It was the best of times; it was the worst of times…

As the stock market hits new all-time highs, the AP reports today on the state of household wealth in the U.S…

It took 5 1/2 years.

Surging stock prices and steady home-price increases have finally allowed Americans to regain the $16 trillion in wealth they lost to the Great Recession. The gains are helping support the economy and could lead to further spending and growth.

The Federal Reserve says household wealth amounted to $66.1 trillion at the end of 2012. That was $1.2 trillion more than three months earlier. And it was 98 percent of the pre-recession peak.

Private economists calculate that further increases in stock and home prices this year mean that Americans’ net worth has since topped the pre-recession peak of $67.3 trillion. Wealth had bottomed at $51.2 trillion in early 2009.

Some economists caution that the regained wealth might spur less consumer spending than it did before the recession.

Caution, indeed.  While the total figures look terrific, the details are a little more troubling. And more troubling, as it turns out, than we think…

In a 2011 study, economists Dan Ariely and Michael Norton asked Americans what their ideal distribution of wealth would be. Then they asked what the respondents thought the actual distribution of wealth was. Less equal than their ideal, came the answer.  The reality…

source

Here are the implication for wealth of that reality animated in a short justly-viral video:

email readers, click here

So that increase in wealth– it’s up in that top 20% quartile, most of it, in the top 10%  The balance of folks?  Well, the other breaking news this week is that “household deleveraging” may be over– that”s to say, American households are borrowing again…  this reality is much more democratically-spread.  And it’s frighteningly-scaled…

 source

The same NY Fed report that brings those tidings– ostensibly good for the economy, as more borrowing means more spending– breaks down that debt, paying special attention to student loans– which have effectively tripled over the last eight years, to nearly $1 Trillion.  Note that “Student Loan” is the relatively small red section of each bar in the chart above.  Still, as the Fed notes:

Deferrals and forbearance [borrowers given temporary "grace"]… mask the true delinquency rates on student loans. Overall, about 17 percent of borrowers are at least ninety days past due on their educational debt, but when we remove the estimated 44 percent of all borrowers for whom no payment is due or the payment is too small to offset the accrued interest, the delinquency rate rises to over 30 percent. These student loan delinquencies and overall large student debt burdens could limit borrowers’ access to (and demand for) other credit, such as mortgages and auto loans. In fact, our data show that the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups, with the decline being greater for student loan borrowers and especially so for those with larger student loan balances. In addition, we find delinquent student borrowers much more likely to be late on other debts.

(Why have student loans grown so quickly?  Here’s an explanation.)

But surely the fact that most household debt is mortgage debt is an encouraging sign– after all, mortgages are a route to building home ownership equity.  Well, for some they surely are.  But while the numbers have improved a bit since the post 2008 trough, there are still over 27% of all mortgage holder “underwater” in the U.S.– with mortgage obligations that exceed the value of their homes.  There’s no equity there.

Which is all simply to observe that, while the aggregated “good news” that we’ve been hearing this week is better than hearing that everything is down, it’s no cause to celebrate an end to our concerns.  As Ariely and Norton demonstrate, most of believe that income and wealth should be more evenly distributed than it is.  And given that we live in a consumer economy– as or more dependent on “consumptivity,” the ability of the population to purchase, as on productivity– our economic future demands it.

Stocks are up; aggregate household wealth is up– but for way too many, the American Dream is a nightmare.

“Will Work for a Job,” Part Three

Further to “Will Work for a Job,” Part One (and Part Two), this bracing chart from the IMF…

(via Paul Kedrosky, TotH to Tim O’Reilly)

For a more detailed look, see this set of charts (pdf) from the April 2010 World Economic Outlook.

Government debt often finances crucial infrastructure, social services, or innovation.  But the huge upsurge in government debt from 2008 was much less a function of investment in “assets” or social goods than it was the price of stabilizing their economies– it was the bail-out.  Whatever my reservations about how the bail out was conducted across the developed economies (and how unevenly the benefits accrued), it seems to me clearly to have been necessary:  the alternative– total meltdown– being much worse.  Still, the reality is that this huge increase to national debts didn’t buy any future benefit or capacity; it simply covered the accumulated cost of irresponsible speculation.

