Are They Too Big To Fail or Are We Too Ignorant To Get It?

I try not to get too political these days, since I find that I usually end up in the middle of some holy war between ideologues.  However, this financial reform thing is too big a deal to leave alone.  As usual, the political class has misplaced blame – whether purposefully or not – for why we are where we are, which means the solutions they are advocating have exactly zero chance of helping.  Allow me to offer an alternative.

First, a little backstory.  Those who know me know that I am a libertarian-minded guy.  So, back in 2008, when Bush was in bailout mode, many were shocked that I was in favor of what he was proposing.  How could a free market proponent go along with massive Uncle Sam bailouts of financial institutions that had clearly been making foolish decisions for quite some time?  Wouldn’t the libertarian position be to let them fail and let the market adjust?  Yes, that’s what the free market position would be…in a vacuum.  The reality, however, was that bailouts were the only option.

My reasoning was (and is) less about the reality of “too big to fail” than it is about perception .  In 2008, had some major banks gone belly-up, we would have had a major crisis in consumer confidence, which could have pushed us right off an economic cliff.  In those days, no one had ever considered the possibility that an organization as massive and influential as AIG might go bankrupt.  So, we were faced with the possibility of runs on banks and all of the panic and chaos that would accompany them.  But that was then, and what have we learned?  Nada.

The notion of “too big to fail” is a financial “mulligan,” something you get maybe once in a generation, when you get caught with a general public that is too ignorant to ride out a blip in a financial cycle.  The fact is that, on its face, there is no size institution that is too big to fail.  The only question is what happens when they fail. But no one is talking about this at all.  The default assumption is that “too big to fail” is a legitimate concept.  Consider the following.  Apparently, there are only three real options in the financial reform debate.  As this article in the Washington Post explains it, they are:

  1. No bailouts.  Easy.  If a financial institution fails, it ends up in bankruptcy court, and the chips fall where they may.  Aside from the fact that most companies will not believe that there really won’t be bailouts, the real concern is the panic that could come from massive failures – the “too big to fail” problem.  This is the fallacy I’m addressing here, so I’ll come back to it.
  2. Limit the size of financial institutions.  Don’t let them get big enough to be too big to fail.  The problems with this are numerous, but the bottom line is that it’s hard to define size in a meaningful way, and sometimes size is critical to global competitiveness.  So that one is off the table, too.
  3. Finally, we have the Chris Dodd solution – creating a new power base in the federal government that allows the executive branch to take corrective action with troubled financial institutions.  In principal, this works as an alternative to bankruptcy, but in reality, this is yet another power grab by the politicians.

So there you have it.  Our three options.  I’m a little disturbed that our immensely innovative and creative policy-makers can’t come up with anything better than these three options, but it really doesn’t matter.  Our solution is here.  It’s number 1, despite the fact that it is rejected out of hand by most everyone these days.

But wait!  Number 1?  Aren’t we back to 2008, where we’re balancing libertarian principles against unacceptable realities? No, because we’re not IN THE CRISIS.  We have the benefit of looking forward.  We can examine what would happen if the top 10 financial institutions became insolvent, and we can educate the general public as to how things would play out.  The free market really is capable of dealing with the failure of any size institution.  People just need to understand what is happening under the hood.  This, to me, is THE issue here.

The most important thing to know is that, even in 2008, in the midst of massive bank failures, there were banks that were doing fine.  Wells Fargo just sat back and watched as the other big players imploded.  And then they came along and picked up the pieces – getting massive assets for pennies on the dollar.  That was a good thing, one that should have been shouted from the roof tops. It illuminated one of the most important aspects of the financial world – it really is a zero-sum game.  When someone wins, someone else has to lose, and vice versa.

The point is that just because a big bank or two loses, there’s no need to run to the other banks to empty bank accounts and stuff everything in mattresses until the crisis passes (as if that’s even possible).  Indeed, the ONLY real concern in 2008 was that the general public would freak out and come to eventually realize that the total amount of cash in our society is a small fraction of what is actually on the books.  The whole bailout deal was really about maintaining the public’s ignorance about how the financial world really works.  And back then, with all that was happening, it made sense.  Now it doesn’t.  Now we can pull back the veil and let people know a) how banks really do business and b) what happens when the big ones fail.  Is that really so hard?

Evidently it is.  The government is fired up to educate us about getting involved in the community, but it never crosses the bureaucratic mind that some PSAs about the ins and outs of the financial industry might be of value. Of course not.  What we need is more government.  Unfortunately, where government intervention always causes problems is in distorting the market signals that individuals use to make decisions.  When management knows that the bank will be dissolved if it makes really bad decisions, they will err on the side of caution when it comes to creating investment instruments and/or loaning capital.  Conversely, if a consumer knows that any bank will be bailed out, he or she has no incentive to bank with strong financial institutions with a reputation for stability.

Yet again, we see our politicians asking for the power to do the impossible.  They want the power to make decisions for financial institutions, when they have neither the information nor the expertise to do this as well as the managers of those institutions.  Oh, how the arrogance astounds.  The solution, which has been validated time and time again throughout history, all over the world, is to let the markets adjudicate the winners and losers.   And what is it that keeps a free market running smoothly?  An educated and informed population. We just need to take on the problem of public ignorance.  Ironically, it is that very same public ignorance that will ultimately pave the way for this massive expansion in government power, so I’m not holding my breath.


