percent this year, but if the global economy tips back into recession, anything is possible. Either way, Rogoff and Reinhart were a lot closer to the mark than most forecasters.

But the administration insisted on optimism. There was talk of “green shoots” and the “recovery summer.” Events in Greece and in oil markets were chalked up to bad luck rather than the predictable aftershocks of a financial crisis. The promised recovery was always just around the corner, but it never quite came. Eventually, the American people stopped listening. A September poll showed that 50 percent of Americans thought Obama’s policies had hurt the economy.

“I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category,” says Peter Orszag, who led the Office of Management and Budget before leaving the administration to work at Citigroup. “I didn’t realize we were in a Reinhart-Rogoff situation until 2010.”

This time, it turned out, wasn’t different. But could it have been?

The boot and the slog

The basic thesis of “This Time Is Different” is that financial crises are not like normal recessions. Typically, a recession results from high interest rates or fluctuations in the business cycle, and it corrects itself relatively quickly: Either the Federal Reserve lowers rates, or consumers get back to spending, or both.

But financial crises tend to include a substantial amount of private debt. When the market turns, this “overhang” of debt acts as a boot on the throat of the recovery. People don’t take advantage of low interest rates to buy a new house because their first order of business is paying down credit cards and keeping up on the mortgage.

In subsequent research with her husband, Vincent Reinhart, Carmen Reinhart looked at the recoveries following 15 post-World War II financial crises. The results were ugly. Forget the catch-up growth of 4 or 5 percent that so many anticipated. Average growth rates were a full percentage point lower in the decade after the crisis than in the one before.

Perhaps as a result, in 10 of the 15 crises studied, unemployment simply never — and the Reinharts don’t mean “never in the years we studied,” they mean never ever — returned to its pre-crisis lows. In 90 percent of the cases in which housing-price data were available, prices were lower 10 years after the crash than they were the year before it.

There is no doubt that the post-crisis trajectory looks more like the slog Reinhart and Rogoff described than the relatively rapid rebound predicted by the administration and many forecasters. Yet even among economists who admire Reinhart and Rogoff’s work, there is skepticism.

One source comes in how Reinhart and Rogoff find the economic phenomena they’re trying to study. “There’s an identification problem,” Stiglitz says. “When you have underlying problems that are deep, they will cause a financial crisis, and the crisis itself is a symptom of underlying problems.”

Another is in their fatalism. “I don’t buy their critique in the sense that this was an inevitability,” says Dean Baker, director of the Center for Economic and Policy Research and one of the economists who spotted the housing crisis early.

The Obama administration didn’t buy the idea of inevitability, either. The team crafted a multi-pronged approach of stimulus spending, programs to address the housing market, and policy coordinated with an activist Federal Reserve. It firmly believed that it was better to do too much than too little. Its credo was well expressed by Romer at that December meeting, when she told the president, “We have to hit this with everything we’ve got.” But in reality, the administration could only hit it with everything it could persuade Congress to give. And that wasn’t enough.

Finding fault with the stimulus

Some partisans offer a simple explanation for the depth and severity of the recession: It’s the stimulus’s fault. If we had done nothing, they say, unemployment would never have reached 10 percent.

That notion doesn’t find much support even among Republican economists. Doug Holtz-Eakin is president of the right-leaning American Action Forum and served as Sen. John McCain’s top economic adviser during the 2008 presidential campaign. He’s no fan of the stimulus, but he has no patience with the idea that it made matters worse.

“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”

A fairer assessment of the stimulus is that it did much more than its detractors admit, but much less than its advocates promised.

“The thing that people who want to argue that the stimulus failed have to deal with,” Bernstein says, “is that if you look at the trajectory of job losses, you will find that right on the heels of the Recovery Act, the rate of job losses began to diminish and then the jobs numbers turned positive. The Recovery Act worked. The problem is we didn’t keep our foot on the accelerator.”

That’s not the sort of success the president had promised, though. He said the stimulus would “jolt our economy back to life.” In Denver, the site of the 2008 Democratic National Convention, he said that although “this was not the end of our economic problems,” it was “the beginning of the end.”

It wasn’t.

Critics and defenders on the left make the same point: The stimulus was too small. The administration underestimated the size of the recession, so it follows that any policy to combat it would be too small. On top of that, it had to get that policy through Congress. So it went with $800 billion — what Romer thought the economy could get away with — rather than $1.2 trillion — what she thought it needed. Then the Senate watered the policy down to about $700 billion. Compare that with the $2.5 trillion hole we now know we needed to fill.

But it is hard to credit the argument that the stimulus could have been much larger at the outset. This was already the biggest stimulus in U.S. history, and congressional leaders had been quite clear with the White House: Don’t send over anything that passes the trillion-dollar mark. To try and double the bill’s size based on a suspicion that the recession was much worse than the early data indicated would have been a hard sell, to say the least.

Even if Congress had been more accommodating, there was a challenge to vastly increasing the size of the initial stimulus: The more you spend, the less effective each new dollar would become.

“We were trying to spend 10 times what had ever been spent in a year,” says Goolsbee, who chaired the Council of Economic Advisers until this year. “The tension was that the biggest bang for the buck comes from direct spending like infrastructure, but once you use up the big-ticket items, you eventually come to a point where the tax cuts are better bang for the buck than the 300 billionth infrastructure dollar.” And tax cuts, frankly, aren’t a very good bang for the buck.

But although the administration’s team hoped the initial stimulus would work, it figured that if it didn’t, it could go back to Congress for more.

“If you’re at the barber and they don’t cut your hair short enough, you can always ask them to go a little further,” Bernstein says. “That’s sort of how I thought about stimulus policy. I don’t think we could have done more in February of 2009 based on political and implementation constraints. But I probably didn’t recognize how hard it would be to go back to the barbershop.”

The theory was that success would beget success. Passing the stimulus would stabilize the economy, prove the White House’s political mettle and deliver immediate relief to millions of Americans. That would help the administration build the political capital to pass more stimulus, if necessary. But when the economy failed to respond as predicted, the political theory fell apart, too.

“The biggest problem we had in terms of the loss of political capital is we came in and did a bunch of stuff, and things got worse,” says Ron Klain, who served as chief of staff to Biden. “And some of that was just bad luck. If we didn’t have the 22nd Amendment and Barack Obama became president in late March rather than in late January, things would have been much worse when we came in than they were. And then the Recovery Act would have come not in February, but in May. We would already have hit bottom, and it would seem like things were getting better.”

This has led to a what-if that torments the White House’s political team: What if it hadn’t taken on so much? The administration rushed from the second bucket of bailout funds to the stimulus to the auto-industry rescue to health care to climate change legislation to financial regulation. In a world where the economy was steadily recovering, Obama might have amassed a record comparable to Franklin Roosevelt’s. But as the situation slowly deteriorated, the American people turned against the administration’s crush of initiatives. The frenetic pace made the White House seem inattentive and unfocused amid a mounting crisis.

But the alternative is similarly difficult to imagine. No one believes that significantly reining in the agenda would have led to much more stimulus. Perhaps the president would have benefited politically from speaking more about jobs and less about health care, but then again, he had historic majorities in both houses of Congress and had come into office promising dramatic change.

A more accurate understanding of the recession could, however, have led to a somewhat different stimulus — and perhaps a more durable political strategy. The policy was constructed at breakneck speed, with the emphasis on getting money spent fast. That led to more tax cuts, as they could happen quickly, and less infrastructure, as projects — particularly anything more complex than road repair — can take years to begin, by which point a typical recession has ended of its own volition.

Another cost of moving quickly was that it put a premium on policies already floating around that could be easily dropped into the legislation. That, according to Holtz-Eakin, solidified Republican opposition.

“If you’re a staffer and you have been watching business in the House and Senate for a long time,” he says, “what you saw them doing was pulling old ideas off the shelf — old ideas you had fought and that Democrats had abandoned. So Republicans in Congress just hated it.”

A stimulus conducted with the Rogoff-Reinhart lessons in mind might have been broken into pieces and spread over a longer time frame. The administration could have pushed to tie key components such as unemployment benefits, state and local aid, and tax cuts to the unemployment rate rather than setting them to expire after two years. With the knowledge that it had years of low growth to combat, there could have been a short-term infrastructure component — potholes, school repairs and the like — followed, in separate legislation that Congress would have had more time to consider, by a long-term infrastructure component for big investments such as high-speed rail and health-information technology.

But there’s little reason to believe that would have turned unemployment numbers around. In fact, we have seen fairly regular extensions of unemployment benefits and tax cuts over the past year. A bill with a longer time frame perhaps would have saved the administration from political headaches down the road, but it could have even made it harder to ask Congress for more, as the initial policy would not have finished spending out yet.

‘Politics on housing are hideous’

The stimulus was a bet that we could get out of this recession through the one path everyone can agree on: growth. The bet was pretty much all-in, and it failed. Reinhart and Rogoff are not particularly surprised. It’s hard to get through a debt-driven crisis without doing anything about, well, debt.

In our crisis, the “debt” in question is housing debt. Home prices have fallen almost 33 percent since the beginning of the crisis. All together, the nation’s housing stock is worth $8 trillion less than it was in 2006. And we’re not done. Morgan Stanley estimates there are more than 2.2 million homes sitting vacant, and 7.5 million more facing foreclosure. It is housing debt that has weakened the banks, and mortgage debt that is keeping consumers from spending.

In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.”

To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”

The Obama administration, perhaps cognizant of the politics, was not nearly so bold. It focused on stimulus rather than housing debt. The idea was that if people could keep their jobs and pay their bills, they could pay their mortgages. But today, few on the Obama team will mount much of a defense of its housing policy.

Its efforts to heal the troubled market at the core of the financial crisis are widely considered weak and ineffective. The Home Affordable Modification Program, which proposed to pay mortgage servicers to renegotiate with financially stressed homeowners, couldn’t persuade the servicers to play ball and so has left most of its $75 billion unspent. The Home Affordable Refinance Program was projected to help 5 million underwater homeowners. It has reached fewer than 1 million.

Even so, the administration rejects the more radical solutions that are occasionally floated. The problem, it says, is that the choices are mostly between timid and unworkable.

One problem was that mortgage finance giants Fannie Mae and Freddie Mac were ultimately controlled by the independent Federal Housing Finance Agency. Created by Congress in 2008, the agency was initially led by a Bush administration appointee, James B. Lockhart III, and when he stepped down, by a career civil servant, Edward DeMarco. The Obama administration’s November 2010 effort to nominate its own director was foiled by Senate Republicans.

By that time, the administration had been in office for almost two years and seen the Democrats’ 60-vote majority in the Senate come and go. If it had moved more quickly to appoint a director when it had firmer control of the Senate, it could perhaps have used Fannie and Freddie to kick off a giant wave of refinancing for underwater homeowners. That alone would have done something to ease the pressure on stressed households.

But when talking about what might have worked on a massive, economy-wide scale — that is to say, what might have made this time different — you’re talking about something more drastic. You’re talking about getting rid of the debt. To do that, somebody has to pay it, or somebody has to take the loss on it.

The most politically appealing plans are the ones that force the banks to eat the debt, or at least appear to do so. “Cramdown,” in which judges simply reduce the principal owed by underwater homeowners, works this way. But any plan that leads to massive debt forgiveness would blow a massive hole in the banks. The worry would move from “What do we do about all this housing debt?” to “What do we do about all these failing banks?” And we know what we do about failing banks amid a recession: We bail them out to keep the credit markets from freezing up. There was no appetite for a second Lehman Brothers in late 2009.

Which means that the ultimate question was how much housing debt the American taxpayer was willing to shoulder. Whether that debt came in the form of nationalizing the banks and taking the bad assets off their books — a policy the administration estimated could cost taxpayers a trillion dollars — or simply paying off the debt directly was more of a political question than an economic one. And it wasn’t a political question anyone really knew how to answer.

On first blush, there are few groups more sympathetic than underwater homeowners or foreclosed families. They remain so until about two seconds after their neighbors are asked to pay their mortgages. Recall that Rick Santelli’s famous CNBC rant wasn’t about big government or high taxes or creeping socialism. It was about a modest program the White House was proposing to help certain homeowners restructure their mortgages. It had Santelli screaming bloody murder.

“This is America!” he shouted from the trading floor at the Chicago Board of Trade. “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.” The traders around him began booing loudly. “President Obama, are you listening?”

If you believe Santelli’s rant kicked off the tea party, then that’s what the tea party was originally about: forgiving housing debt.

Ultimately, concerns about the politics and policy questions behind widespread debt forgiveness were sufficient to scare the administration off of the policy. It’s a decision some ex-members of the White House regret.