And so, huge debt.

To be sure, more developed economies have more developed capacities to service debt.  For example,  U.S public debt was, in the years immediately following World War II, at the same kind of level (measured in % of GDP) as foreseen by the IMF; within a decade, it had been reduced by over half.  But that reduction was driven by the extraordinary economic growth of the U.S.in those post-war years, largely fueled by the increase in consumer demand occasioned by the growth of civilian employment, the rise in home ownership and spread to the suburbs, and the baby boom…  forces that laid the foundation for continued growth over the next couple of decades.

Current demographics in the U.S. and the rest of the developed world suggest that the next decade will have a very different character. The developed economies’ capacity to handle their debt will diminish as lower birthrates mean that their citizens will increasingly age out of the work force, and begin drawing services even as they cease to contribute to their funding…  add in the cost of responding to climate disruption, keeping aging infrastructure serviceable, et al., and it’s a pretty strained picture.

Necessity is, as we know, the mother of invention.  Japan, for example, is looking to robots to bridge the worker gap…  but even then, is having to plan for a tight squeeze.

For the rest of the developed world, immigration is the more obvious remedy; indeed, 2.5 million immigrants contributed to US growth in the Fifties (ten times as many as entered in the Thirties). These immigrants stepped into jobs all over the country– and they contributed new ideas, built new businesses.  They contributed to overall economic growth and contributed to support the social services available to all Americans.

But, as history reminds us, immigration will effectively remake societies even as it “saves” their economies.  Many see this growing diversity as a strengthening and enriching of the society (as well as the economy); I do.  But as the rise of anti-change nationalist nostalgia movements (like the Tea Party in the U.S., Le Pen’s National Front in France, and others throughout the developed world) illustrate, many others disagree– disagree loudly enough so far to have frustrated the reform of immigration laws in most of the (currently-)rich world.

In Part Two of this post (and elsewhere), I try to argue for a U.S. marketplace genuinely open to innovation and to the emergence of new, and new kinds of, businesses– as ours decreasingly is.  It seems clear to me that we need, similarly, to be more open when it comes to immigration as well.  On both those fronts, there are myriad ways to get it wrong.  Try as we might– and as we must– to legislate, regulate, and operate effectively, we could fail.  And indeed, opponents of these moves– apologists for advantaged incumbents and xenophobes– are quick to catalog the risks, to argue against taking action.

But the alternative?  We know that doesn’t work; indeed, that’s what drove us into the trench that we’re in.  We’ve got to find a way past the status quo– accelerating consolidation, enhancing the power of oligopolies, “retiring” people for whom there is no plan for support– or risk having to learn the same painful, costly lessons all over again.

In the meantime, further to Part One– and to observe the obvious– money spent paying interest is money that is not being spent on the things that can build a strong economy, reduce the level of debt, and fuel a healthy society.

“Will Work for a Job,” Part Two

As we face the situation recounted in Part One…

We’re all going to be making economic sacrifices for awhile, making cuts in order to dig ourselves, individually and as societies/economies, out of the trench into which we’ve fallen. There is, in country after country (and household after household), a great deal of arguing about which things to cut, and how far; there’s even (I believe wise) talk of restructuring the worst of the debts to make them more manageable.  Still, there’s no disagreement that something has to give, and that one way or another, the sacrifices required will denominated in some combination of lower consumption and reduced government services.

But as Lou Gerstner knew when he took on the turnaround of IBM, we can’t save our way to growth.  We can cut to stop the bleeding; but if we want to create opportunity and the possibility of improvement and growth, individual or national, we have to find ways to add new value– value that will translate into employment and well-being.  In theory, this new value can be created in incumbent companies or in innovative new ones; historically, it’s come from some combination of both.