Caveman Radio – End The Fed – Wed March 10th 9-11pm EST

Another show in the can.  This one was especially fun because I had David Hillary joining me from New Zealand.  David is a banking and monetary policy expert.  He is the author of the blog, Lost Soul.  Very smart guy.

(Gotta love the Internet – making it possible to do a live call-in radio show with hosts on opposite ends of the planet.  Truly amazing.)

You can download the mp3 here.

I think the show went well.  We tried to use Ron Paul’s book as a hub for a broad discussion on banking and monetary policy.  David has been educating me over the last couple of weeks on the three major points of view relative to these topics.

  • Keynesians – people who believe we need a Central Bank and a strong Federal government to manage our economy
  • Rothbardians – people who believe we should abolish central banks and other prevailing aspects of banking (including the fractional reserve system) and return to a gold coin monetary standard
  • Free bankers – people who believe we do not need a central bank, but we do need a gold standard, and we need to maintain the Fractional Reserve system

Ron Paul is in the Rothbardian camp.  His book, therefore, focuses on all of the terrible things that are the result of the Fed, fiat currency (currency not tied to anything concrete), and the fractional reserve system.  David and I fall into the Free Banker camp.  (This is a position I’ve adopted as a result of my investigations and talks with David.)  So we took the main points of a few Paul’s chapters to discuss the flaws in the Rothbardian approach and to illuminate the value of Free Banking.

Lots of good stuff there.  We covered everything from how banks are supposed to work (it probably isn’t what you think) to what the gold standard is, how interest rates work, and the role of the Fed in our society.  In the end, we conclude as Ron Paul does – we should end the Fed.  However, our reasoning is completely different.  Ron Paul’s big hangup is mostly with the Fractional Reserve system, though he attributes most of the so-called problems from it to the Fed.  Of course, he also is very upset with our fiat currency, so he wants us to return to a gold standard.  That, in itself, is also a good idea.  But doing that without a Fractional Reserve system is frankly impossible.

In the end, David put forward a completely workable way to move from where we are today to a free banking model.  We can get there, folks.  We just need some folks in Washington who are in favor of real change (as opposed to the fake change that was sold to America in 2008).

So have a listen and form your own conclusions.

Economic Freedom Versus Political Freedom

Original Post (with comments)
Milton Friedman wrote in, Capitalism and Freedom, that it is possible to have economic freedom without political freedom, but that the opposite is impossible. That makes pretty good sense, but what he didn’t talk about was what might happen in a place where economic freedom exists and political freedom does not. It appears that we may soon find out.

Reuters is reporting that some Chinese villages have recently resorted to violence to deal with factories that are polluting rural farmlands. (Click here for the article.)

After chemical plants set up shop in a nearby industrial park, residents of this farming town in China’s wealthy coastal province of Zhejiang pressed authorities to shut them down, complaining that waste was polluting their crops and river. Using China’s centuries-old method of petitioning, they took complaints first to local authorities, then to city officials, and finally all the way to the central government, more than 600 miles away in Beijing.

“None of it achieved any results,” said one resident, who asked not to be named. For five years, frustration built. Then, as the villagers in Huashui, near the Zhejiang city of Dongyang, moved to block the road leading to the plant, their frustration exploded. “Ordinary people don’t have any other way. It was only by not letting the workers in that we could stop the factory from producing,” said the resident. She gestures at the landscape where plants making everything from chemicals to zippers are encroaching on what was once some of China’s most fertile farmland. The blockade escalated into a full-scale riot involving as many as 30,000 people. Thousands of police had to be called in from neighboring towns to put it down. Yet, after years of fruitless petitioning, the riot worked.

Interesting, huh? It looks as if China’s supersonic expansion has extended out of the industrial areas and into the countryside, where many of the new facilities are causing serious problems for the local inhabitants. This, in itself, is not particularly surprising.

Commercial growth is often at odds with people who are resistant to change. Sometimes these people are justified in their resistance. In that case, in politically free places, those people have recourse. They can appeal to their leaders to address their grievances. For example, here in Atlanta, the City Council is considering (and will likely pass) a moratorium on building new residences in much of the city. Click here for the article.

The impetus for this is complaints by many long-time residents that their property taxes are skyrocketing due to the continuous building of “McMansions.” You see, Atlanta is somewhat unique in the sense that there are quite a few nice greenspace neighborhoods scattered in and around the commercial areas of the city. Most of the homes in many of those neighborhoods are fairly small. They’re well maintained, but they’re small. So builders are coming in, knocking them down, and replacing them with larger, more elaborate homes. Some folks don’t like it, so they’ve appealed to their political leaders for help. Putting aside the arguments for or against prohibiting this practice, one thing is clear – our politically free society is working as it is supposed to.

But not in China. In China, the political leaders are all about stability – they’ll do anything to keep from rocking the boat. In this case, that means ignoring complaints and hoping they’ll just go away. This is because the Chinese government is in a very precarious situation. As more and more Chinese people get a taste of the prosperity that comes with economic growth, the ability of the Chinese government to maintain a docile population is deteriorating rapidly. Now they’re seeing what happens when political freedom does not accompany economic freedom.