“If we had thought harder about Rogoff and Reinhart, we might have made some different trade-offs regarding debt reduction,” Bernstein says. “Moral hazard is a big problem when you’re making policy regarding write-offs and principal cramdowns. It was always in the room when you were trying to help one underwater homeowner write off some debt while the person next door was playing by the rules and paying their mortgage every month. But with hindsight, I might have argued more rigorously against the risk of it.”

The Fed’s inflation option

There was, however, one institution that some think could have reduced the debt overhang crushing the economy and that didn’t face such political obstacles: the Federal Reserve.

The central bank manages the nation’s money supply and credit and sits at the center of its financial system. Usually, it spends its time guarding against the threat of inflation. But in December 2008, Rogoff argued that the moment called for the reverse strategy.

“It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass,” he wrote.

Inflation — the rate at which prices for goods go up and buying power goes down — makes any amount of money worth less over time. It can help a depressed economy in three ways: It erodes the real value of debt. It gives people an incentive to spend and invest now, as their money will not go as far later. And it tends to drive down the value of the dollar against other currencies, making U.S. exporters more competitive.

At the Federal Reserve, inflation is a four-letter word. It has spent the past few decades convincing the market that it can and will “anchor” inflation at about 2 percent. Lifting that anchor could cause problems down the road, without doing much good in the present. After all, Federal Reserve Board Chairman Ben S. Bernanke doesn’t have a red inflation button beneath a glass case on his desk. Creating inflation is difficult when demand for goods is low, and it’s not even clear that the Fed can do it.

Rogoff scoffs at this. “Creating inflation is not rocket science,” he wrote. “All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20 or 30 percent instead of 5 or 6 percent. Indeed, fear of overshooting paralyzed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.”

But the policymakers who would have needed to create that inflation aren’t so sure. “It’s difficult, if not impossible, to create persistent inflation without demand exceeding potential supply over an extended period,” says Donald L. Kohn, who served as vice chairman of the Federal Reserve Board until 2010. “Yes, changing expectations might push inflation higher, but why would expectations change materially and persistently under current circumstances?”

Bernanke seems to agree. So, it seems, does the administration, at least judging by the economists it considered nominating to the Fed.

Summers, who had the inside track to chair the central bank if the Obama administration decided against renominating Bernanke, echoes Kohn’s skepticism. “In the model I understand,” he says, “inflation is mostly driven by demand, and when you increase demand, you increase inflation. And if you don’t increase demand, you don’t increase inflation. But if you’ve solved demand, you’ve solved your problem.”

Nobel laureate Peter Diamond, whom the Obama administration nominated to fill a vacant seat on the Fed’s board, puts it this way: “If the Fed says we are determined to keep going till we have, say, 4 percent inflation, would that really turn around expectations in a way that would stimulate the economy and create higher inflation? I doubt it.”

And, of course, the Fed might be insulated from politics, but it’s not immune to it. In recent years, Rep. Ron Paul (R-Tex.) has gained national prominence in part on an “End the Fed” platform. Texas Gov. Rick Perry, a Republican presidential contender, has threatened to do something “ugly” to Bernanke. Congress passed legislation to audit the Fed. Even noted monetary economist Sarah Palin weighed in, saying, “It’s time for Ben Bernanke to cease and desist.”

To the Fed, the nightmare scenario is that it tries to create inflation now and fails. It would have given up its hard-won credibility as an inflation fighter and invited political backlash, all without helping the economy.

Labor market’s long period of pain

Growth-focused and debt-focused strategies are attempts to end the recession. They’re policy on the offensive. But perhaps the real lesson from Rogoff and Reinhart is that these recessions rarely end quickly, and so officials must manage a long period of pain — defensive policy, so to speak. America doesn’t do defense very well.

“We’re trying right now to keep our lifestyles going,” says Michael Spence, a Nobel Prize-winning economist at New York University. “It’s not really working, but the way we’re doing it is putting all the burden on the unemployed while trying to leave the employed untouched. Eventually, this is going to require a redistribution of that burden.”

In other countries, he says, the burden is more widely shared. The employed work less — and get paid less — so there are more jobs to go around. That leads to a little pain for a lot of people, rather than a lot of pain for fewer people. It also keeps more workers on the job, which means their skills don’t deteriorate and the economy isn’t left with people who became unemployed and then found themselves unemployable.

That’s what we’ve seen here: Employers have become so leery of hiring the unemployed that the Obama administration has proposed to make it illegal to discriminate against them. Such a policy is easier said than done, but it speaks to the downside of letting workers fall out of the labor force for long periods of time.

Germany’s response to the recession included a work-sharing program that subsidized salaries when employers trimmed the hours of individual workers to keep more people on the job. If workers attended job training, the government gave a more generous subsidy.

The program worked. Even though Germany’s economy was devastated by the recession — declining by almost 7 percent — the jobless rate fell slightly, from 7.9 percent at the start of the recession to 7 percent in May 2010.

There are reasons to question whether work-sharing programs would have been as effective here as they were in Germany. For one thing, they work best in sectors where jobs are bound to return after a recession — such as Germany’s export sector — rather than sectors that need to be downsized after being inflated by a credit boom.

Germany also has a different labor market. Employers, unions and the government work together with an unusual level of cooperation. The culture is much more hostile toward layoffs than the United States’ is, which has caused Germany problems in the past but has been a boon throughout this recession.

But paying the private sector to save jobs was not the administration’s only option. There was also the possibility of simply paying workers to work.

For one thing, the government could have refused to fire anyone. Says Baker, of the Center for Economic and Policy Research: “We’ve lost 500,000 state and local jobs, and before that, we were creating 160,000 a year. If we hadn’t had those losses and had done more to keep creation at that pace, we would have almost another million jobs.”

It also could have started hiring. Romer, for instance, proposed to add 100,000 teacher’s aides. Imagine similar proposals: Every park ranger could have had an assistant park ranger. Every firefighter station could have added three trainees. Every city could have expanded its police force by 5 percent. Everyone between ages 18 and 26 could have signed up for two years of paid national service.

In a relatively quick recovery, these programs wouldn’t have made sense. Better to support the economy more generally and let workers migrate from unproductive sectors to productive ones. Employing workers directly is, at best, a stopgap, and at worst, a waste of the government’s resources and the worker’s time. The government doesn’t know where workers are best used. That’s better left to the market.

But in a long slog of a recession, that logic falls apart. Workers don’t move into more productive sectors of the economy. They lose their jobs, and then they lose their paychecks, homes and, eventually, skills. That sucks demand out of the economy, further depresses home prices and makes it harder for the labor market to recover.

Call-and-response conundrum

So could this time have been different? There’s little doubt that it could have been better. From the outset, the policies were too small for the recession the administration and economists thought we faced. They were much too small for the recession we actually faced. More and better stimulus, more aggressive interventions in the housing market, more aggressive policy from the Fed, and more attention to preventing layoffs and hiring the unemployed could have led to millions more jobs. At least in theory.

Of course, ideas always sound better than policies. Policies must be implemented, and they have unintended consequences and unforeseen flaws. In the best of circumstances, the policymaking process is imperfect. But January 2009 had the worst of circumstances — a once-in-a-lifetime economic emergency during a presidential transition.

Reinhart, for one, thinks the Bush and Obama administrations don’t get sufficient credit for all they did.

“The initial policy of monetary and fiscal stimulus really made a huge difference,” she says. “I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn’t fully appreciated.”

In that way, Reinhart says, this time really was different — at least from the Great Depression, when output shrank by 30 percent and a quarter of the workforce was unemployed. “If the choice was this or the ’30s,” she says, “I’d take this hands down.”

Give policymakers some credit: They really have learned from the Depression. So did the Japanese. In the 1990s, they pumped monetary and fiscal stimulus into their economy, too, and they didn’t suffer a depression. But they never found themselves in a recovery. They stagnated for a decade, and then for another.

What we’re in looks more like Japan in the ’90s than the United States in the ’30s. Reinhart doesn’t think that’s an accident; she thinks it’s a product of the initial successes. “The same policies that serve you well in limiting the output collapse do not serve you well in speeding the time it takes to get out,” she says.

By saving the banking system, you end up with banks that are quietly holding on to toxic assets in the hope that one day they’ll be worth something. By limiting the output gap, you keep the economy from getting so bad that truly radical solutions, such as wiping out hundreds of billions of dollars of housing debt, become thinkable. You limp along.

The question, of course, is why do governments limp out of recessions when the weight of history tells them to run?

“Now knowing how much worse the storm was, people look back and say, you guys undershot,” sighs Treasury Secretary Timothy F. Geithner. “But we didn’t think we were undershooting at the time. We thought that the dominant strategy had to be massive, overwhelming force. There were political limits to what we could do, but we thought we were operating to expand the scope of those limits. I used to say to people, ‘Which mistake is harder to correct: doing too much, or doing too little?’ ”

Yet the Obama administration did too little. Its team of interventionist Keynesians immersed in the lessons of the Depression and Japan did too little. Everyone does too little, even when they think they’re erring on the side of doing too much. That’s one reason “this time” is almost never different.

The tendency thus far has been to look at these crises in terms of the identifiable economic factors that make them different from typical recessions. But perhaps the better approach is to look at the political factors that make them turn out the same, that stop governments from doing enough even when they have sworn to err on the side of doing too much.

These crises have a sort of immune system. It is never possible for the political system to do enough to stop them at the outset, as it is never quite clear how bad they are. Even if it were, the system is ill-equipped to take action at that scale. The actors comfort themselves with the thought that if they need to do more, they can do it later. And, for now, the fact that this is the largest rescue package anyone has ever seen has to be worth something.

Perversely, the very size of the package is part of its problem. With something extraordinary that is nevertheless not enough, the economy deteriorates, and the government sees its solutions discredited and its political standing weakened by the worsening economic storm. That keeps it from doing more.

Meanwhile, the opposition’s capacity to do more is arguably even more limited, as it has turned against whatever policies were tried in the first place. Add in the almost inevitable run-up in government debt, which imposes constraints in the eyes of the voters and, in some cases, in the eyes of the markets, and an economy that started by not doing enough is never able to get in front of the crisis.

These sorts of economic crises are, in other words, inherently politically destabilizing, and that makes a sufficient response, at least in a democracy, nearly impossible.

There’s some evidence for this internationally. Larry Bartels, a political scientist at Vanderbilt University, examined 31 elections that took place after the 2008 financial crisis and found that “voters consistently punished incumbent governments for bad economic conditions, with little apparent regard for the ideology of the government or global economic conditions at the time of the election.” Just look to Europe, where the path to ending the debt crisis and saving the euro zone — the group of nations that use the currency — is clear to most economists but impossible for any European politician.

That isn’t to say that this time couldn’t have been different or that next time won’t be. But it is no accident that these crises so often turn out the same, in so many countries, with so many types of governments, who have tried so many kinds of responses.

In general, the policies that are vastly better than whatever you are doing are not politically achievable, and the policies that are politically achievable are not vastly better. There were many paths that could have been taken in January 2009, and any one would have made this time a bit different. But not different enough. Not as different as we wish.

John Cassidy - How Markets Fail: The Logic of Economic Calamities

2011-10-25T21:29:00.000-07:00

http://mediafire.com/?kw5h43ojgbriycp
password: ebooksclub.org

JOHN CASSIDY - THE DEMAND DOCTOR

2011-10-25T21:28:00.000-07:00

Oct 10, 2011

THE DEMAND DOCTOR

What would John Maynard Keynes tell to do now – and should we listen?

By JOHN CASSIDY

Half a decade has passed since the bursting of a huge asset-price bubble, and the U.S. economy is still depressed. More, than ten million Americans are jobless, and many more are working part time. The gross domestic product has yet to recover its pre-bust level. In Florida and other areas where the speculative frenzy ran hot, vast developments stand empty. Overseas, things are no better, and in some places they're worse. Britain looks much like America. In Continental Europe, a debt crisis is wreaking havoc. Democratically elected governments appear powerless to turn things around. Political extremism is on the rise.

So conditions are grim when, on New Year's Day, 1935, the English economist John Maynard Keynes mails a letter to George Bernard Shaw. "I believe myself to be writing a book on economic theory which will largely revolutionize ̶ not, I suppose, at once but in the course of the next ten years—the way the world thinks about economic problems," Keynes tells his friend. "I can't expect you, or anyone else, to believe this at the present stage. But for myself I don't merely hope what I say,—in my own mind, I'm quite sure." Keynes is right. When "The General Theory of Employment, Interest and Money" appears, in February, 1936, it provides an intellectual justification for the large-scale public-works programs that Keynes has been advocating for years, and that F.D.R.'s Administration has recently launched as part of the New Deal. Keynes argues against the idea that the economy will recover on its own, and in favor of active measures—the manipulation of public expenditures, taxes, and interest rates—to spur growth and employment. His theory will become the keynote of a new era of economic policy-making. The main impediment to such policies, Keynes writes, is the lingering influence of outmoded theories:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back

Today, some regard Keynes himself as that academic scribbler, entrancing a generation of mindless followers. For many others, he's the economist whose sweeping theory, shaped by a Great Depression, remains the surest guide out of our current woes. In the wake of the global financial crisis of 2007-09, President George W. Bush and President Barack Obama both launched tax-relief and spending initiatives designed to stimulate growth. Nicolas Sarkozy, in France, and Gordon Brown, in Britain, proclaimed the end of the free-market era. We were all Keynesians, and knew it—for about five minutes.