But this time around, there’s data suggesting that we will be unusually reliant on innovation and entrepreneurs to create jobs– that’s to say, that incumbent companies can’t/won’t…

Celerant Consulting, an HR consulting firm, has just released  a corporate workforce productivity study, drawing on a  review of hundreds of subjects across the developed world (download a pdf of the report here).  The striking findings are summarized in this chart:

source

As the report observes,

Across all four industries surveyed – Energy, Chemicals, Healthcare, and Consumer Staples – the Impactability Study revealed a similar pattern of inefficiency. Value-add activity accounted for 50 percent or less of time spent on the job, leaving significant room for improvement. Although areas such as Healthcare and Chemicals are to some extent exposed to greater bureaucratic hurdles that direct more hours to approval processes, there is no question that each industry can reduce costs by refocusing the organization’s workforce.

One can quibble with Celerant’s methodology, and argue for marginally higher or lower productivity numbers in one sector or another.  But I doubt that anyone feels that the report is fundamentally wrong.  In our hearts (and minds and stomachs) we know that organizations that struck their “Coase balance” when the state of technology and society were very different, and have accreted layers of organizational sediment ever since, are bound to be inefficient today.  From Dilbert to The Office, we recognize the situation even as we laugh at it.

So, there’s plenty of productivity to be had in incumbent companies without adding any staff.  Indeed, these big companies may even be able further to reduce their employee costs, either by continuing to reduce staff or by holding– even lowering– wages and salaries.  Indeed this is what the Bureau of Labor Statistics suggests is happening: productivity up; labor costs down…  Not very good news for the economy as a whole, in which employment is a continuing concern; but OK for shareholders, right?

In the very short-run, maybe; but overall, not so much.  Companies that are focused on cutting costs, in which employees are fearful of their salaries or jobs, are not hot beds of innovation.  There are exceptions, like IBM under Gerstner; but they tend to prove the rule:  most often, companies in the Celerant boat are trying to figure out how to do the same things with less (or, like the airlines today, to do less with lots less).  Innovation in companies like these too often amounts to figuring how how to charge more for the same thing (c.f., airline “service fees”).  This is, as Gerstner knew, no way to build a profitable, growing future.

Clearly, big, incumbent companies should try to innovate.  Some (again, pace Gerstner) may get it right.  But, for all these reasons, many more probably won’t– if they even try.

So, if incumbent companies aren’t likely to create the innovation and employment that we’ll need to achieve sustainable growth in our economies, where will we find it?

It’s been long believed that small businesses, and the jobs they create, lead economies out of recessions.  Surely, they have historically played play an important role (a role threatened by the current contraction of capital available to them.)

But Paul Kedrosky argues that we should look more specifically to new companies.  Using the mathematical  idea of the “drunkard’s walk” (a version of the probability theory concept of the random walk), he illustrates the “inevitability” that new companies are key…

…the central thing about job creation from young companies is its inevitability. It is a species of mathematical certainty (one driven by initial simplicity and a wall) that young companies must create the most jobs (even without assuming particular skill on their part, or taking into account sectoral or economic growth, both crazily conservative assumptions).

“Crazily conservative assumptions” indeed.  Those new companies are– certainly not entirely, but largely– exploring the frontiers of the market.  They are innovating products, services, and processes– creating the “stuff” of real economic growth.  And they are giving their employees the opportunity to learn the skills and work habits that can achieve it.

So while cutting away the fat in incumbent companies and established markets is both necessary and useful to economic renewal, it doesn’t begin to be sufficient.  Real growth requires the creation of new value, in new ways.  And while there are some older, bigger companies that can pull that off, it is historically the role of small, new entrants– of the entrepreneurs and their start-ups.

How do we encourage new business, create the conditions in which it can help us out of the trench that we’re in?  There are detailed answers being developed in lots of spots, e.g., at the Kauffmann Foundation.   Here, let me suggest one very obvious theme:

If we want to encourage innovation and entrepreneurship, then we have to stop pursuing policies that pre-empt them by advantaging large incumbent companies and their desire to preserve– and milk– the status quo.  From obvious fronts like financial, securities, and anti-trust regulations, to corners as seemingly arcane as the patent process, the deck is stacked.