I’m not sure how I feel about this. On one hand, I like the idea that the people are starting to take matters into their own hands. However, for now, the need for political expediency on the part of China’s leaders is winning the day, which is why these riots were successful. As this trend continues, things will have to come to a head. The Chinese government will have to decide what they’re willing to do to keep things as they are. The result may be another Tiananman Square, or the result may be capitulation. My money is on the former.

Are we witnessing the beginning of a Chinese revolution? If so, then I hope the people win. Politically freedom is an absolute prerequisite for an enlightened society. Alas, history is not on their side. In any case, keep your eyes on China, folks. It’s gonna get dicey.

Ethical Capitalism

This happens to me from time to time.  Over a span of no more than a few weeks, without any preconceived agenda or plan, I come across several disparate pieces of information (books, articles, movies, websites, etc.) that all inadvertently conspire to solidify concepts that have previously been loosely floating around my brain.  The last time it happened was when I started getting the feeling that evolutionary psychology was approaching a tipping point on its way to becoming a set of ideas that would have applicability beyond the walls of academia. This time, the focus is on capitalism – specifically, whether it is possible to have a long-term capitalist system that does not ultimately cause more problems that it solves.  To start with my conclusion, the answer is a resounding yes.

As the ten or so folks who visit this site regularly know, I’ve suffered some painful disillusionment recently with respect to America’s behavior on the international stage over the last few decades.  (See this and this.)  That was the start.  Then, I saw the documentary, Enron: The Smartest Guys In The Room, which essentially explains the whole debacle from Enron’s inception to its eventual demise.  Not pretty, to say the very least, and as the trial of Ken Lay and Jeff Skilling gets underway, it would be very easy to look at all this and come away with the feeling that capitalism is just another band in a spectrum of insidious human institutions.  However, it’s tough to square that with the irrefutable fact that those populations that have embraced free market capitalism have, on pretty much any measure you care to examine, enjoyed more prosperity than they did under any other system. Still, there must be something going on here.  That something is the constant of human corruption.

I think it’s critical to recognize that some systems, such as communism, are inherently flawed, which is to say that no cadre of saints could ever wring success from them.  Even if you were to hypothetically (read: impossibly) factor out all manner of human corruption, the result would be the same – mass suffering and a general decline in overall prosperity.  In the case of communism and its cousin, socialism, the culprit is the necessary role of information in the execution of decisions regarding the means of production and the distribution of that which is produced.  As Friedrich Hayek tells us in, The Fatal Conceit, it is simply impossible for a centralized authority to have the information it needs to make good decisions across a panoply of individual situations.  That’s how you end up with a surplus of plates, but a shortage of forks.  But capitalism is not one of those institutions.

Capitalism, as an institution, is perfectly sound.  It works with human nature, which is why it works at all.  But like all other institutions that involve our species, it is always at risk of being corrupted from within.  As Brian Tracy so clearly writes in, Something for Nothing, all humans are hardwired to be lazy, greedy, ambitious, selfish, vain, ignorant, and impatient.  In addition, all humans have the same basic hierarchy of needs – safety, security, comfort, leisure, love, respect, and fulfillment – in that order.  The question is how we get from our inherent attributes to the satisfaction of our needs.  It would be easy to say that good institutions are the answer.  In a sense, they are, but I think we’re now seeing that our good institutions could still use some work.

Is capitalism bad because big oil has enough money and enough influence to push our leaders to embrace wholly unethical practices when dealing with underdeveloped countries?  After all, it was capitalism that made it possible for big oil to get where it is today.  Is capitalism bad because a few nefarious fellows (like Lay, Skilling, and Fastow) can conspire to plunge California into an energy crisis and hoodwink Wall Street and the rest of the world into losing billions of dollars on a house of cards?  No and no.  The problem is ethics.

I have recently come across a company called LRN.  Here’s what they do:

LRN helps leading companies around the world inspire do-it-right cultures. We provide everyone in the enterprise with the legal and ethics knowledge needed to make better decisions and take appropriate actions.

The founder and CEO of the company is a guy called, Dov Seidman.  He’s a Harvard Law grad (The company has its roots as a legal services provider.), and it appears that his mission in life (and business) is to bring ethics to the forefront of corporate American culture.  What intrigues me is that it appears that the business environment in this country following all of the scandals of late is becoming more and more receptive to this.  Sounds good, right?  So how does it work?

The basic idea is that companies, especially large ones, have to embrace a culture of ethics.  That means they can’t just look at regulatory and legal issues as hindrances to business as usual.  They, meaning the employees at large, have to internalize what it means to operate ethically.   Again, it sounds great, but how do you make it happen?

It takes a commitment from the very top to instruct every member of the organization on what it means to do business ethically, and it takes a system that is designed to penalize unethical behavior, and, more importantly, to reward ethical behavior.  The idea is not to determine some universal set of ethics across all industries and then chip away at getting more and more companies to buy into them.  It’s about getting each and every company out there to settle on a set of values and then implement systems that ensure that they are observed at all levels.  This is no easy task, but it can happen.

Up until summer of 2005, I worked for IBM.  One thing that I really appreciated about working for Big Blue was the fact that every employee had to commit to a set of Business Conduct Guidelines.  Every year, we had to login to the IBM intranet, read the guidelines, and acknowledge our commitment to them.  Though I can’t speak for everyone, I can certainly say that I took those guidelines seriously.  They meant a lot to me, and I was all too happy to share them with customers.