In 2010, Britain's new government turned away from expansionary policies and introduced major budget cuts, making arguments that harked back to Keynes's opponents in the nineteen-thirties, such as Friedrich Hayek, an Austrian economist who taught at the London School of Economics. Soon Greece, Ireland, and other debt-burdened European countries were launching ever more Draconian austerity programs. On this side of the Atlantic, with unemployment remaining stubbornly high, conservative economists insisted that the Keynesian medicine had failed to cure the patient and had perhaps even worsened the disease—an argument seized upon by Republican politicians.

"Keynesian policy and Keynesian theory is now done," Governor Rick Perry, of Texas, declared during a Republican Presidential candidates' debate last month. "We'll never have that experiment on America again." The following night, however, President Obama proposed what, in all but name, was another Keynesian stimulus package: a four-hundred-andfifty-billion-dollar jobs program, consisting of tax cuts and increases in federal spending.

Seventy-five years after the publication of “The General Theory,” there is a fierce and consequential argument about what, in Keynes’s economic theory, is living and what, as Perry would have it, is "done." Has the global economy's stuttering progress since 2008 demonstrated the limitations of Keynesian policies—or the dangers of abandoning them prematurely?

The publishing industry, at least, has been bullish on Keynes in the past few years. Robert Skidelsky, the author of a monumental three-volume Keynes biography, responded to the financial crisis with a new primer titled "Keynes: The Return of the Master." Another eminent English historian, Peter Clarke, followed up with "Keynes: The Rise, Fall and Return of the 20th Century's Most Influential Economist," while new collections on Keynes and Keynesianism have appeared from Cambridge University and M.I.T. This fall, there is "Capitalist Revolutionary: John Maynard Keynes," by Roger E. Backhouse, an economic historian at the University of Birmingham, and Bradley W. Bateman, an economist at Denison University; "Keynes Hayek: The Clash That Defined Modern Economics," by the British journalist Nicholas Wapshott; and "Grand Pursuit," a history of economics by Sylvia Nasar, the author of "A Beautiful Mind," which devotes many pages to Keynes and his contemporaries.

So what was the core of his message? Before the Great Depression, most economists adhered to a Newtonian conception of the economy as a self-correcting system. When the economy entered a slump, businesses laid off workers and shut down factories—but these negative trends contained their own remedy. The trick was to look at price changes. Unemployment drove down wages (the price of labor) until firms found it profitable to start hiring again. Idling factories drove down interest rates (the price of borrowing) until entrepreneurs found it worthwhile to take out loans and re-start production. Before very long, prosperity would be restored. Attempts to hasten this process were liable to interfere with the natural forces of adjustment and make things worse. As Hayek wrote in “prices and Production” (1931), “The only way permanetly to ‘mobilize’ all available resources is . . . not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure."

In "The General Theory," Keynes took aim at this view of the world. His central insight was that the economy was driven not by prices but by what he called "effective demand"—the over-all level of demand for goods and services, whether cars or meals in fancy restaurants. If car manufacturers perceived that the demand for their products was lagging, they wouldn't hire new workers, however low wages fell. If a restaurateur had vacant tables night after night, he would have no incentive to borrow money and open a new venture, even if his bank was offering him cheap loans. In such a situation, the economy could easily remain stuck in a rut, until some outside agency—the government was Keynes's favored candidate—intervened and spurred spending. Only then would private businesses be emboldened to expand production and hire workers.

Nasar, in her capacious and absorbing book, makes the key point well:

What made the General Theory so radical was Keynes's proof that it was possible for a free market economy to settle into states in which workers and machines remained idle for prolonged periods of time. . . . The only way to revive business confidence and get the private sector spending again was by cutting taxes and letting business and individuals keep more of their income so they could spend it. Or, better yet, having the government spend more money directly, since that would guarantee that 100 percent of it would be spent rather than saved. If the private sector couldn't or wouldn't spend, the government would have to do it. For Keynes, the government had to be prepared to act as the spender of last resort, just as the central bank acted as the lender of last resort.

For three decades after the Second World War, Keynes's theory provided the framework for policymaking on both sides of the Atlantic. The West enjoyed a time of rapid growth and rising standards of living, and although it would be simplistic to ascribe these trends solely to the prescriptions of policymakers, economists who balked at Keynesian doctrine were often cast aside.

Three-quarters of a century later, Keynes’s notion of “effective demand,” nowusually called “aggregate demand,” is stilll a mainstaty of policy making around the world. Whenever the economy stumbles and unemployment starts climbing, discussion inevitably centers on what can be done to boost spending and investment. Few economists, on the left or the right, seriously advise the government to sit on its hands and let the price system work its magic. Rather, the conversation turns on what methods the authorities should use to stimulate the economy, besides cutting interest rates. Liberal economists, like Paul Krugman and Joseph Stiglitz, usually favor infrastructure spending. Conservative economists, like Greg Mankiw and Glenn Hubbard, tend to prefer tax cuts. But neither group questions the need for the government to step in and bolster demand.

In the course of his career, Keynes advocated tax cuts and interest-rate cuts, but he didn't limit himself to those measures. During the nineteen-twenties, when the unemployment rate reached double figures, and British monetary policy was hamstrung by the gold standard, Keynes called for additional spending on public housing, roadworks, and other civic projects. "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them."

With the onset of the Great Depression, Keynes stepped up his calls for action. But, as outlays on unemployment benefits increased and tax revenues declined, the budget deficit ballooned, generating alarm at His Majesty's Treasury. In the summer of 1931, the government made deep spending cuts, intending to restore confidence in government finances. Keynes warned that the effect would be to worsen the slump, throwing more people out of work. He said that budget deficits were a by-product of recessions, and that they served a useful purpose. “For government borrowing of one kind or another is nature’s remedy, so to speak, for preventing business losses from being, in so severe a slump as the present one, so great ass to bring production altogether to a standstill.”

As the Depression deepened, seeming to confirm his warnings, Keynes sharpened his theoretical arguments. In 1933, drawing on an article by his student Richard Kahn, he made the case that one dollar of additional government spending—on a new railway station, say—could ultimately generate two dollars, or even more, in additional output and income. This was the so-called "multiplies'' effect. As the unemployed were set to work on public projects, he reasoned, they would spend their wages on other goods and services, which would prompt businesses to take on more workers. Those workers, in turn, would spend more, leading to further hiring, and so on. What's more, all of these newly employed workers would be paying taxes, which would bring down the budget deficit. "It is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the Budget," Keynes wrote. "There is no possibility of balancing the Budget except by increasing the national income, which is much the same thing as increasing employment."

In Keynes's day, many people—including politicians sympathetic to Keynes—were suspicious of the multiplier. The whole thing smacked of sophistry. Wapshott, in a long overdue and well-researched book that usefully gathers together much hitherto scattered information, recounts Keynes's 1934 visit to the White House, where he expounded the logic of the multiplier to F.D.R. After he left, Roosevelt remarked to Frances Perkins, his Labor Secretary, "I saw your friend Keynes. He left a whole rigmarole of figures. He must be a mathematician rather than a political economist." Despite the enormous public-works projects of the New Deal, F.D.R. didn't formally adopt deficit spending as a policy tool. Indeed, he kept a keen eye on the red ink. In 1937, with the economy on the mend, he ordered tax hikes and spending cuts, which caused the economy to crater again. President Truman was even more suspicious of Keynesian theorizing. “nobody can ever convince me that Government can spend a dollar thatit’s not got,” he to Leon Keyserling, a Keynesian economist who chaired his Council of Economic Advisers. "I'm just a country boy."

The multiplier continues to spark controversy. Echoing the arguments that Keynes's opponents at the Treasury made during the nineteen-thirties, conservative economists like Robert Barro, at Harvard, argue that it is close to zero: for every dollar the government borrows and spends, spending elsewhere in the economy falls by almost the same amount. Whenever individuals see the government boosting spending or cutting taxes on a temporary basis, Barro maintains, they figure that these policies will eventually have to be paid for in the form of higher taxes. As a result, they set aside extra money in savings, which cancels out the stimulus.

Barro's caution may apply in certain conditions—say, a highly indebted economy with close to full employment. It's certainly true that the Keynesian multiplier varies according to how stimulus funds are spent; how the central bank reacts to higher government spending (if it raises interest rates, interest-sensitive spending will fall, reducing the multiplier); and, most important, whether workers and machinery are lying idle. But Keynes didn't advocate deficit spending for an economy at full employment. It was only when the economy was in a deep slump, he thought, that higher output "could be provided without much change of price by home resources which are at present unemployed."

This jibes with history. Immediately before and during the Second World War, the U.S. government borrowed unprecedented sums to finance the military buildup, and the economy finally recovered from the Great Depression. In 1937, one in seven American workers was jobless; in 1944, one in a hundred was. A wartime economy may present a special case, but a recent working paper by the National Bureau of Economc Research looked at data going back to 1980 and found that government investments in infrastructure and civic projects had a multiplier of 1.8—pretty dose to Keynes's estimate.

So why didn't the Obama Administration's 2009 stimulus package usher in a true recovery? Keynes would have pointed out that, with households and firms intent on paying down debts and building up their savings in the aftermath of a credit binge, large-scale deficit spending is needed merely to prevent a recession from turning into a depression. With interest rates already close to zero, Keynes would have argued that the economy was stuck in a "liquidity trap," greatly limiting the Federal Reserve's scope for further action. He would also have noted that the stimulus was—especially compared with the devastation it meant to address—rather small: equivalent to less than two per cent of G.D.P. a year for three years. Even this overstates its magnitude, given that much of the increase in federal spending was offset by budget cuts at the state and local levels. In its totality, government spending didn't increase much at all. Between 2007 and the first half of this year, it rose by about three per cent in real dollars.

Besides, recovering from a financial meltdown requires more than government spending: the banking system has to be recapitalized (in the nineteen-nineties, Japan's cash-hoarding "zombie banks" were a drag on its stimulus programs); bad debts have to be written down; sector-specific problems must be addressed. Following the crisis of 2008, both the Bush and the Obama Administrations moved promptly to shore up the banking system, but they neglected to deal with the housing debacle. A more effective mortgage-modification program for homeowners who are under water on their loans would have helped. In 2009, when the Obama Administration launched a refinancing program, it predicted that between three and four million people would get some relief, but so far fewer than one million mortgages have been modified. The lingering effects of the housing crisis continue to weigh down the rest of the economy.

Finally, Keynes would have directed our attention to international problems. A confirmed internationalist, Keynes would undoubtedly have supported the head of the Chinese central bank's call, in 2009, for the creation of a new global reserve currency to be issued and controlled by the International Monetary Fund. (Keynes proposed almost precisely the same thing in 1944, at Bretton Woods, where he helped design a new international economic system, but the Americans ruled it out.) The rationale is that if the issuer of the reserve currency acts irresponsibly, the rest of the world is at its mercy, so it might be better to have an international currency that no single country controls. For now, the Chinese proposal has gone nowhere; the world's focus is elsewhere. But, as the Asian economies continue their rise, it is sure to come back onto the agenda.

And Keynes would have had strong views about the European sovereign-debt crisis. The U.K. economy of his day, like the current U.S. economy, was dependent on global capital flows, and Keynes knew what excessive government debts could do to an economy. In 1919, he was an adviser to the British delegation at the peace talks in Paris, which saddled Germany and Austria with crushing debts. Outraged by this Carthaginian settlement, he wrote his first best-seller, "The Economic Consequences of the Peace," warning that the Versailles Treaty would prove disastrous for the victors as well as for the defeated. Today, he would be advocating major debt write-downs for countries like Greece and Portugal. The so-called "rescue packages" that these nations have received in recent years have barely reduced their debt, while the austerity policies imposed on them have plunged their economies deeper into the abyss, exactly as Keynesian theory would predict.

Indeed, these days the strongest evidence for Keynesianism has been negative. The recent slowdown in the U.S. economy occurred just as Obama's 2009 stimulus package was running dry. The U.K. economy provides an even more striking case study. As in this country, the authorities reacted to the 2008 financial crisis by cutting interest rates, boosting public expenditure, and allowing the budget deficit to rise sharply. In 2009 and in the first part of 2010, the economy began to recover. But since the middle of last year, when the Conservative-Liberal coalition announced substantial budget cuts to balance the budget, growth has virtually disappeared. "The reason the current strategy will fail was succinctly stated by John Maynard Keybes,” Robert Skidelsky and the economist Felix Martin wrote in the Fiancial Times recently. "Growth depends on aggregate demand. If you reduce aggregate demand, you reduce growth."