Indeed, these policies knit together to become a kind of “pro-consolidation platform”– one that both parties have adopted.  The results, we’ve already begin to see:  the financial crisis, the reduction in meaningful consumer voice and choice in an increasing number of arenas, the feudal concentration of income, wealth, and power in a big-bank, big-company elite…

source

Beware the Land of the Giants– it is a barren place.

As Adam Smith argued, markets can be a wondrous thing, they can lead to increased economic growth, increased welfare, and increased equality– but only if the governments that legitimize and police them work to be sure that they are actually “open” and “free.”

“Will Work for a Job,” Part One

Thursday’s mysterious Space Mountain-like stock market plunge aside, the domestic U.S. economic news last week seemed pretty good:  employment up, personal consumption expense up– sounds like a recovery.

And a recovery it may ultimately be.  But a peek underneath those number and a look out at the global economy each suggest that it’s premature to party…

My friend, anthropologist Grant McCracken, is an insightful observer of the American consumer.  Last year, as many were arguing that a new frugality– a “new normal”– was sweeping the nation, he begged to differ.  In The Harvard Business Review Blog, Grant argued that consumers would soon be spending again as though it were 1999. And indeed, in Q1 consumer spending added 2.6 points to GDP growth, following a strong Q4 last year.

But as Calculated Risk observes, the entire increase in consumption in Q1, and most of the growth in prior months, has been due to government transfer payments and reductions in personal savings.  That’s to say: Grant’s right, we’re continuing to spend…  we’re just not earning to support the expense.

click image to enlarge (source)

Perhaps that’s at least in part because we’re still not working.  This week’s report of 290,000 new jobs notwithstanding, the unemployment rate rose to 9.9%.  Add in the number of workers who are involuntarily on reduced hours and the number (U-6, as the BLS calls it) swells to 17.1%.  And then there is the record number of people unemployed for 27 or more weeks– 6.72 million, or 4.34% of the work force.  To put this in perspective, the recession of the early 80s peaked at 10.3% unemployment; but long-term (27+ weeks) unemployment never rose above 2.6%… to wit, the preponderance of transfer payments as noted above.

click image to enlarge (source)

There are lots of signs that can signal an economic rebound; but in the end, a sustainable recovery will be built on employment, on jobs.  In Part Two, a look at where those jobs might (and might not) be found.  But first, a quick look at the global context in which any U.S. recovery will have to make its way.  In a way that’s analogous to the domestic employment situation, underneath the good news of the moment, there’s trouble.

To wit, the news this morning of European-IMF agreement on a bail-out plan for Greece:  it’s encouraging…  But friend Peter Herford recently forwarded a terrific (albeit, mildly terrifying) piece from Der Spiegel, looking at the underpinnings of the European debt crisis: “The Mother of All Bubbles.”

Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it…

Here, too, we find ourselves returning to jobs as a– the– central concern…

As we think about the ways in which we in the developed world have lived beyond our means, we arrive quickly at the extraordinary accumulation of public debt that’s the “hero” of the European drama (which isn’t to say, of course, that it’s not an issue in the U.S. and elsewhere):

click image to enlarge (source)

…and at the kind of private debt– commercial, mortgage and consumer credit– that contributed so powerfully to the 2008 meltdown:

source

click image to enlarge (source)

But as we consider private debt, it’s worth calling out the corporate/commercial component– the bit that’s directly related to the businesses that provide jobs.  While there have been some bankruptcies among over-levered companies, corporate credit doesn’t seem, given the relative paucity of attention its gotten, to have played much of a role in getting us into our current pickle.  Indeed, most of the concern about corporate debt since 9-15-08 has been around whether there would be enough of it to support a recovery.

If governments are going to be reducing their services, then growth will have to come from new/higher incomes, from real growth… and that– the creation of those new jobs and of those higher incomes– is the role of business.   If we’re going to climb out of the trough we’re in (a trough that, if Spiegel is right, could be about to get deeper still),  business must create new (and new kinds of) value, and in so doing, create jobs.

And so, to Part Two…

“…what remains after one has forgotten everything he learned at school.”*

The Bureau of Labor Statistics reminds us that it’s smart to stay in school:

But as Calculated Risk reports, while unemployment among the best educated is still lowest, it’s increased as much in percentage terms for them during this current recession as for any other group.

click to enlarge

One notes that all four groups** were slow to rebound after the 2001 recession– not an encouraging reminder if one is hoping for a brisk employment-led, consumption-fueled recovery this time around.