As a business development professional (read: sales guy), I was constantly competing with other big names for business.  I often emphasized the fact that IBM is an ethical company with a commitment to doing the right thing by its customers.  To some, this no doubt came off as standard sales fluff.  However, given the fact that no complex business relationship is hiccup-free, savvy customers are comforted to know that when things go wrong, the company on the other end has a policy of being on the up and up.  Culturally-speaking, we at IBM believed we held the moral high ground, and I can tell you that we were often rewarded for it.  This is what Seidman envisions for corporate America.

In fact, in 2004, Seidman testified before the United States Sentencing Commission.  Here’s the deal with the commission:

The United States Sentencing Commission is an independent agency in the judicial branch of government. Its principal purposes are: (1) to establish sentencing policies and practices for the federal courts, including guidelines to be consulted regarding the appropriate form and severity of punishment for offenders convicted of federal crimes; (2) to advise and assist Congress and the executive branch in the development of effective and efficient crime policy; and (3) to collect, analyze, research, and distribute a broad array of information on federal crime and sentencing issues, serving as an information resource for Congress, the executive branch, the courts, criminal justice practitioners, the academic community, and the public.

At the time of Seidman’s testimony, they were considering the role of ethics in determining how to handle legal infractions by business, large and small.  Here’s a link to the whole transcript.  It’s a bit long, but Seidman’s arguments are really compelling.  Here’s a snapshot:

Compliance is about self-governance by its very nature. And therefore, if we believe that the most powerful form of self-governance is further down the spectrum of culture beyond mere acquiescence with law, then only ethics can get us there. I’m also rejecting as unfeasible in today’s world is that a set of corporate mechanisms and bureaucracies can be created, indeed pure compliance programs that attempt to ensure that everyone acquiesces and complies with the law. Instead, I believe that compliance with law is, in fact, an outcome – an outcome of a true self-governing culture.

Quite right.  In terms of Tracy’s basic human attributes, we can say that the system that positively harnesses our inherent greed and selfishness in the pursuit of our aims is ethics.  And when the right ethics are in place, we find that our needs for love, respect, and fulfillment are more easily satisfied.  You see, as social animals, we thrive on the acceptance of others.  Having a common set of values and a system that illuminates breaches in those values is the key to keeping the dark side of human nature in check.  It’s a kinder, gentler version of the public hanging.

If, during my says at IBM, I had chosen to do as many competitors did, offering kick-backs to decision-makers for choosing IBM, I would have been met with raised eyebrows at the very least (and, more likely, disciplinary action).  My colleagues would have thought less of me for taking the easy wrong over the hard right.  Though we were co-workers, we were also competing with one another in some ways – in terms of quota attainment and such.  By operating unethically, I would have given myself an edge, which was tantamount to cheating.  Yes, I lost deals to competitors who delivered big screen TVs to CIOs who bought their wares, but I could always hold my head up, and that was ultimately more important to me than getting the deal or my acknowledgement of the IBM Business Conduct Guidelines.  That’s an ethical culture, and it came about because I was working within a system that would not allow me to overly satisfy my needs for security and comfort (by way of sales commissions) without jeopardizing my need for respect.  A good ethical system creates checks and balances between human attributes and human needs – breaches mean that needs don’t get met.  Simple, and completely consistent with human nature.

The bottom line is that the solution to the problems of capitalism are out there.  They’re not easy, and they have costs, but the benefits far outweigh them.  Indeed, as Seidman says, compliance with the law is an outcome of an ethical culture.  But there are many others, the best of which is the value of being known for doing the right thing.  That means that we have to reject the understandable, but intellectually lazy, conclusion that capitalism in itself is the problem.  As always, it is our implacable human nature that poses the challenge.  Fortunately, just as the invisible hand co-opts our nature to produce the best of all possible environments, so can ethics keep the invisible hand from reaching in the cookie jar when no one is looking.

Zero-Sum Versus Wealth Creation

Original Post (with comments)
I keep thinking about Wilkinson’s article on Capitalism and Human Nature. I spent some time on his blog site, The Fly Bottle, and I noticed a trackback to a blog (Mixing Memory) that is, you might say, less than impressed with his work, and with evolutionary psychology (EP) in general. The writer, known only as Chris, asserts that Wilkinson’s reliance upon EP is unfounded at best, and illogical at worst. This is no surprise to me – there are lots of folks, many of them reputable academics, who think EP is a farce, mainly because they think you can’t prove any of it. I’ll put aside my response to the naysayers at large for now and deal directly with one of Chris’ statements against Mr. Wilkinson.

A central point in the Capitalism and Human Nature piece is that humans in the ancestral environment lived in relatively small groups, which led them to be coalitional (proned to in-group prejudice), hierarchical (aware of and in pursuit of status), and envious zero-sum thinkers (that is, they conceived of a finite pie and felt enmity toward individuals who amassed too much of it). This is standard fare for EP. Wilkinson’s point, however, which is a very good one, is that this kind of nature does not bode well for the invisible-hand type of economy. Chris, of Mixing Memory fame, however, sees this aspect of Wilkinson’s article as bordering on the nonsensical.