Yet Keynes was anything but a spendthrift. When deficits and debts reached historically high levels, he believed, it was necessary to spell out how they would be reduced in the long term. As Backhouse and Bateman observe in their timely and provocative reappraisal, Keynes never said that deficits don't matter (the lesson that Dick Cheney reportedly drew from President Reagan). He believed not only that large-scale deficit spending should be confined to recessions, when business investment was unusually curtailed, but that it should be directed mainly toward long-term capital projects that eventually would pay for themselves.' When some of his followers, by way of postwar planning, advocated using tax cuts and deficit spending to "fine-tune" the economy on an ongoing basis, Keynes struck a note of caution. "If serious unemployment does develop, deficit financing is absolutely certain to happen, and I should like to keep free to object hereafter to the more objectionable forms of it," he wrote.

If Keynes was scarcely the deficit dove some take him to be, efforts to portray him as some sort of socialist are even more risible. When he wasn't busy writing, teaching, or advising governments, he wagered on the global markets in the manner of a modern hedge-fund manager. He also sewed as the director of an insurance company and as the portfolio manager of the King's College endowment. An Old Etonian and the son of a Cambridge economist, he never made any pretense about his privileged background, or where his social and political sympathies lay. "If I am going to pursue sectional interests at all, I shall pursue my own," he wrote in the nineteen-twenties. "The Class war will find me on the side of the educated bourgeoisie."

As the Depression proceeded, and some of Keynes's colleagues and students turned to Comunism, Keynes declared the theory of Marxism to be “complicated hocus pocus." When Beatrice and Sidney Webb, the Fabian grandees, went to Russia and returned proclaiming Stalinism to be the way of the future, Keynes was, as Nasar recounts, aghast. Asked to contribute to an essay collection for Beatrice's eightieth birthday, he said the only sentence that came to him was "Mrs. Webb, not being a Soviet politician, has managed to survive to the age of eighty."

Astute conservatives have sometimes acknowledged that, fundamentally, Keynes was one of them. He came not to bury free enterprise but to save it from itself. "It is certain that the view inevitably associated with present-day capitalistic individualism," he wrote in his magnum opus. "But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom." During the Second World War, some economists hailed the introduction of price controls and central planning; Keynes viewed this policy as a temporary expedient that shouldn't be sustained. He even had praise for Hayek's controversial book "The Road to Serfdom" (1944), which compared wartime Britain to Soviet Russia and Nazi Germany. "Morally and philosophically," he wrote to Hayek, "I find myself in agreement with virtually the whole of it."

Keynes's Republican critics, as you'd guess, have more in common with him than they let on. Representative Paul Ryan, who is now railing against "the discredited economic playbook of borrow-and-spend Keynesian policies," was, as the commentator Jonathan Chait has pointed out, a strong supporter of cutting taxes on classic Keynesian grounds—to boost spending and reinvigorate a struggling economy. In a February, 2001, hearing devoted to the fiscal proposals of the recently elected George W. Bush, Ryan said, "I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1^st, to make sure we get a good punch into the economy, juice the economy to makesure that we can avoid a hard landing.”

Both Democratic and Republican Administrations have supported stimulus programs; what they disagree on is how to structure and pay for them. Democrats, while pointing out that such programs generate additional tax revenues, have stopped short of claiming that they are entirely self-financing. Republicans have respected no such limits in selling the tax cuts they favor. Going back to the writings of Arthur Laffer, a Stanford-trained economist who advised President Reagan, some of them have claimed that tax cuts, by prompting people to work harder and invest more, can actually reduce the deficit. And where did Latter get this idea? In a 2004 article entitled "The Laffer Curve: Past, Present, and Future," he cited a passage of "The Means to Prosperity" in which Keynes wrote:

Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more.

Reaganomics, too, was a species of Keynesianism.

But any attempt to categorize Keynes along traditional left-right lines is apt to founder. In his life and in his theorizing, he delighted in paradox. As a young man, he had affairs with men, like the Bloomsbury exquisite Duncan Grant; at forty-two, he married a Russian ballerina and settled down with her until his death, twenty years later. A critic of the British financial establishment in the twenties and thirties, he ended his days as one of its pillars.

Even his great intellectual contribution—the notion that economies can remain in an "equilibrium" state with mass unemployment—defies easy explanation. How exactly does it come about? Not simply because, as textbooks often suggest, prices and wages get "stuck," maybe asa result of union contracts, Keynes was convinced that, even if wages and prices are flexible, the economy could remath mired. Any economy was capable ofwhat modem economists call "multiple equilibria"; different stable points of functioning, at levels, ranging from penury to prosperity.

In particular, Keynes understood how a financially driven economy, like ours, can go into self-sustaining downward spirals (and upward spirals) under the influence of crowd psychology and chronic uncertainty about the future. In the classical scheme of things, banks and financial markets are treated as abstractions, which effortlessly convert savings (money) into investment (forms of capital like factories or computers). Keynes pointed out that the link between savings and investment was far from straightforward. It relied on people who are looking to make quick profits, and who are susceptible to shortsightedness, herd behavior, and panic. "Speculators may do no harm as bubbles on a steady stream of enterprise," he commented. "But the position is serious when enterprise becomes a bubble on the whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

The problem isn't that Wall Street traders are reckless or stupid; Keynes had a wary respect for their smarts. The problem is that our investment choices can never be truly rationalized. "If we speak frankly," Keynes wrote, "we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing." Keynes distinguished this sort of incalculable uncertainty from quantifiable risk—the risk, say, that your straight flush will be trumped by four of a kind, or that you will be killed at Russian roulette. When you decide to build a factory or take a flyer on the stock market, the arithmetic of probability and rational decision theory provide no real guidance. Such decisions can be taken, Keynes wrote, only as a result of "animal spirits—of spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

In a boom, when animal spirits are high, businesses and entrepreneurs are brimming with investment projects, which banks and other financial institutions are all too eager to finance. After a bust, the opposite applies. In Keynes's words, "If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die—though fears of loss may have a basis no more reasonable than hopes of profit had before." Five years ago, banks were extending mortgages to anybody who walked in the door; today, many good borrowers can't get credit. Corporate America, after jettisoning workers by the millions to preserve profits, is sitting on billions of dollars of cash. American households, known everywhere for their prodigal ways, have discovered the virtues of saving and thrift.

Keynes's recognition of the irreducible role played by "animal spirits" points to the vanity of supposing that the economy could be wholly mastered—the dreams nurtured by the postwar generations of economic policymakers of playing the economy like an organist at his console. Keynes himself underestimated the difficulties of trying to maintain expansionary, full-employment policies for long periods. In "The General Theory," he wrote that the remedy for the business cycle "is not to be found in abolishing booms and thus keeping us in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom." When governments tried to adhere to this advice, they eventually ran into problems. In the nineteen-seventies, inflation and unemployment rose simultaneously, a phenomenon known as stagflation. Keynesian economists and policymakers struggled to respond, giving Milton Friedman and other conservative economists the opening they needed to market a modestly updated version of the pre-Keynesian free-market paradigm.

There was another problem that Keynes didn't deal with adequately: preventing the sort of asset-price bubbles—that "whirlpool of speculation"—experienced in the nineteen-twenties. When policymakers signal that they will respond to any setback by pumping more cheap money into the economy, they encourage irresponsible risktaking—something Alan Greenspan discovered to our detriment. (To be sure, many economists take inspiration from Keynes when they argue for taxes on financial transactions in order to curb such speculation.)

Yet Keynes's own theory should have cautioned us about its practical limitations. To revive animal spirits and jolt an economy out of its rut, he tells us, the only option is to bring in the government, which, because it doesn't have to answer to worried stockholders or anxious relatives, can insure a ready demand for the output of small and large firms: "for if effective demand is deficient not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him." All this remains true. It's just that knowing the principle is not enough. The dutiful Keynesian policymaker must decide on a certain level of borrowing and spending and also on when to withdraw the stimulus. But how much additional demand does it take to make businessmen feel optimistic when they get up in the morning? And how much debt can be sustained without roiling markets with self-fulfilling anxiety?

There's no straightforward calculation that will yield the ideal policy for shifting an economy from a "bad" equilibrium to a "good" one. Writing with his high-table air of assurance, Keynes could make it sound deceptively easy to be a Keynesian. At the heart of his vision, however, there is an elusive combination of boldness and humility. It calls mot merely for the management of risk but something politically far more demanding: the acknowledgement of uncertainty.■

Daniel Kahneman - Thinking, Fast and Slow

2011-10-25T21:17:00.001-07:00

http://mediafire.com/?lw2x47b559c42ht
password: ebooksclub.org

Jim Collins - Great by Choice Uncertainty Chaos and Luck

2011-10-25T17:24:00.000-07:00

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http://www.filesonic.vn/file/2626625641

Christopher Chabris, Daniel Simons - The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us

2011-10-22T23:44:00.000-07:00

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CHRISTOPHER F. CHABRIS - Why the Grass Seems Greener

2011-10-22T23:42:00.000-07:00

Why the Grass Seems Greener

We are of two minds—one deliberative and rational, the other quick and intuitive. They often don't agree.

There's a scene in a "Seinfeld" episode in which Kramer, after reacting emotionally to a movie about a woman in a coma, sits down with a lawyer to prepare a living will. The lawyer goes through a list of situations in which a person might want his life support terminated. "You have a liver, kidneys and a gall bladder but no central nervous system," the lawyer intones. Kramer votes to pull the plug, explaining: "I gotta have a central nervous system!" The lawyer goes on: "One lung, blind, and you're eating through a tube." Kramer declines this life, too: "That's not my style." "All right," the lawyer says, offering one more scenario. "You can eat, but machines do everything else." Kramer decides that, in this case, life would still be worth living, "because I could still go to the coffee shop."

Behind the silliness lies a serious question: Can our healthy selves predict how we will feel in unhealthy circumstances with enough certainty to choose whether we would want to live or die? Can our present selves, in general, make reliable choices for our futures selves? How good are our decisions anyway, and how do we make them?

Enlarge Image

Bloomberg

West Vs. East We think Californians are happier than New Yorkers because we focus first on only the most salient difference between the two places: the weather.

Enlarge Image

Getty Images

Daniel Kahneman, a cognitive psychologist who won the Nobel Prize in economics in 2002, faced a problem somewhat like Kramer's when he and his wife were debating whether to move from Berkeley, Calif., to Princeton, N.J. His wife claimed that people were less happy on the East Coast than in California; Mr. Kahneman thought this unlikely. But rather than just argue the point, he conducted a study. Sure enough, while most people in California—and elsewhere—believed that Californians were happier, Californians themselves reported being no more satisfied with their lives than people in Ohio and Michigan.

Why do people think Californians are happier than Ohioans? Because they focus on the most salient difference between the two places: climate. The "focusing illusion," according to Mr. Kahneman, happens when we call up a specific attribute of a thing or experience (e.g., climate) and use it to answer a broader and more difficult question (what makes life enjoyable, in California or anywhere else?).

Mr. Kahneman describes the California study and much else in "Thinking, Fast and Slow," a tour de force of psychological insight, research explication and compelling narrative that brings together in one volume the high points of Mr. Kahneman's notable contributions, over five decades, to the study of human judgment, decision-making and choice.

Many of these contributions were the result of work that Mr. Kahneman did with Amos Tversky, a fellow psychologist who would no doubt have shared Mr. Kahneman's Nobel had he not died—prematurely, at the age of 59—in 1996. The two men began to collaborate in 1969, after meeting at a seminar. Mr. Kahneman had been researching perception and attention while Mr. Tversky was applying mathematical models to decision-making. The melding of their approaches and personalities led to a creative partnership rarely paralleled in the history of science. Mr. Kahneman is careful to give full credit to their collaboration even as he writes—with estimable clarity and wit—in his own voice.

The first article they wrote together, titled "Belief in the Law of Small Numbers," showed that even trained research psychologists had poor judgment about statistical inferences: The sample sizes of their experiments were often too small to support their conclusions. This problem, like so many others, had broad implications. Crucial policy decisions are often based on statistical inferences, but as Mr. Kahneman notes, we "pay more attention to the content of messages than to information about their reliability." The effect is "a view of the world around us that is simpler and more coherent than the data justify."

One major effect of the work of Messrs. Kahneman and Tversky has been to overturn the assumption that human beings are rational decision-makers who weigh all the relevant factors logically before making choices. When the two men began their research, it was understood that, as a finite device with finite time, the brain had trouble calculating the costs and benefits of every possible course of action and that, separately, it was not very good at applying rules of logical inference to abstract situations. What Messrs. Kahneman and Tversky showed went far beyond this, however. They argued that, even when we have all the information that we need to arrive at a correct decision, and even when the logic is simple, we often get it drastically wrong.