But in some ways more striking is a difference we might expect, but that hasn’t yet emerged.  Calculated Risk:

I’d expect the unemployment rate to fall faster for workers with higher levels of education, since their skills are more transferable, than for workers with less education. I’d also expect the unemployment rate for workers with lower levels of education to stay elevated longer in this “recovery” because there is no building boom this time. Just a guess and it isn’t happening so far … currently the unemployment rate for the highest educated group is still increasing.

Clearly, from an individual’s point-of-view, it’s still smarter to get more education than less.  But the perturbations of past periods remind us that the gearing between between academic degrees and financial success isn’t always perfectly tight…  Indeed, those with sharply-defined professional credentials in fields– e.g, finance– that are unlikely even in the intermediate term (if ever) to recover their bubble-fueled growth rates, may find their advanced degrees at best unhelpful; at worst, downright prejudicial.

Economic recovery and growth will be driven to some large extent by innovation; that innovation will create new– and new kinds of– jobs.  Looking even just five years out, much less ten, one has to admit that it’s just not possible to predict what these emergent jobs, nor their requirements, will be.  (Consider, e.g., the hottest topic– and job category– in marketing/advertising these days: “social media marketing”…  which wasn’t even a glimmer a decade ago, and was just being born five year ago.)  This is a challenge for those new to the work force, who have to wrangle the product of their schooling and their personal experience into a shape that can fit the entry-level positions they seek.  It is a much bigger challenge for those  mid-career who find themselves needy of making a move:  these more mature folks have not only to learn new fields, they also have to re-direct the considerable momentum of perception and habit that characterized their old– and they have to do those things, usually, in ways that justify salaries way north of entry-level.

All of which underlines for your correspondent the extraordinary value of a liberal arts education.  When one is faced with a “working adulthood” that is one transitional challenge after another, no skill is more valuable than the capacity to adapt.  And no capability is more central to that adaptation than the ability effectively and efficiently to learn.

This is precisely what, at its core, a liberal arts education is about:  learning to learn.

There are many, many other reasons, rooted in personal and societal benefits, to pursue a liberal arts education, and top support a strong foundation of liberal arts in higher education.  But the lessons of the last couple of years– indeed, of the last several decades– suggest that the economic rationale is plenty strong as well…

And besides, it’s fun.

* “Education is what remains after one has forgotten everything he learned in school.”
- Albert Einstein

** To put these cohorts into perspective, the Census Bureau suggests that, of these folks “25 yrs. and over” (in 2008):
- 13.4% had less than a high school diploma.
- 31.2% were high school graduates, no college.
- 26.0% had some college or associate degree.
- 29.4% had a college degree or higher.

UPDATE:  Reader JK directs our attention to another treatment of the data, in the NY Times. As he suggests, even more dramatic.

Tis the season…

As we metabolize our way through the annual tryptophan haze, two contributions on a theme that’s been raised here before (c.f., for example,  here, here, and most fundamentally, here), two video commentaries on the current state of economic play…

First, via the ever-insightful Calculated Risk, a piece from the Versus Holiday Songbook:

And (on a very different note, but to the same end), via MonkeyBusinessBlog, a “soliloquy” from Wallstreetpro2 (alert:  after you get past the first few seconds– which are devoted to a pitch for precious metals– this video is, by reason of sustained use of profanity, not even nearly “suitable for work”… but then, it’s a holiday; we’re not at work):

While it’s easy to quibble with a detail here or there, and to fault the not-so-veiled xenophobia in the latter, it’s hard to dismiss the through-line.   But that it’s a problem of a scale befitting both the cynical nostalgia and the epic anger?  Quod erat demonstrandum.

So, what to do?