He writes, “In fact, it is the coalitional and hierarchical nature of human groups that makes economic and power hierarchies so natural, and readily accepted by most individuals.” Really? In my view, the only thing natural and readily accepted by humans is the tendency toward reciprocity. Getting from small-group trade to a free-market economy, complete with free-market financial systems, is not just a series of baby steps, all easily navigated by our default DNA. Chris’ statement, in my mind, betrays his misunderstanding of the depth of Wilkinson’s insight here. I’m not at all shocked that one who understands science, or appears to, would be less erudite in matters economic. Indeed, I’d say most people don’t understand the difference between having a zero-sum economy and an economy that creates wealth. Allow me to oversimplify it. It all comes down to where the money is kept.

The concept of wealth creation is sometimes difficult to grasp, but at its most basic level, it has to do with the relationship between the aggregate amount of money the country would have if each person kept his or her portion at home under the mattress (we’ll call this real money) and the aggregate amount of money the country has when most money is kept in banks (call this funny money). To understand this, we need only understand the fractional reserve system, which is the system used by all banks in the US. The idea is that banks only keep a fraction of their deposits on hand. When you deposit a dollar into your bank, it may only add 15 cents to its cash. The rest is loaned out to other customers. The borrowers may then deposit the money in that bank or another bank, and the process is repeated again and again. The effect is the creation of a huge difference between real money and funny money. This was made possible the moment the US went off the gold standard, but we need not digress.

(Update: Jan 2010: I have since learned that a fractional reserve system is possible, nay probable, even with a gold standard, so I retract this statement.  It doesn’t impact the point of the post, but I thought it was worth noting.)

The point is that when money is kept in banks, the economy as a whole has considerably more money than it would have if everyone kept their money at home under their mattress. Wealth is created. In a zero-sum economy, there is a finite pie that can only be divided so many times. In a wealth-creating economy, there is what is normally a finite pie, and then laid over it is this artificial pie that miraculously expands the pie below as it grows. Don’t worry if it’s hard to visualize – your genes have no frame of reference for this, because it occurs nowhere else in nature. The wealth-building economy (also known as the free-market economy and the capitalist economy) is the brain-child of men who were so far outside the box, they couldn’t even see it. How about a more practical example?

(I think I’ve heard Neal Boortz use this example.) Suppose two people win the lottery, five million cash for each of them. One guy buys himself a big, nice house. He buys lavish gifts for his friends and family, and generally lives it up till the money runs out. The other guy uses his money to buy a Waffle House. He ends up hiring 20 people, taking out a loan for a piece of property, and staying in business for years to come. The question that is usually asked is, who is better? Both guys are rich, so if you hate the rich, should you hate them both equally? I’ll sidestep that and use this example to point out the difference between zero-sum and wealth creation. The first guy lives in a zero-sum world. He takes his money and spends it till it’s gone. The second lives in a wealth creation world. He takes advantage of the fractional reserve system that underlies our economy and he creates a money machine that ends up bringing in far more revenue than his original five million. It cost no one anything for him to do this. No exploitation involved. No cheating involved (we may assume). In fact, he created jobs in the process. He expanded the pie for everyone.

So, to get back to Mr. Mixing Memory, Wilkinson’s point is that our nature is not inherently equipped to grasp a wealth-creating economy – an economy that is not finite, an economy that is not zero-sum, and economy that is not hierarchical (at least relatively speaking), and an economy that is not coalitional (our Waffle House lottery winner did not know about, nor did he care about, whomever might benefit from his choices). But…as the invisible hand concept evokes, man has no need to grasp the mechanics of this kind of economy. It does its job – it satisfies individual small-scale demands; the rest takes care of itself. Indeed, Wilkinson is saying that capitalism works well with human nature, even if humans are not wired to understand it. Am I the only one who sees the irony in guys like Chris at Mixed Memory not understanding it either?

Consumerism – Status Gone Haywire

Original Post (with comments)
The last post prompted some back and forth discussion regarding the legitimacy of the Enlightened Caveman concept. I hold that there is a duality between what our genes were designed for and want and what we as conscious, sentient beings want. I also believe that the best approach to life entails having the latter control the former. But some seem to think that the more the latter controls the former, the more the world looks like a Vegas version of Pottery Barn. It’s as if the enlightenment is getting us nowhere. Well, folks I’m here to tell you that this is not enlightenment. This is caveman 101, and, if anything, it proves my point beyond dispute.

I’ve been talking lately about appearances. Why? Not because I’m obsessed with the topic, but because it has everything to do with how our world is unfolding. The idea that one should be aware of his or her appearance delta is what is known in the software development world as a work-around – it’s the best you can do with the situation. Ideally, as the world becomes more rational, and less caveman, the need to be aware of an appearance delta diminishes. Just like it is no longer socially acceptable to utter the “N” word in any city with more than 250,000 people, so should it be no longer acceptable to judge a book by its cover, to automatically cut slack to someone because they are physically, or better yet, viscerally appealing to you, or to do the opposite when someone does not make it over your bar. But to operate as if things were already this way would be foolish. It would be failing to recognize reality.