Thinking, Fast and Slow

By Daniel Kahneman
Farrar, Straus & Giroux, 499 pages, $30

Consider the "Linda problem," which became Messrs. Kahneman and Tversky's most famous experiment. Subjects were asked to read a description of Linda, a single, 31-year-old woman with a philosophy degree who had espoused left-wing causes like nuclear disarmament in college. The subjects were asked which of two possibilities was more probable: that Linda was a bank teller or that Linda was a bank teller and an active feminist. Logically, the conjunction of two things must be less probable than one of those two things alone. In this case, there have to be more bank tellers than feminist bank tellers, and there must be at least a chance that Linda is one of the nonfeminist bank tellers, so "bank teller" is the right answer. But 85% of college students chose the wrong answer. Similarly, people asked to estimate the probability of a stock-market crash next year will likely give a greater probability to a stock-market crash that is precipitated by a European debt crisis than to a stock market crash by itself—even though the latter is a single event and the former a conjunction of two.

This "conjunction fallacy" (like the focusing illusion) illustrates a broader pattern—of human reasoning being distorted by systematic biases. To understand one source of such errors, Mr. Kahneman divides the mind into two broad components. "System 1" makes rapid, intuitive decisions based on associative memory, vivid images and emotional reactions. "System 2" monitors the output of System 1 and overrides it when the result conflicts with logic, probability or some other decision-making rule. Alas, the second system is a bit lazy—we must make a special effort to pay attention, and such effort consumes time and energy.

You can get an idea of the two-system distinction by trying to solve this simple problem, from the work of the psychologist Shane Frederick: "If it takes 5 machines 5 minutes to make 5 widgets, how many minutes does it take 100 machines to make 100 widgets?" The answer "100 minutes" leaps to mind (System 1 at work), but it is wrong. But a bit of reflective thought (by System 2) leads to "five minutes," the right answer.

The divided mind is evident in other situations where we are not as "rational" as we might assume. Most people require a larger expected outcome to take a risk when a sure thing is available as an alternative (risk aversion), and they dislike losses much more than they like gains of equivalent size (loss aversion). These now-commonplace concepts are central to prospect theory, perhaps the most influential legacy of Messrs. Kahneman and Tversky.

Mr. Kahneman notes that we harbor two selves when it comes to happiness, too: one self that experiences pain and pleasure from moment to moment and another that remembers the emotions associated with complete events and episodes. The remembering self does not seem to care how long an experience was if it was getting better toward the end—so a longer colonoscopy that ended with decreasing pain will be seen later as preferable to a shorter procedure that involved less total pain but happened to end at a very painful point. Complications like this should make us wary of letting simplistic measures of happiness determine national policy and social goals

Mr. Kahneman stresses that he is just as susceptible as the rest of us to the cognitive illusions he has discovered. He tries to recognize situations when mistakes are especially likely to occur—such as when he is starting a big project or making a forecast—and then act to rethink his System 1 inclinations. The tendency to underestimate the costs of future projects, he notes, is susceptible to taking an "outside view": looking at your own project as an outsider would. To avoid overconfidence, Mr. Kahneman recommends an exercise called the "premortem," developed by the psychologist Gary Klein: Before finalizing a decision, imagine that, a year after it has been made, it has turned out horribly, then write a history of how it went wrong and why.

Many books about the mind—a crowded genre these days—combine vivid stories with accounts of seminal experiments and then proceed to argue for changes in law, policy or business practices. "Thinking, Fast and Slow" is different. It is almost defiantly focused on the science, with a leavening of memoir and personal observation. Mr. Kahneman's stated goals are minimalist: to "enrich the vocabulary that people use" when they talk about decisions, so that his readers benefit from his work at the "proverbial watercooler, where opinions are shared and gossip is exchanged."

Such modesty is rare and inspiring. All scientists, not least social scientists, should be wary of adhering to any belief system in their professional lives other than the one that requires fidelity to their data. As soon as you have a cause, you have a conflict of interest. Mr. Kahneman has kept his attention focused on doing research and, now, on explaining it as well. Thanks to the elegance and force of his ideas, and the robustness of the evidence he offers for them, he has helped us to a new understanding of our divided minds—and our whole selves.

—Mr. Chabris is a psychology professor at Union College and a co-author of "The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us."

Languagesno>vi GoogleCE

Why the Grass Seems Greener We are of two minds—one deliberative and rational, the other quick and intuitive. They often don't agree. There's a scene in a Seinfeld episode in which Kramer, after reacting emotionally to a movie about a woman in a coma, sits down with a lawyer to prepare a living will. The lawyer goes through a list of situations in which a person might want his life support terminated. You have a liver, kidneys and a gall bladder but no central nervous system, the lawyer intones. Kramer votes to pull the plug, explaining: I gotta have a central nervous system! The lawyer goes on: One lung, blind, and you're eating through a tube. Kramer declines this life, too: That's not my style. All right, the lawyer says, offering one more scenario. You can eat, but machines do everything else. Kramer decides that, in this case, life would still be worth living, because I could still go to the coffee shop. Behind the silliness lies a serious question: Can our healthy selves predict how we will feel in unhealthy circumstances with enough certainty to choose whether we would want to live or die? Can our present selves, in general, make reliable choices for our futures selves? How good are our decisions anyway, and how do we make them? Enlarge ImageClose Bloomberg West Vs. East We think Californians are happier than New Yorkers because we focus first on only the most salient difference between the two places: the weather. Enlarge ImageClose Getty Images Daniel Kahneman, a cognitive psychologist who won the Nobel Prize in economics in 2002, faced a problem somewhat like Kramer's when he and his wife were debating whether to move from Berkeley, Calif., to Princeton, N.J. His wife claimed that people were less happy on the East Coast than in California; Mr. Kahneman thought this unlikely. But rather than just argue the point, he conducted a study. Sure enough, while most people in California—and elsewhere—believed that Californians were happier, Californians themselves reported being no more satisfied with their lives than people in Ohio and Michigan. Why do people think Californians are happier than Ohioans? Because they focus on the most salient difference between the two places: climate. The focusing illusion, according to Mr. Kahneman, happens when we call up a specific attribute of a thing or experience (e.g., climate) and use it to answer a broader and more difficult question (what makes life enjoyable, in California or anywhere else?). Mr. Kahneman describes the California study and much else in Thinking, Fast and Slow, a tour de force of psychological insight, research explication and compelling narrative that brings together in one volume the high points of Mr. Kahneman's notable contributions, over five decades, to the study of human judgment, decision-making and choice. Many of these contributions were the result of work that Mr. Kahneman did with Amos Tversky, a fellow psychologist who would no doubt have shared Mr. Kahneman's Nobel had he not died—prematurely, at the age of 59—in 1996. The two men began to collaborate in 1969, after meeting at a seminar. Mr. Kahneman had been researching perception and attention while Mr. Tversky was applying mathematical models to decision-making. The melding of their approaches and personalities led to a creative partnership rarely paralleled in the history of science. Mr. Kahneman is careful to give full credit to their collaboration even as he writes—with estimable clarity and wit—in his own voice. The first article they wrote together, titled Belief in the Law of Small Numbers, showed that even trained research psychologists had poor judgment about statistical inferences: The sample sizes of their experiments were often too small to support their conclusions. This problem, like so many others, had broad implications. Crucial policy decisions are often based on statistical inferences, but as Mr. Kahneman notes, we pay more attention to the content of messages than to information about their reliability. The effect is a view of the world around us that is simpler and more coherent than the data justify. One major effect of the work of Messrs. Kahneman and Tversky has been to overturn the assumption that human beings are rational decision-makers who weigh all the relevant factors logically before making choices. When the two men began their research, it was understood that, as a finite device with finite time, the brain had trouble calculating the costs and benefits of every possible course of action and that, separately, it was not very good at applying rules of logical inference to abstract situations. What Messrs. Kahneman and Tversky showed went far beyond this, however. They argued that, even when we have all the information that we need to arrive at a correct decision, and even when the logic is simple, we often get it drastically wrong. Thinking, Fast and Slow By Daniel Kahneman Farrar, Straus & Giroux, 499 pages, $30 Consider the Linda problem, which became Messrs. Kahneman and Tversky's most famous experiment. Subjects were asked to read a description of Linda, a single, 31-year-old woman with a philosophy degree who had espoused left-wing causes like nuclear disarmament in college. The subjects were asked which of two possibilities was more probable: that Linda was a bank teller or that Linda was a bank teller and an active feminist. Logically, the conjunction of two things must be less probable than one of those two things alone. In this case, there have to be more bank tellers than feminist bank tellers, and there must be at least a chance that Linda is one of the nonfeminist bank tellers, so bank teller is the right answer. But 85% of college students chose the wrong answer. Similarly, people asked to estimate the probability of a stock-market crash next year will likely give a greater probability to a stock-market crash that is precipitated by a European debt crisis than to a stock market crash by itself—even though the latter is a single event and the former a conjunction of two. This conjunction fallacy (like the focusing illusion) illustrates a broader pattern—of human reasoning being distorted by systematic biases. To understand one source of such errors, Mr. Kahneman divides the mind into two broad components. System 1 makes rapid, intuitive decisions based on associative memory, vivid images and emotional reactions. System 2 monitors the output of System 1 and overrides it when the result conflicts with logic, probability or some other decision-making rule. Alas, the second system is a bit lazy—we must make a special effort to pay attention, and such effort consumes time and energy. You can get an idea of the two-system distinction by trying to solve this simple problem, from the work of the psychologist Shane Frederick: If it takes 5 machines 5 minutes to make 5 widgets, how many minutes does it take 100 machines to make 100 widgets? The answer 100 minutes leaps to mind (System 1 at work), but it is wrong. But a bit of reflective thought (by System 2) leads to five minutes, the right answer. The divided mind is evident in other situations where we are not as rational as we might assume. Most people require a larger expected outcome to take a risk when a sure thing is available as an alternative (risk aversion), and they dislike losses much more than they like gains of equivalent size (loss aversion). These now-commonplace concepts are central to prospect theory, perhaps the most influential legacy of Messrs. Kahneman and Tversky. Mr. Kahneman notes that we harbor two selves when it comes to happiness, too: one self that experiences pain and pleasure from moment to moment and another that remembers the emotions associated with complete events and episodes. The remembering self does not seem to care how long an experience was if it was getting better toward the end—so a longer colonoscopy that ended with decreasing pain will be seen later as preferable to a shorter procedure that involved less total pain but happened to end at a very painful point. Complications like this should make us wary of letting simplistic measures of happiness determine national policy and social goals Mr. Kahneman stresses that he is just as susceptible as the rest of us to the cognitive illusions he has discovered. He tries to recognize situations when mistakes are especially likely to occur—such as when he is starting a big project or making a forecast—and then act to rethink his System 1 inclinations. The tendency to underestimate the costs of future projects, he notes, is susceptible to taking an outside view : looking at your own project as an outsider would. To avoid overconfidence, Mr. Kahneman recommends an exercise called the premortem, developed by the psychologist Gary Klein: Before finalizing a decision, imagine that, a year after it has been made, it has turned out horribly, then write a history of how it went wrong and why. Many books about the mind—a crowded genre these days—combine vivid stories with accounts of seminal experiments and then proceed to argue for changes in law, policy or business practices. Thinking, Fast and Slow is different. It is almost defiantly focused on the science, with a leavening of memoir and personal observation. Mr. Kahneman's stated goals are minimalist: to enrich the vocabulary that people use when they talk about decisions, so that his readers benefit from his work at the proverbial watercooler, where opinions are shared and gossip is exchanged. Such modesty is rare and inspiring. All scientists, not least social scientists, should be wary of adhering to any belief system in their professional lives other than the one that requires fidelity to their data. As soon as you have a cause, you have a conflict of interest. Mr. Kahneman has kept his attention focused on doing research and, now, on explaining it as well. Thanks to the elegance and force of his ideas, and the robustness of the evidence he offers for them, he has helped us to a new understanding of our divided minds—and our whole selves. —Mr. Chabris is a psychology professor at Union College and a co-author of The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us.

DANIEL KAHNEMAN

2011-10-22T23:40:00.001-07:00

October 19, 2011

Don’t Blink! The Hazards of Confidence

By DANIEL KAHNEMAN

Many decades ago I spent what seemed like a great deal of time under a scorching sun, watching groups of sweaty soldiers as they solved a problem. I was doing my national service in the Israeli Army at the time. I had completed an undergraduate degree in psychology, and after a year as an infantry officer, I was assigned to the army’s Psychology Branch, where one of my occasional duties was to help evaluate candidates for officer training. We used methods that were developed by the British Army in World War II.