Increasingly, wise and experienced observers are arguing that financial institutions central to the economic infrastructure– banks, some insurance companies, a few huge employers (like GM and Chrysler)… any institution that government(s) can’t permit to crash– must not be allowed to become (or, in our current situation, to remain) “too big to fail.” Former IMF Chief Economist and MIT Professor Simon Johnson, Nobel Laureate Joesph Stiglitz (see also Bloomberg video here), former Federal Reserve Chairman Paul Volcker– all warn against letting institutions grow so large that they cannot be allowed to die.

Why?  Far from reducing the appetite for the kind of risky behavior that drove us into our current trough, the effective guarantee of a government bailout removes all moral hazard; if the truly-huge get to keep their winnings, but have their losses covered, why not take more and more risk?  And since the bankers and the markets all know that the guarantee is in place, the gargantuan incumbents enjoy a cost advantage– they can (as the first video reminds us) raise money more cheaply than their competitors (after all, there’s no risk)– money that they have used not to restore the flow of credit, but to acquire even more scale through acquisitions, to fund extraordinarily profitable proprietary trading…  and of course, to pay those infamous bonuses (and here).  All, while these behemoths raise their fees to their customers (see here, here, and here, for instance).

For my part, I agree– I hope that efforts like those of Vermont Senator Bernie Sanders bear some fruit.

But I fear that they neither go far enough to address inherent risk and the attendant issues of fairness, nor get at what is, at the core of our troubles, an extraordinary opportunity for growth…  and after all, a crisis is a terrible thing to waste.  More on that shortly…

How to cook a Black Swan…

The Black Swan

from John Gould, The Birds of Australia (Vol. 7 [n1-a.7]; plate 6), 1840-48

Nassim Nicholas Taleb, an experienced financial trader,  NYU professor, and author of The Black Swan: The Impact of the Highly Improbable, has been accused by a small subset of his readers of unhelpfulness.  “OK,” his critics prod, “we get that big surprises can be bad.  But how do we prevent them?”

The bulk of Taleb’s readership would surely reply, “read the book again– and this time pay attention,” as Taleb’s account of how Black Swans emerge, along with his concluding essay, do offer powerful prophylactic guidance.

But Taleb himself is more gracious.  As though in answer to those critics, he has recently published a set of “Ten Principles for a Black Swan-Proof World” that is a model of clarity and common-sense simplicity.

He articulates his ten “rules” with special attention to the economic crisis, though they are more broadly applicable.  And he builds directly, as readers of his book will note,  on the longer and more richly-substantiated observations and arguments in his book…

…which makes his prescription particularly chilling reading.  His piece is short; it sits below in full (with thanks to The Financial Times).  Consider, against each of the points Taleb makes, what we– the Obama Administration, the Fed, the G20, et al.– are actually doing.

The good news is that TARP, the Stimulus Package, and the myriad other bandages and prostheses being applied might actually “work”– they might halt the decline and get our economies back on the road…  battered, slow for awhile, but moving again… and with luck, over time,  at greater and greater speed.

The bad news is that we are not addressing the fundamental issues that drove us into this fix… which means that– quite apart from the distaste of rewarding the very people who created the disaster (c.f., here)– we are simply recreating the conditions for further big, nasty surprises… for the after-the-fact discovery that we were taking much bigger risks than we realized…  for the emergence of another Black Swan.

Let it not be said that we weren’t warned:

TEN PRINCIPLES FOR A BLACK SWAN-PROOF WORLD

By Nassim Nicholas Taleb

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

Playing to keep on playing…

Herman Posthumus
Landscape with Roman Ruins, 1536

Societies flourish and economies grow when they are open to learning (in every sense of the word)– to ferment, to innovation.  As historians from Gibbon on have observed, they founder when self-protective elites emerge, “closing” society– to learning, to ferment, and to innovation– making (real) change an enemy, and managing the economy to serve their own interests.

Simon Johnson, a past Chief Economist at the IMF who now teaches at the Sloan School at MIT, has published a powerful article in the current issue of The Atlantic,  “The Quiet Coup.”