Like it or not, our genes are in command in the public at large, and this explains the Wal-Martification of America. Appearances also, particularly what we want others to think of us, play a crucial role in shaping our goals in life. It’s all about buying big stuff, expensive stuff, but it’s not our fault. Today’s mass-media world provides the general public with the most insidious of insights – what the other guy has. Everyone watches TV, and TV is a barrage of what the other guy has, the life the other guy leads, the car the other guy drives, and on and on. Conservative parrots will cry about how the growth of government has created the crisis that is the two-career home – the tax burden is so high that the wife, the one who used to be able to stay home with the kids, now has to work full time to make ends meet. The truth is that today’s families have an expectation of two $30,000 cars, private school for the kids, expensive yearly vacations, second homes, and all manner of gadgetry and conveniences, and all that costs a heck of lot more than the necessities of the 70’s. And why would they want so much? Cause that’s what the other guy has, and now they know it. The caveman is but a moth to the flame when it comes to what the other guy has.

Status, status, status. In caveman days, you had to be in the upper echelon if you expected to snag a mate…or lunch. That meant you paid close attention to what the folks with food and mates had and were doing, and you followed suit. And here we are, tens of thousands of years later, and nothing has changed. Well, something has changed – the smarts we used to master our environment eventually bit us in the ass. When we were tribal people, all we knew was our immediate environment. We knew where we stood. We paid attention to the folks with status, and we worked at moving up, but we knew where the top was and we knew, fairly well, how close we could get to it. But when we became more explosed to the outside world, when we started to find out that the guy at the top of our particular hierarchy was nothing, that the pinnacle was much higher, all hell broke loose. Things went from a local contest to a national contest quick, and the caveman is still reeling.

The quest for status, more than anything else, is driving consumerism. We want the big things, the expensive things, but we only have so much money. That means we economize wherever we can on the little things – we go to Wal-Mart. Capitalism, the best but not perfect economic system, is always replete with suppliers for demand such as this, even if the profit motive pushes them to exploitation. What we save at Wal-Mart, we spend on what the other guy has. But every time we make another purchase, we watch another show on TV. We see another guy. Suddenly, the DVD isn’t enough. Now, it’s gotta be the plasma TV. And if we can’t afford it, fucking finance it! There are all these nice people mailing us cards that tell us how we can borrow more than the value of our home because we have good jobs. Jobs that we never leave, cause if we do, it’s time to pay up. And what would people think? But why do we have to have all this garbage? Why do we have to worry about what people think? Status.
It feels good. Every time we get what the other guy has, and he notices, this calm comes over our tormented by TV caveman psyche. Our genes are saying, ahh, we’re that much closer to the top, that much more assured of our persistence for another generation. So, I cannot side with the idea that it is our culture that has created this plastic world. It is the very essence of our nature that is pushing us in the wrong direction. It doesn’t take a genius to figure out that life is not about what the other guy has. But it takes an enlightened caveman to recognize that a big part of him will never accept it.

And lest anyone think me an anti-corporate type – we need not rail against Wal-Mart for satisfying our caveman desires. Just as the drug war makes no sense because it is focused on demand, so is our indignation misplaced if we insist that companies that cater to our archaic side are the problem. We must simply endeavor to understand our “shallow” side so that we may harness it and retool consumer demand to complement what makes sense in life. It happens one person at a time. One conversation at a time.

Panamanian Economics – Corruption Versus Capitalism

I went to Panama last March on a fact-finding mission. A buddy and I had been hearing for months that there were real estate opportunities aplenty in cool areas like Bocas del Toro, Panama’s Caribbean archipelago. So we flew into Panama City (not the one with Spinnaker’s and wet t-shirt contests) and then made our way to the islands the next day.

One of the things I pay close attention to when I travel is the gap between the rich and poor. I look to see if there’s a significant middle class because I think it says a lot about the economy and the rule of law. I can say that it appeared to me that Panama City was mostly middle class, although I’ll concede that I did not see all of it. There were certainly some nice homes (well guarded, I might add), but the majority of what I saw was what you’d think of as everyday housing – not too big or nice, but not dilapidated. More importantly, the city was bustling with people tending to their “para hacer” lists. Things changed dramatically as we made our way to the coast.

Bocas del Toro is a collection of islands just south of the Costa Rican border, on the Carribean side of Panama. It is an interesting place because the main town, Bocas Town, is sheltered from the ocean by the backside of two sizable islands – it’s own and one other. There are some smaller islands in the mix, as well. The result is a place where much of the transportation is by boat, on water that is as smooth as glass. Houses and hotels are built on stilts. It’s actually one of the neatest places I’ve ever been. Alas, economically, the place is a train-wreck.

As I said, my friend and I were investigating rumors that property was dirt cheap, but on the rise as international tourism was taking off. We concluded that it was probably true. We also concluded that we’d be idiots to try and find out for sure. This is where the rule of law comes into play. You see, Panama is very friendly to foreign investment, mainly because the US is the biggest user (and therefore customer) of the Panama Canal. As a foreigner investing in Panama, you can set things up so that you don’t have to pay any taxes – not on property, not on income – for a period of ten years. If you invest in some sort of re-forestation project, ten years can become twenty. The Panamanian government has latched onto the idea, which has been well proven, that foreign capital creates local jobs. It’s the rising tide lifts all boats principle. However, the adherence to the rule of law is really the arbiter of long-term success.

In Panama City, you can see the wonders of a free market with an influx of capital – Panama City is the financial center of Central and some of South America. Though I am quite certain that corruption is present there, I am also certain that enough of the folks in power have realized that gains from malfeasance are easily dwarfed by gains from saying what you mean and meaning what you say. Essentially, the leaders in Panama City have officially become westernized. Not so in Bocas del Toro.