One test, called the leaderless group challenge, was conducted on an obstacle field. Eight candidates, strangers to one another, with all insignia of rank removed and only numbered tags to identify them, were instructed to lift a long log from the ground and haul it to a wall about six feet high. There, they were told that the entire group had to get to the other side of the wall without the log touching either the ground or the wall, and without anyone touching the wall. If any of these things happened, they were to acknowledge it and start again.

A common solution was for several men to reach the other side by crawling along the log as the other men held it up at an angle, like a giant fishing rod. Then one man would climb onto another’s shoulder and tip the log to the far side. The last two men would then have to jump up at the log, now suspended from the other side by those who had made it over, shinny their way along its length and then leap down safely once they crossed the wall. Failure was common at this point, which required starting over.

As a colleague and I monitored the exercise, we made note of who took charge, who tried to lead but was rebuffed, how much each soldier contributed to the group effort. We saw who seemed to be stubborn, submissive, arrogant, patient, hot-tempered, persistent or a quitter. We sometimes saw competitive spite when someone whose idea had been rejected by the group no longer worked very hard. And we saw reactions to crisis: who berated a comrade whose mistake caused the whole group to fail, who stepped forward to lead when the exhausted team had to start over. Under the stress of the event, we felt, each man’s true nature revealed itself in sharp relief.

After watching the candidates go through several such tests, we had to summarize our impressions of the soldiers’ leadership abilities with a grade and determine who would be eligible for officer training. We spent some time discussing each case and reviewing our impressions. The task was not difficult, because we had already seen each of these soldiers’ leadership skills. Some of the men looked like strong leaders, others seemed like wimps or arrogant fools, others mediocre but not hopeless. Quite a few appeared to be so weak that we ruled them out as officer candidates. When our multiple observations of each candidate converged on a coherent picture, we were completely confident in our evaluations and believed that what we saw pointed directly to the future. The soldier who took over when the group was in trouble and led the team over the wall was a leader at that moment. The obvious best guess about how he would do in training, or in combat, was that he would be as effective as he had been at the wall. Any other prediction seemed inconsistent with what we saw.

Because our impressions of how well each soldier performed were generally coherent and clear, our formal predictions were just as definite. We rarely experienced doubt or conflicting impressions. We were quite willing to declare: “This one will never make it,” “That fellow is rather mediocre, but should do O.K.” or “He will be a star.” We felt no need to question our forecasts, moderate them or equivocate. If challenged, however, we were fully prepared to admit, “But of course anything could happen.”

We were willing to make that admission because, as it turned out, despite our certainty about the potential of individual candidates, our forecasts were largely useless. The evidence was overwhelming. Every few months we had a feedback session in which we could compare our evaluations of future cadets with the judgments of their commanders at the officer-training school. The story was always the same: our ability to predict performance at the school was negligible. Our forecasts were better than blind guesses, but not by much.

We were downcast for a while after receiving the discouraging news. But this was the army. Useful or not, there was a routine to be followed, and there were orders to be obeyed. Another batch of candidates would arrive the next day. We took them to the obstacle field, we faced them with the wall, they lifted the log and within a few minutes we saw their true natures revealed, as clearly as ever. The dismal truth about the quality of our predictions had no effect whatsoever on how we evaluated new candidates and very little effect on the confidence we had in our judgments and predictions.

I thought that what was happening to us was remarkable. The statistical evidence of our failure should have shaken our confidence in our judgments of particular candidates, but it did not. It should also have caused us to moderate our predictions, but it did not. We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each particular prediction was valid. I was reminded of visual illusions, which remain compelling even when you know that what you see is false. I was so struck by the analogy that I coined a term for our experience: the illusion of validity.

I had discovered my first cognitive fallacy.

Decades later, I can see many of the central themes of my thinking about judgment in that old experience. One of these themes is that people who face a difficult question often answer an easier one instead, without realizing it. We were required to predict a soldier’s performance in officer training and in combat, but we did so by evaluating his behavior over one hour in an artificial situation. This was a perfect instance of a general rule that I call WYSIATI, “What you see is all there is.” We had made up a story from the little we knew but had no way to allow for what we did not know about the individual’s future, which was almost everything that would actually matter. When you know as little as we did, you should not make extreme predictions like “He will be a star.” The stars we saw on the obstacle field were most likely accidental flickers, in which a coincidence of random events — like who was near the wall — largely determined who became a leader. Other events — some of them also random — would determine later success in training and combat.

You may be surprised by our failure: it is natural to expect the same leadership ability to manifest itself in various situations. But the exaggerated expectation of consistency is a common error. We are prone to think that the world is more regular and predictable than it really is, because our memory automatically and continuously maintains a story about what is going on, and because the rules of memory tend to make that story as coherent as possible and to suppress alternatives. Fast thinking is not prone to doubt.

The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.

I coined the term “illusion of validity” because the confidence we had in judgments about individual soldiers was not affected by a statistical fact we knew to be true — that our predictions were unrelated to the truth. This is not an isolated observation. When a compelling impression of a particular event clashes with general knowledge, the impression commonly prevails. And this goes for you, too. The confidence you will experience in your future judgments will not be diminished by what you just read, even if you believe every word.

I first visited a Wall Street firm in 1984. I was there with my longtime collaborator Amos Tversky, who died in 1996, and our friend Richard Thaler, now a guru of behavioral economics. Our host, a senior investment manager, had invited us to discuss the role of judgment biases in investing. I knew so little about finance at the time that I had no idea what to ask him, but I remember one exchange. “When you sell a stock,” I asked him, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: because most buyers and sellers know that they have the same information as one another, what made one person buy and the other sell? Buyers think the price is too low and likely to rise; sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong.

Most people in the investment business have read Burton Malkiel’s wonderful book “A Random Walk Down Wall Street.” Malkiel’s central idea is that a stock’s price incorporates all the available knowledge about the value of the company and the best predictions about the future of the stock. If some people believe that the price of a stock will be higher tomorrow, they will buy more of it today. This, in turn, will cause its price to rise. If all assets in a market are correctly priced, no one can expect either to gain or to lose by trading.

We now know, however, that the theory is not quite right. Many individual investors lose consistently by trading, an achievement that a dart-throwing chimp could not match. The first demonstration of this startling conclusion was put forward by Terry Odean, a former student of mine who is now a finance professor at the University of California, Berkeley.

Odean analyzed the trading records of 10,000 brokerage accounts of individual investors over a seven-year period, allowing him to identify all instances in which an investor sold one stock and soon afterward bought another stock. By these actions the investor revealed that he (most of the investors were men) had a definite idea about the future of two stocks: he expected the stock that he bought to do better than the one he sold.

To determine whether those appraisals were well founded, Odean compared the returns of the two stocks over the following year. The results were unequivocally bad. On average, the shares investors sold did better than those they bought, by a very substantial margin: 3.3 percentage points per year, in addition to the significant costs of executing the trades. Some individuals did much better, others did much worse, but the large majority of individual investors would have done better by taking a nap rather than by acting on their ideas. In a paper titled “Trading Is Hazardous to Your Wealth,” Odean and his colleague Brad Barber showed that, on average, the most active traders had the poorest results, while those who traded the least earned the highest returns. In another paper, “Boys Will Be Boys,” they reported that men act on their useless ideas significantly more often than women do, and that as a result women achieve better investment results than men.

Of course, there is always someone on the other side of a transaction; in general, it’s a financial institution or professional investor, ready to take advantage of the mistakes that individual traders make. Further research by Barber and Odean has shed light on these mistakes. Individual investors like to lock in their gains; they sell “winners,” stocks whose prices have gone up, and they hang on to their losers. Unfortunately for them, in the short run going forward recent winners tend to do better than recent losers, so individuals sell the wrong stocks. They also buy the wrong stocks. Individual investors predictably flock to stocks in companies that are in the news. Professional investors are more selective in responding to news. These findings provide some justification for the label of “smart money” that finance professionals apply to themselves.

Although professionals are able to extract a considerable amount of wealth from amateurs, few stock pickers, if any, have the skill needed to beat the market consistently, year after year. The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. Where there is skill, however, the rankings will be more stable. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, orthodontists or speedy toll collectors on the turnpike.

Mutual funds are run by highly experienced and hard-working professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year.

More important, the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice. There is general agreement among researchers that this is true for nearly all stock pickers, whether they know it or not — and most do not. The subjective experience of traders is that they are making sensible, educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are not more accurate than blind guesses.

Some years after my introduction to the world of finance, I had an unusual opportunity to examine the illusion of skill up close. I was invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some 25 anonymous wealth advisers, for eight consecutive years. The advisers’ scores for each year were the main determinant of their year-end bonuses. It was a simple matter to rank the advisers by their performance and to answer a question: Did the same advisers consistently achieve better returns for their clients year after year? Did some advisers consistently display more skill than others?

To find the answer, I computed the correlations between the rankings of advisers in different years, comparing Year 1 with Year 2, Year 1 with Year 3 and so on up through Year 7 with Year 8. That yielded 28 correlations, one for each pair of years. While I was prepared to find little year-to-year consistency, I was still surprised to find that the average of the 28 correlations was .01. In other words, zero. The stability that would indicate differences in skill was not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.

No one in the firm seemed to be aware of the nature of the game that its stock pickers were playing. The advisers themselves felt they were competent professionals performing a task that was difficult but not impossible, and their superiors agreed. On the evening before the seminar, Richard Thaler and I had dinner with some of the top executives of the firm, the people who decide on the size of bonuses. We asked them to guess the year-to-year correlation in the rankings of individual advisers. They thought they knew what was coming and smiled as they said, “not very high” or “performance certainly fluctuates.” It quickly became clear, however, that no one expected the average correlation to be zero.

What we told the directors of the firm was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill. This should have been shocking news to them, but it was not. There was no sign that they disbelieved us. How could they? After all, we had analyzed their own results, and they were certainly sophisticated enough to appreciate their implications, which we politely refrained from spelling out. We all went on calmly with our dinner, and I am quite sure that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before. The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.

The next morning, we reported the findings to the advisers, and their response was equally bland. Their personal experience of exercising careful professional judgment on complex problems was far more compelling to them than an obscure statistical result. When we were done, one executive I dined with the previous evening drove me to the airport. He told me, with a trace of defensiveness, “I have done very well for the firm, and no one can take that away from me.” I smiled and said nothing. But I thought, privately: Well, I took it away from you this morning. If your success was due mostly to chance, how much credit are you entitled to take for it?

We often interact with professionals who exercise their judgment with evident confidence, sometimes priding themselves on the power of their intuition. In a world rife with illusions of validity and skill, can we trust them? How do we distinguish the justified confidence of experts from the sincere overconfidence of professionals who do not know they are out of their depth? We can believe an expert who admits uncertainty but cannot take expressions of high confidence at face value. As I first learned on the obstacle field, people come up with coherent stories and confident predictions even when they know little or nothing. Overconfidence arises because people are often blind to their own blindness.

True intuitive expertise is learned from prolonged experience with good feedback on mistakes. You are probably an expert in guessing your spouse’s mood from one word on the telephone; chess players find a strong move in a single glance at a complex position; and true legends of instant diagnoses are common among physicians. To know whether you can trust a particular intuitive judgment, there are two questions you should ask: Is the environment in which the judgment is made sufficiently regular to enable predictions from the available evidence? The answer is yes for diagnosticians, no for stock pickers. Do the professionals have an adequate opportunity to learn the cues and the regularities? The answer here depends on the professionals’ experience and on the quality and speed with which they discover their mistakes. Anesthesiologists have a better chance to develop intuitions than radiologists do. Many of the professionals we encounter easily pass both tests, and their off-the-cuff judgments deserve to be taken seriously. In general, however, you should not take assertive and confident people at their own evaluation unless you have independent reason to believe that they know what they are talking about. Unfortunately, this advice is difficult to follow: overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.

Daniel Kahneman is emeritus professor of psychology and of public affairs at Princeton University and a winner of the 2002 Noble Prize in Economics. This article is adapted from his book “Thinking, Fast and Slow,” out this month from Farrar, Straus & Giroux.

Editor: Dean Robinson

Robert M. Solow - Working in the Dark

2011-10-02T18:32:00.000-07:00

Grand Pursuit: The Story of Economic Genius

By Sylvia Nasar

(Simon & Schuster, 558 pp., $35)

I thought I knew what this book was going to be about when I started it, but by the time I came to the end I was no longer sure. There is a prologue that begins with Charles Dickens’s observations and depictions of miserable London poverty, and then moves naturally to the classical Malthusian trap as the only explanation offered by the political economy of the time: any improvement in the general standard of living will be wiped out by increased population, so nothing much can be done except perhaps exhortations of abstinence. Dickens himself entered a plea for a more humane political economy. (This was an interesting piece of news to me. Presumably he intended something more than sugarcoating the pill, but what?) That could indeed be a “Grand Pursuit”: how economics and the economy learned to adapt to sustained growth and rising living standards. Sylvia Nasar’s first chapter almost confirms this idea; it is about Marx and Engels, with more emphasis than is usually given to Engels and his powerful Condition of the Working Class in England in 1844.