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

It’s an important read.  Johnson marshalls observations that readers have no doubt made themselves over the last few years to lay out a calmly-but-firmly-argued case that is chilling, angering– and in the end, a call to action.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries,a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Indeed.* But while we’re at it, let us note that this sort of elitism– insiders playing with insiders at everyone else’s expense– is rampant across the economies of the U.S. and the rest of the West.  In sector after sector, from healthcare/pharma through energy and automotive to defense, the boundary between funding/regulating oversight and the funded/regulated commercial actors has burred beyond all recognition. Players move from one side of that divide to the other, and back, without missing a beat– and with a shared agenda that is all about sustaining the insider game that they are playing.  Consider, e.g., the case of Mary Schapiro.   And when industries consolidate, as under the current circumstances they’re likely to do at an accelerated pace, this problem grows.

Let us note too that one of our primary lines of defense against this sort of cronyism, the press, has largely gone over to the other side.  As Jim Fallows noted in Breaking the News, the Fourth Estate is all-too-often less concerned with the distance necessary to perspective on what they’re covering, than with being a part– and getting a piece– of it.

Clearly, this sort of exclusionary– if not down-right predatory– insiderism works against those on the outside.  Whether artificially raising asset “values” (so that they rise in price out of the reach of “ordinary people” and concentrate in the hands of insiders trading them back and forth with each other, as in the credit bubble), or surreptitiously lowering standards (as in the food industry, among many others), “civilians”– or customers or outsiders or whatever we wish to call them… or ourselves– sacrifice to sustain the trajectories of insiders.

But the irony is that in the medium-to-long term it stops working for the insiders as well.  Ultimately, the ability of a consumer-driven economy to grow depends on “consumptivity”– the ability of consumers to spend.  And as we’re seeing in the downturn that Johnson dissects, if insiders’ actions strip consumers of that capacity, the game grinds to a halt.

It’s all-too-easy to understand the impulse of one who’s finally made it into a privileged inner-circle to want to stay there– and indeed to “pull the ladder up behind them.”  But it’s all-too-important to understand why that’s an impulse resolutely to resist:  the insider plays that result, however satisfying in the short-run, are self-defeating; they make for the end of the very game they were meant to win.

And that– that impulse to “win”– is surely the most fundamental problem.  In Finite and Infinite Games, James Carse distinguishes between games meant to be won– and thus ended– and games played in order to keep playing.  Infinite games can be competitive; some players will do better than others.  But in infinite games, all of the players have a stake in there being enough players doing well enough to keep the game going and growing… because keeping the game going and growing is what everyone is playing to do.

As Johnson’s article reminds us, whatever other differences we’ve got, we share a real stake in our economy (and our society) being an “infinite game.”

It’s time– it’s past time– to start playing that way.

* For a more colorfully-argued version of essentially the same case as Johnson’s, see Matt Taibbi’s “The Big Takeover.”

I see…

A guest post from (Roughly) Daily…

“27 Visualizations and Infographics to Understand the Financial Crisis” (including a few that will be recognizable to readers of these missives or of Scenarios and Strategy)…

(See also this Ad Age piece on how “Data Visualization is Reinventing Storytelling Online,” referred by Tim O’Reilly)

As we begin to get it, we might spare a consoling thought for that pioneer of guerilla marketing Honore de Balzac, who, on this date in 1842, opened his play Les Ressources de Quinola to an empty house… Hoping to create “buzz” for the play, Balzac (the poster boy of over-achievers, who worked 14-16 hour shifts, propelled by a reported 50 cups of coffee a day) had started, then encouraged, the rumor that tickets were sold out.  Unfortunately for him, his fans took the news at face value and stayed home.

Balzac

Updates on two fronts…

Apologies for the longer-than-usual silence; I have been out of radio contact.  As I reintegrate, two updates on earlier topics…

source

Further to “The Truth, the Whole Truth, and Nothing but the Truth…,”  Senator Patrick Leahy (D- Vermont) lays out his case for a Truth Commission in the pages of Time.

And further to a series of posts (e.g., “The Giant Pool of Money” and “Life Imitating Art“) on the economic crisis and ways of trying to understand it, a fascinating pair of animations from Jonathan Jarvis, “The Crisis of Credit Visualized – Part 1“

and “The Crisis of Credit Visualized – Part 2“