One of the big draws to Bocas is teak wood. Just run a google search on “bocas del toro teak wood” and see how much comes up. The offers vary, but the general theme is the same – you can pay a ludicrously low price for 10-20 acre increments of waterfront land with beaches that transition into teak forests . The teak is meant to be your nest egg – they (a crew of workers comes with the deal) harvest them every ten years or so – yielding a reportedly whopping return on investment. On top of that, these visionary developers have dedicated some of the land to harvesting the Noni plant, which, as near as I can tell, is something like Aloe but with a “it’ll cure what ails you” kind of mystique. This is harvested yearly, offering investors reliable and consistent income. So, to summarize, here’s what you get: land for cheap that is right on the water (high appreciation potential), the full rights to build whatever you like on it (vacation home or business), a farm of teak trees that will provide a windfall of cash every ten years (built-in revenue stream), and a crop of Noni plants that will pay the light bills (icing on the cake). Too good to be true? You bet.

It didn’t take much digging to conclude that the areas away from Panama City are not even remotely westernized, at least not the economic sense. They’re in a strange place, between the past “he who has the cash makes the rules” system and the future “follow the rules and create the cash” system. Corruption still holds sway over Bocas del Toro. The concept of quid pro quo has not yet really taken hold there, at least not where foreigners are concerned. To some (too many) of the locals, we are nothing more than walking money bags. Their job is to extract as much as possible from us, and there is no ethical or practical issue with saying or doing whatever it takes to make that happen. From my perspective, whether you’re renting a taxi, hiring a tourguide, or buying a teak farm, you are well served if you do not count on honesty or integrity from the locals.

We met another American who had been in Panama for much longer than we had. He had the occasion to befriend an attorney who spends half her time in Panama City and half her time in Miami. She explained to him that a very large portion of the time she spends in Panama deals with helping foreigners who’ve been scammed in real estate deals, many of which take place in Bocas Del Toro. Apparently, they have quite a slick operation set up there.

Buyers are courted and shown real, working tree farms. They’re provided access to reference customers who sing the praises of their investments. When these marks decide to pull the trigger, they are treated to a credible closing, complete with piles of legal paperwork. The thing is that the paper is worthless. The check clears and the crime is discovered only when the “new owner” tries to exercise his rights of ownership – either by building something or simply by hanging out. The Bocas authorities are called in and the person gets that sickening feeling that you get when you know you’ve been had. The police, who most likely are in on the con, rave about how this is causing all sorts of problems and how they are hot to nail these ladrones (criminals). From there, the story is just like any con movie – the victims return to the scene of the closing, only to find an empty building with no one around. The company they dealt with is gone, vanished from paradise. And the point of all this?

The situation in Panama, if we can extrapolate the Bocas situation, highlights something important about how societies handle the transition to capitalism. The thing about going from a closed market to a free market that invites foreign participation is that there is a queue for the receipt of benefits. The haves are the first in line, which means they will have more before the money trickles down to those who have nothing. This can be very disconcerting when seeing far into the future must always give way to daily necessities. So, for many rural Panamanians, the benefits of honoring contracts with foreigners have simply not yet availed themselves. In an area where there is no middle class, corruption, for most folks, is still a better business than truth. The problem is that this can only go on for so long before the whole project withers away.

Capitalism is a vacuum for money, but only if the profit motive can be realized. When money goes in and then disappears because the main rule of the game is that there are no rules, the vacuum dissipates…and fast. This is what is happening in Bocas right now. A friend visited there a couple of months ago and says that Bocas del Toro is already played out. How can that be? As recently as March, you could smell the opportunity there. There were major resorts planned on one of the biggest islands and more and more tourists were visiting and staying longer and longer. It seems, however, that one too many investors got burned by the short-sighted (although understandably pragmatic, from their point of view) actions of latino grifters on the long con. The resorts are on hold. The money well has dried up before it ever really got going. It’s sad, really…but maybe not.

Like I said, Bocas del Toro is beautiful. Though I liked the idea of buying low and selling high while the international tourist boom made landfall there, I now like the idea of being able to go back to a place that’ll be largely unchanged and still every bit as charming (don’t get me wrong, I had fun) in 10 years. And now that I know what I’m dealing with, I’ll conduct business as I do in Jamaica – product first…then the money, mon. And if I’m in a real good mood, I might just finish off the transaction with my favorite Spanish phrase: “Donde tu frijole playa?” (That one, you’ll have to look up.)

Scandinavian Economic Prosperity and Merits of the Welfare State

I was listening to the Michael Medved radio show today (He’s really good, by the way.). The topic was Scandinavian family values, or rather the lack thereof. He was referring to a USA Today article that talks about how 82% of Nordic children are born to unwed mothers. Though it is somewhat shocking to think that an entire culture has embraced such a backwards mentality as to consider marriage more deliberately than bearing children, it appears to be so. A couple cited in the article is expecting a baby in May but they’ve decided to put off marriage until they’re sure they’re right for each other. Say what? Aside from the differences in religious and social attitudes in Scandinavia, there appears to be an economic explanation for this practice.

According to a caller from Copenhagen (you gotta love internet radio), the Danish system rewards having children before you get married – government benefits are substantially higher for single mothers than they are for married parents. Putting aside that this is obviously stupid, I think it illuminates something more important about the relationship between economic policy and social attitudes. But first, it’s time to put to rest the myth that the Nordic system is the pinnacle of compassionate and effective economic policy.