But this suggested theme does not hold up. The book is not “The Story of Economic Genius” that is promised in the subtitle. It is instead the story of the public and private lives of a handful of major figures in economics, some of them pretty clearly possessed of “economic genius,” at least part of the time, and some of them pretty clearly not, unless one plays fast and loose with the notion of genius. Most surprisingly, there is not much about the evolution of economic ideas in this book, either in the way Dickens hoped or otherwise. There is a lot of quite fascinating biographical detail about a series of interesting economists, and even more about the political, financial, and economic setting in which they functioned. Nasar spends much more time on the public role of her subjects than on their thoughts about economics itself. They were indeed all public figures of one kind or another. Many of them were also important economists, but you do not hear much about that at all; and when you do, the book skimps on intellectual content.

One does not have to wait for an example of this gap. A chapter on Alfred Marshall follows immediately after Engels and Marx. Marshall was one of the founders of modern economics. His Principles of Economics, which appeared in 1890 and went through a total of eight revised editions, was the great general treatise after John Stuart Mill. When I first studied economics in 1940, we were not given Marshall to read as a textbook; it would probably have been an improvement if we had. It is not much remembered today that Marshall was not merely the man who systematized the theory of the firm and the interaction of supply and demand in a competitive market. He was also an assiduous observer of the industrial practices of his time, and the ways in which they often deviated from the neat but necessary abstractions of theory, including his own. He was interested, for example, in the role that perceptions of fairness played in the determination of wages. He knew that rising productivity was the serious answer to mass poverty. You might say that he was starting to give Dickens his wish. So it is surprising to read a forty-three-page chapter about Alfred Marshall that arrives at the Principles of Economics only in its last few pages. By contrast, Agnar Sandmo, the author of Economics Evolving: A History of Economic Thought, an excellent recent history, offers an economist’s-eye view: he devotes a twenty-five-page chapter to Marshall, almost all of which is essentially about the content and the influence of Marshall’s great work.

THIS PATTERN of downplaying intellectual content persists throughout. The rest of Nasar’s cast of characters includes Beatrice Webb (an oddball in this company), Irving Fisher, Joseph Schumpeter, John Maynard Keynes, Friedrich Hayek, Joan Robinson, Milton Friedman, Paul Samuelson, and Amartya Sen. In no case is there a serious discussion of the ideas that might earn their author a place in a history of economic thought, although some on the list are truly important figures in that story. It may be that this approach does best, almost accidentally, by Schumpeter. So far as economics, as understood by economists, is concerned, Schumpeter contributed one important and fertile idea, and he had formulated it by 1912. It was the insight that the dynamics of a capitalist economy are driven by technological and organizational innovation, and the key figure in this process is the entrepreneur who mediates between sheer invention and the market economy. He also emphasized the importance of credit creation as the mechanism that places resources in the hands of active entrepreneurs.

As part of his theory, Schumpeter developed and dramatized the central concept of “creative destruction.” Many important innovations render existing goods, methods of production, and forms of organization obsolete, or otherwise displace them. Economic value and social status are brusquely destroyed. Pre-existing expectations are overturned. But this is the way a capitalist economy has to advance if it is to advance at all. This was Schumpeter’s way, and the right way, to dispel the classical economists’ pessimistic vision of the “stationary state,” enforced by diminishing returns and the Malthusian iron law of wages. The outline of the central Schumpeterian drama is not hard to understand, once it has been seen, and it requires no technical elaboration. “Creative destruction” has achieved the status of a buzzword. It finds a proper place in the book. (It goes without saying that modern economists have elaborated on the basic idea and added bells and whistles.)

Schumpeter also created an exciting and picturesque history for himself, and Nasar makes a couple of highly entertaining set-pieces out of it. (The student joke, certainly put about by Schumpeter himself, was that he had early on set himself the goal of being the greatest horseman, the greatest lover, and the greatest economist of his era but, alas, only had enough time to accomplish two of the three.) He had a brief and spectacularly unsuccessful stint as minister of finance in the socialist government of Austria in the immediate aftermath of World War I. Probably no one could have succeeded under the circumstances created by wartime devastation and the impositions of the Versailles Treaty. All this makes lively reading, and the proportions between exotic life and original contribution to economics may be about right. (Sandmo gives Schumpeter six pages in his history of economic ideas.)

SCHUMPETER thought of Keynes as his natural rival for the title of “greatest economist.” They were born in the same year, 1883. Keynes probably did not believe that he had a natural rival. Nasar’s approach is less successful with Keynes than with Schumpeter, because the proportions are wrong. Keynes, too, had a gossip-worthy private life and an important public role, beginning with the Paris Peace Conference; as a subordinate member of the British delegation, he saw the dangers in the Treaty of Versailles and wrote a devastating book about them called The Economic Consequences of the Peace. That public career extended to the Bretton Woods Conference one world war later, where Keynes was one of the architects of the International Monetary Fund, the World Bank, and therefore the postwar international financial system.

This part of Keynes’s story is certainly well told in the book. But Keynes was also the creator of serious macroeconomics in 1936, in The General Theory of Employment, Interest, and Money. He was not without antecedents, of course, but he provided the first workable intellectual apparatus for thinking about what determines the level of “output as a whole.” A generation of economists found his ideas the only available handle with which to grasp the events of the Great Depression of the time. The analytical issues here are inevitably more complicated and abstract than something like creative destruction. Nasar gives them a scant two pages, which seem to me to be inadequate; a reader who does not already understand will not absorb the significance of Keynes’s break with then-standard doctrine. By shying away from a fuller exposition, Nasar keeps her narrative moving, but misses an important opportunity. These issues are still alive or, perhaps more accurately, they are alive again.

One reason why Keynes’s great book is so difficult to explain is that it is no masterpiece of clarity. There are still learned arguments about “what Keynes really meant.” I want to emphasize two of its themes, because they seem to be central to his place in the story of economic genius, and because they point directly to the reason why Keynesian economics, born in the 1930s, has become dramatically relevant again today. Back then, serious thinking about the general state of the economy was dominated by the notion that prices moved, market by market, to make supply equal to demand. Every act of production, anywhere, generates income and potential demand somewhere, and the price system would sort it all out so that supply and demand for every good would balance. Make no mistake: this is a very deep and valuable idea. Many excellent minds have worked to refine it. Much of the time it gives a good account of economic life. But Keynes saw that there would be occasions, in a complicated industrial capitalist economy, when this account of how things work would break down.

The breakdown might come merely because prices in some important markets are too inflexible to do their job adequately; that thought had already occurred to others. It seemed a little implausible that the Great Depression of the 1930s should be explicable along those lines. Or the reason might be more fundamental, and apparently less fixable. To take the most important example: we all know that families (and other institutions) set aside part of their incomes as saving. They do not buy any currently produced goods or services with that part. Something, then, has to replace that missing demand. There is in fact a natural counterpart: saving today presumably implies some intention to spend in the future, so the “missing” demand should come from real capital investment, the building of new productive capacity to satisfy that future spending. But Keynes pointed out that there is no market or other mechanism to express when that future spending will come or what form it will take. Perhaps God has not yet even decided. The prospect of uncertain demand at some unknown time may not be an adequately powerful incentive for businesses to make risky investments today. It is asking too much of the skittery capital market. Keynes was quite aware that occasionally a wave of unbridled optimism might actually be too powerful an incentive, but anyone in 1936 would take the opposite case to be more likely.

So a modern economy can find itself in a situation in which it is held back from full employment and prosperity not by its limited capacity to produce, but by a lack of willing buyers for what it could in fact produce. The result is unemployment and idle factories. Falling prices may not help, because falling prices mean falling incomes and still weaker demand, which is not an atmosphere likely to revive private investment. There are some forces tending to push the economy back to full utilization, but they may sometimes be too weak to do the job in a tolerable interval of time. But if the shortfall of aggregate private demand persists, the government can replace it through direct public spending, or can try to stimulate additional private spending through tax reduction or lower interest rates. (The recipe can be reversed if private demand is excessive, as in wartime.) This was Keynes’s case for conscious corrective fiscal and monetary policy. Its relevance for today should be obvious. It is a vulgar error to characterize Keynes as an advocate of “big government” and a chronic budget deficit. His goal was to stabilize the private economy at a generally prosperous level of activity.

A second characteristically Keynesian theme meshes very well with the first. In a complex economy, many business decisions have to be made in a fog of uncertainty. This is especially true of investment decisions, as already discussed: a lot of money has to be placed at risk today in an enterprise whose future success can only be guessed. (Much the same can be said of consumer purchases of expensive durable goods.) The standard practice is to focus on the uncertainty and think about it in terms of probabilities, which at least allow for an orderly analysis and orderly decision-making. Keynes preferred to focus on the fog. He thought that some of the important uncertainties were essentially incalculable. They would end up being dealt with in practice by a mixture of apprehensiveness, rules of thumb, herd behavior, and what he called “animal spirits.” The point of this distinction is not merely philosophical: it suggests that long-term investment behavior will sometimes be irregular, unstable, and given to doldrums and stampedes. Expectations can be volatile, and transmit their volatility widely. Passive or perverse policy can be dangerous to the economy’s health.

There is much more to be said, of course, about the “Keynesian revolution,” including its gaps and its limitations. It has been debated by economists ever since 1936. Sandmo’s history of economic thought gives it a whole twenty-eight-page chapter. But even his very brief sketch will supplement Nasar’s vivid account of Keynes’s activity in the great world.

IRVING FISHER was America’s first great economist, and also a bit of a crank about alcohol, healthy food, eugenics, and more. (He invented the Rolodex.) Fisher, who was born in 1867 and died in 1947, was conspicuously over-optimistic at the wrong time about the economy and the stock market, and lost a fortune (partly his wife’s) in the collapse of the 1930s, accompanied by those who followed the confident investment advice in his newspaper columns. Nasar makes the most of this quirky character, and uses the conjunction of quirkiness and intellectual prowess as a nice counterpoint to the stereotypical views of Beatrice Webb and other educated English visitors who saw Americans as a bunch of hayseeds and traveling salesmen. Once again, this makes for lively reading with some history thrown in; but the reader will not grasp what Fisher contributed to the grand pursuit of economic understanding, what makes him worth including in the story of economic genius.

Actually he contributed more than one valuable idea. The most important and indispensable, however, was a systematic way to think about the rate of interest, saving, and investment—in other words, about the main economic connection between present and future. What he wrote on this central question in 1907 and again in 1930 is still, though much elaborated, the foundation for modern thinking. I hope I can communicate the rough idea. For a saver, the current rate of interest describes the terms on which current consumption can be exchanged for future consumption: a little less consumption (more saving) now can be lent on the market, and principal and interest can be spent on consumption next year or later. The higher the interest rate, the more future consumption a dollar of current saving will buy. It is generally supposed that a unit of future consumption is worth somewhat less to a consumer than the same unit of current consumption right now; but the earning of interest can make saving worthwhile. The main potential borrowers are business firms that are contemplating adding to their capacity by real investment. To them, the interest rate is a cost (“the cost of capital”), and they will make a particular investment only if they think it will earn enough to cover interest costs at least, plus some compensation for risk. The capital market is the arena in which a rate of interest is determined at which aggregate borrowing and lending are matched, with each potential borrower and lender, investor and saver, adapting as best they can to whatever interest rate is available in the market. The “equilibrium” interest rate is determined by this balancing of supply and demand.

This summary is so crude as to be an insult to Fisher’s exposition in two fat books. He was, by the way, quite aware of the potholes that could disturb the smooth operation of the capital market, such as the influence of family affection, superstition, imperfect foresight, fashion, and so on. Keynes’s radical uncertainty would not have seemed far-fetched, and indeed Keynes made important use of Fisher’s ideas in his own discussion of business investment. So capital markets could be capricious and unstable. Generations of economists have worked to add realism and detail to this underlying apparatus, not always with perfect success, as you may have noticed. But it remains the foundation of any discussion of finance.

FRIEDRICH HAYEK is a slightly awkward case for Nasar to handle. He was clearly an eminent economist. He had no official public life, and presumably would not have wanted one. But he was, and still is, a conservative, even a libertarian, icon; and he was at least a nominal influence on Margaret Thatcher. When the Royal Swedish Academy of Sciences divided a Nobel Prize between Hayek and Gunnar Myrdal, they knew it would make both men unhappy.