Scandinavia is often held to be an example of a successful welfare state, where taxes are high but benefits are high and much appreciated by a population more happy with the return on their substantial investments. On the surface, given the prosperity of these three countries, this argument seems compelling. It seems to refute the notion that the kind of economic freedom reflected in free-market capitalism (and its necessarily minimalistic welfare model) is a prerequisite for truly elevating the human condition. However, I am inclined to believe that it is the social pressures that exist in such ethnically homogenous populations that explain the success of the massively regulated and redistributive economies in Scandinavia.

The problem for free market fans like myself when considering this area of the world has always been reconciling the notion that there is no free lunch with the fact that Sweden, Norway, and Denmark have in years past enjoyed very low unemployment and a commendable general standard of living. How could such generous benefits be sustained economically? Why wouldn’t the freeloaders bankrupt the system? The answers, until the last decade or so, have revolved around the fact that freeloading among Scandinavians was socially unacceptable. The folks who could work did work because the social repercussions of being a deadbeat sponging off the system were more painful than whatever agony was associated with maintaining gainful employment. Social responsibility effectively protected the system. Therefore, the security of comprehensive state-provided benefits could be enjoyed by all without fostering resentment toward a significant portion of the population for taking without contributing. Nowadays, however, the Scandinavian welfare state is in a crisis, and immigration is turning out to be the chief culprit.

I found an article on the Royal Danish Ministry of Foreign Affairs website called “Denmark – Conditions of Life – The Scandinavian Welfare Model.” The author, Niels Ploug, describes the situation:

It has never been the intention either with unemployment, sickness benefits or with cash benefits that so many people should receive them or that they should receive them for so long as has been the case in recent years. The financing of the welfare state has thus become a problem, and as it has not been politically possible to increase taxes, which are already very high, the Scandinavian countries have accrued a very large national debt which on the long view could represent a threat to the welfare systems.

The reason so many are receiving benefits is the influx in the last few years of immigrants. The Scandinavian systems were designed to provide benefits to all residents. Prior to the immigration stampede, this was viable because the ratio of people contributing to the system (via high taxes) versus people extracting benefits from the system was high enough to sustain it. However, now that immigrants are moving in and realizing that they can live in relative luxury (compared to life back home) without so much as lifting a finger, the system is descending into deeper and deeper waters. Thus, the free market fan is vindicated.

Whenever income distribution is derided by classical liberals (not to be confused with the modern-day notions of liberalism), the misguidedly compassionate are quick to point to Scandinavia as an example of the realization of their vision. It is the harshness of capitalism, they argue, that creates poverty and crime. If we only adopted the redistributive policies of our Nordic friends, many of our problems would go away. This, as we can now see, is nonsense.

The fact is that there is no ethnic homogeneity in this country to protect us against freeloaders. Our society is so anonymous that it is entirely possible to remain unemployed and receive unemployment and welfare benefits without any “neighbors” ever knowing – especially now that food stamps are giving way to benefit cards that are often indistinguishable from debit and credit cards. So there are no real social incentives to be productive. We can see how a relatively small population of immigrants with no ethnic connection or feeling of social responsibility are bankrupting the Scandinavian system. Imagine implementing that system here. It would make the inane US social security system look like the height of economic acumen. And, beyond simple economics, as in the case of single mothers in Nordic countries, there are significant social ramifications to such systems.

As the caller from Denmark pointed out, there’s a definite connection between the terms of the provision of benefits and the behavior of the general public. It simply makes sense economically to have a child before you get married. According the Ploug article, about two-thirds of single mothers in Sweden receive housing allowances, which means that available benefits are being taken advantage of in a big way. And why not? If you and your partner are blissfully in love and want to have a child, you’ll receive significantly more income from the state if you do so while unmarried. Could it be that much of the rationalization for this practice (liberal attitudes about the sanctity of marriage, etc.) is a smoke-screen for the fact that people will often do what makes the most sense economically? This has certainly been the case in the US.

When Welfare Reform was passed in 1996 limiting the amount of time benefits could be received, the US saw a gradual reduction in the number of people on the welfare rolls. When there was no economic incentive to get to work, many welfare recipients were content with limiting their exertions to walking to the mailbox every month to collect a check from Uncle Sam. But when the money ran out, necessity forced them into the workplace. So, when we look at Scandinavia, we should not see a shining example of how things ought to be. We should see the massive impact that economic policies have on the prosperity of nations and on the value systems embraced by the populations therein. It is, quite simply, an axiom that large-scale income redistribution inevitably leads to a decline in fiscal health. What is also becoming more and more clear, however, is that attitudes regarding employment, family life, and the relationship between the rich and poor are disproportionally influenced by economic policies in the welfare state. This is an object lesson in the concept of unintended consequences.

Social attitudes should be shaped by the public’s rational pursuit of the good life. But when economic policies place arbitrary hurdles in the way of practical courses of action, impractical and often irrational options become the paths of least resistance. Over time, they become socially acceptable simply by virtue of being well worn. The problem is that, eventually, these paths place the good life entirely out of reach. As far as I’m concerned, it’s better to let necessity continue to be the mother of invention. What do you want to bet she’s married?