To understand Hayek’s place in economics, one has to go back to the period immediately after World War I. Soviet communism ruled in Russia and an entirely different sort of socialist government was in power in Hayek’s native Austria. Hayek’s mentor, the even more far-right economist Ludwig von Mises, undertook to argue that efficient centralized economic planning was an impossibility in an advanced economy. The main reason was that no central planning bureau could conceivably have all the knowledge needed to allocate resources to alternative uses effectively. That knowledge—technological possibilities, local conditions, consumer preferences, likely futures for all these—is necessarily scattered around the economy. A system of (competitive) markets is a uniquely suitable way for this knowledge to be expressed and converted into decentralized decisions about production and consumption. No central organization could conceivably access and analyze this information and calculate the appropriate allocations.

Hayek developed these arguments with great subtlety, and extended them beyond the narrow range of purely economic decision-making. His most influential work, within economics, was probably an article titled “The Use of Knowledge in Society,” published in the American Economic Review in 1945. Hayek’s interests shifted to political and constitutional theory, where the same basic ideas played a central role. Back in the 1920s and 1930s, he had worked on the theory of business cycles, coming to the conclusion, roughly speaking, that the main cause of periodic slumps was overinvestment in durable capital induced by loose monetary policy and low interest rates. This line of thought never took off. (I have to confess that, as a student, I found Hayek’s writings on the business cycle simply impenetrable, although I managed at least once to answer an exam question on them successfully.)

Hayek’s appeal to the political right comes not from these fairly tame, if interesting, ideas. It rests on The Road to Serfdom, a bestseller in 1944. There Hayek argued that even well-intentioned attempts to regulate industry are not only bad in themselves, but the start of a slippery slope that leads inexorably to “serfdom.” I remember thinking that, if Hayek were right, I should live to see Norway and the Netherlands at least halfway to tyranny. It seemed implausible then and it seems embarrassing today.

Here I have to digress briefly, partly because the issue is interesting and partly to correct a casual error in Nasar. The Mises-Hayek critique of central planning was convincing (and clearly confirmed by subsequent facts). One response was a literature exploring the theory of “market socialism.” Could a public-ownership economy organize itself to use the remarkable properties of competitive markets and the informationcarrying capacity of market prices, while requiring only feasible interventions by a government agency? Indeed, if the government agency did its job properly, could such a system avoid some of the price distortions associated with everyday big-business capitalism? This impulse produced interesting ideas, as useful for understanding the workings of capitalism as for designing a hypothetical market socialism. In the end, the general verdict was that the real source of failure of market socialism would be its inability to motivate and to exploit the technological and organizational innovations that provide the engine of growth in a private-enterprise economy.

In the course of the book, Nasar refers to Oskar Lange as “a Polish economist and central planner who collaborated with the KGB,” and later as a cold war spy. Lange immigrated to the United States via London, and taught economics very successfully at the University of Chicago. He wrote several quite interesting and well-known mainstream papers (and some less interesting ones) on a variety of topics, mostly technical. At the end of the war, and against the advice of his friends, he returned to Poland and held posts in the then-communist government. I had never heard any allegations of spying or earlier association with the KGB, and Nasar provides no evidence or reference. However that may be, it is certainly wrong to describe Lange as a central planner. He was, on the contrary, one of the leading theorists of decentralized market socialism, from as early as 1936. The sorts of prices that were presumed to be used to guide such an economy are colloquially known as “Lange-Lerner prices” after him and Abba Lerner.

SO WHAT WAS the “Grand Pursuit”? In a brief epilogue, Nasar suggests two possibilities. One is the actual real-time historical process by which the advanced countries have freed themselves from the Malthusian trap, and created an economy in which a rising standard of living is not only achieved but expected. The other is the story of how economists have learned to understand the mechanisms and relationships that make the historical process possible. There is an interesting connection between these two trails. Nasar sniffs at it, but does not follow it.

We think of the Industrial Revolution as having started in the last quarter of the eighteenth century with a famous series of mechanical inventions. No doubt some people profited, but the general standard of living did not start to rise immediately. Decades went by before anything like that could be detected. Still, it is puzzling that so intelligent a person as John Stuart Mill, writing in the middle of the nineteenth century, continued to take it for granted that the stationary state with subsistence or near-subsistence wages was the inevitable end of the process. Mill knew of the inventions that had transformed the textile and metalworking industries of Great Britain. He even began to think about invention and innovation not as serendipitous events, but as economic processes. But he did not make the intellectual leap that Nasar attributes to Marshall a few decades later. Why not?

One can guess at several reasons for this failure of imagination. First of all, Mill’s thinking was still in the clutches of the Malthusian trap. The real-world change in family behavior that we now call the “demographic revolution” had not yet happened (as it has still not happened in some parts of Asia and Africa). When couples began to control family size, a major obstacle to real economic growth weakened or disappeared. Secondly, the notion of a continuing, more or less self-generating process of invention and innovation, as against just a run of episodes, was not yet part of the mental furniture of economics. And thirdly, even if Mill or some of his contemporaries had been able to conceptualize economic progress in this way, they lacked the analytical technique that might have enabled them to work out a coherent picture of a progressive economy evolving in time. Weaving it all together, which is now second nature to graduate students, was not then a practical possibility. So the intellectual side of the Grand Pursuit had to wait for a bit.

This could have been an interesting story to trace in more detail, through a larger cast of characters, coming to terms, step by humdrum step, with the new reality, and folding it into the body of economic theory. On the other hand, that might make rather dull reading. In any case, Nasar took a different tack, as I have already described it. She offers a colorful, sometimes even exciting, series of historical vignettes involving important protagonists in the history of economic thought. They appear sometimes as meritorious, occasionally as foolish, usually as self-confident, in the manner of important protagonists. You know that they have contributed to the body of economic thought, although you may not always know exactly what they have contributed. At least your sense of them is not less than life-size.

Are these stories really part of the Grand Pursuit? In a way, I guess, they are. These performances on the public stage are one vehicle, maybe the most important vehicle, which carries the results of economic research to broader attention. Without them, serious economic ideas might never have the opportunity to influence policies and events. Of course, even with them the results can be dubious: in the current controversy over statutory limits to U.S. Treasury borrowing, the influence of serious economics has been zero, or perhaps less. Still, this may be the logic of Nasar’s approach. A reader whose interest is kindled by the personalities and the narratives might like to turn to the history of economic thought by Agnar Sandmo that I cited earlier, to learn more about the evolution of ideas, and their content. You may remember that when Miss Prism, the governess in The Importance of Being Earnest, reminds Gwendolyn to read her political economy, she instructs the pupil to skip the chapter on the Indian rupee, because it is too sensational for a young girl. If only.

Robert M. Solow is Institute Professor of Economics emeritus at MIT. He won the Nobel Prize in Economics in 1987. This article appeared in the October 20, 2011 issue of the magazine.

Gerry Johnson, Kevan Scholes, Richard Whittington - Fundamentals of strategy

2011-10-02T01:19:00.001-07:00

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Thomas L. Friedman, Michael Mandelbaum - That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back

2011-10-02T00:44:00.000-07:00

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Books of The Times

Savior of the World, Heal Thyself: Prescription for America’s Ailments

By WALTER RUSSELL MEAD

Published: October 2, 2011

In “That Used to Be Us” Thomas L. Friedman and Michael Mandelbaum join a growing number of foreign policy thinkers warning that America’s position abroad cannot endure without a renewal of the domestic sources of American prosperity and strength.

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THAT USED TO BE US

How America Fell Behind in the World It Invented and How We Can Come Back

By Thomas L. Friedman and and Michael Mandelbaum

380 pages. Farrar, Straus & Giroux. $28.

The concerns are justified. The United States faces the most profound set of challenges since the 1930s, when an economic depression and the breakdown of the British-led international order raised basic questions about our domestic politics and international strategy.

“That Used to Be Us” represents an effort by Mr. Mandelbaum, a professor at Johns Hopkins University and one of the country’s leading public intellectuals, and Mr. Friedman, a columnist for The New York Times whose three Pulitzer Prizes only hint at the global influence of his work, to describe the rocky conditions of the present day and prescribe a way forward. This may be an American crisis, but as Mr. Friedman and Mr. Mandelbaum eloquently explain, it is not just an American concern. Nor is it simply a matter of improving the living standards of future generations in this country. Because of the unique — and at this point irreplaceable — American role in providing important public services across the globe, the world as a whole will become a much poorer and more dangerous place if Americans fail at the task of national renewal.

The authors provide a thoughtful and balanced corrective to critics on the left who believe that our present economic troubles demonstrate the fundamental failure of the liberal democratic capitalist ideas on which American society is built, and the critics on the right who believe that only a return to 19th-century small government policies can save us. The principles behind our society, they argue, are broadly correct, but without institutional reform we cannot apply them as fairly or as fully as we should.

When it comes to solutions the authors reach for a classic American approach that — at least in my judgment — is fundamentally sound though difficult to apply. A long tradition of American thinkers and statesmen — George Washington, Alexander Hamilton, Henry Clay, Abraham Lincoln, Theodore Roosevelt, Dwight D. Eisenhower, to name a few — have argued that a strong and forward-looking federal government should promote a healthy domestic economy and a strong international presence.

This tradition is often called Hamiltonian because of Alexander Hamilton’s role in formulating its basic outlines while serving as Washington’s Treasury secretary. Mr. Friedman and Mr. Mandelbaum’s blueprint for the next stage in American prosperity is essentially a revival of this Hamiltonian vision of a strong, pro-market national government that creates the most favorable possible conditions (and provides funds for the infrastructure) to promote private enterprise.

As Mr. Friedman and Mr. Mandelbaum note, this Hamiltonian project cuts across the conventional wisdom in both political parties today. The Republican hostility to most forms of government activity recalls the stances of Hamilton’s opponents who argued that a powerful federal government would attack liberty and waste taxpayer money. Politicians like Representative Ron Paul and Gov. Rick Perry of Texas consciously draw on the anti-Hamiltonian ideas of thinkers like Thomas Jefferson to attack the idea of a powerful, economically interventionist federal government.

But the authors of this book also have uncomfortable words for Democrats. Hamiltonians historically believed in sound government finance and efficient administration. This is not the kind of talk that public sector labor unions and partisans of the entitlement state like to hear. “That Used to Be Us” unsparingly describes the causes and likely consequences of the recklessly unsustainable pension and entitlement promises that are among the gravest fiscal problems we now face. It also calls for smarter and less cumbersome forms of regulation, something that business is more likely to support than some traditional Democratic constituencies.

These are big truths, and the authors see them clearly and whole. As is usual in Mr. Friedman’s work the power of the core argument is buttressed by detailed reportage and blizzards of specific fact and detail, but the accumulation of anecdote and evidence never detracts from the book’s central thrust. “That Used to Be Us” is an important contribution to an intensifying debate, and it deserves the widest possible attention. But there are a couple of weak spots in the argument that could use shoring up.

One small example involves California. On the one hand the authors take that state to task for its fiscal irresponsibility, chaotic policy making and a generally incoherent approach to economic development and governance. Yet at other times they hail California as a model, citing its tough energy and construction codes. Many people argue that those energy regulations contribute to the gridlock that is driving California’s economy down. “That Used to Be Us” would present a stronger argument if it addressed problems like this more directly.

More broadly, the authors propose an essentially Hamiltonian approach to the country’s challenges but do not really take on the arguments that Jeffersonian critics make in response. For example, can subsidies and incentives really work when the technological uncertainties are so large and political lobbies so powerful?

The authors point to Chinese high-speed rail development and American government support for alternative energy generation as highly effective, but recent rail mishaps in China and the Solyndra bankruptcy here render these solutions more problematic. (Daniel Yergin’s new book, “The Quest,” also raises important questions about the value of alternative energy subsidies.) And what of the way lobbyists and private interests distorted Fannie Mae mortgage programs in ways that worsened the housing bubble? Even well-intentioned federal interventions often go awry.

Partly because small-government advocates are denigrated rather than engaged, many conservative thinkers will look at this book as more liberal sludge — calls for greater federal spending, tough energy policy to ward off climate change, more control over American life by credentialed “experts” — and dismiss “That Used to Be Us” as same-old, same-old boilerplate from the Eastern establishment.

That would be a mistake. The gaps opening between the arguments in this book and conventional Democratic politics run very deep. When talking about the cultural sources of American strength Mr. Friedman and Mr. Mandelbaum can sound like staunch Tea Party members. When pointing to an institution where American values are still strong, they choose the military. They say the United States has been an exceptional nation, and they want it to remain one.

As American politics looks increasingly dysfunctional, Mr. Friedman and Mr. Mandelbaum show great courage in casting aside conventional assumptions. Few readers will agree with every observation and argument in this thoroughly researched and passionately argued book, but all of them should find “That Used to Be Us” compelling, engaging and enlightening.

Walter Russell Mead is the James Clarke Chace professor of foreign policy and humanities at Bard College and editor at large of The American Interest.