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Excessive symmetry at the Fed

In that the quest for unanimity rather than democracy is the attempt to close the circle of Platonic symmetry leading to tragedy and bad poetry. But here’s the thing:

The Curse of Unanimity” by Binyamin Appelbaum, NYT:

The transcripts that the Federal Reserve released last week of its policy makers’ 2008 meetings record in painful detail the ignorance of its officials about economic conditions during that crisis year …

What the transcripts do not explain is why the Fed failed at one of its most basic tasks.

I wrote last week that the cause was a combination of bad data, bad models and bad assumptions. But that does not explain why the Fed discounted good data, failed to build better models or persisted in its mistaken assumptions. It does not explain why other people were able to see the cliff.

Neil Fligstein, a sociology professor at the University of California, Berkeley, argues in a recent paper that the broader problem was cultural …

Fed officials like to describe themselves as guided by data, but Professor Fligstein says the transcripts portray a kind of storytelling competition in which Fed officials select data that fits with their broader narratives about the evolution of economic conditions. Thus accounts of mortgage fraud were dismissed as anecdotal because officials believed that markets were operating efficiently. “They had a meeting about whether there was a bubble and it’s a whole meeting about why there wasn’t a bubble,” Professor Fligstein said. “It’s all about, ‘This can’t be true in theory so it can’t be true in reality.’”

Moreover, it is clear in the transcripts that Fed officials strongly prefer to agree with each other. They are not satisfied with making decisions by a majority vote …

Professor Fligstein said the Fed would benefit from a more diverse set of decision-makers.

Janet Yellen was sworn in as Chair of the Board of Governors of the Federal Reserve System on February 3, 2014, making her the first woman to hold the position. A cultural change in itself.

Why the Federal Reserve Failed to See the Financial Crisis of 2008: The Role of “Macroeconomics” as a Sensemaking and Cultural Frame, by Neil Fligstein, Jonah Stuart Brundage, Michael Schultz. Excerpt from the summary:

One of the puzzles about the financial crisis of 2008 is why the regulators were so slow to recognize the impending collapse of the financial system. In this, paper, we propose a novel account of what happened. We analyze the meeting transcripts of the Federal Reserve’s main decision-making body, the Federal Open Market Committee (FOMC) … This lack of awareness was a function of the inability of the FOMC to connect the unfolding events into a narrative reflecting the links between the housing market, the subprime mortgage market, and the financial instruments being used to package the mortgages into securities. We use the idea of sense making to explain how this happened. The Fed’s main analytic framework for making sense of the economy, macroeconomic theory, made it difficult for them to connect the disparate events that comprised the financial crisis into a coherent whole.

The study defines “macroeconomics” in ways to distinguish the “cognitive limits of FOMC members,” who for example did not sufficiently focus on trying to understand connections between what is referred to as the “real economy” and the “financial economy.” The importance of interdisciplinary relationships is evident. Also in this connection, you may have come across Justin Fox‘s The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. If not, ‘nough said!

But then there’s this: The Inflation Obsession by Paul Krugman. I am tempted to further connect, obsession, yet again, with “closing the impossible circle of pure symmetry” that keeps springing open in Unicycle, but I will resist.

Long and the short of macroeconomics

Mark Thoma succinctly answers many questions with one: How Keynes Would Handle an Abnormally Slow Recovery
 
In theory, Keynesian stabilization policy should “shave the peaks and fill the valleys.” That is, when the economy falls into a recession the government should use deficit spending to lift the economy back towards the full employment level. It should then pay for the policy – increase revenues or reduce spending – during boom periods when the economy is overheated and needs to be slowed down. But what if, like now, there is no boom following the bust? How should we pay for the programs that were put into place during the recession in that case?

Quotes by Founders on inequality of opportunity today

Timely quotes by the Founders on inequality, chosen by David Clay Johnston in a Newsweek article on The Citizen’s Share: Putting Ownership Back into Demcracy, by Joseph R. Blasi, Richard B. Freeman, and Douglas L. Kruse

The founders, despite decades of rancorous disagreements about almost every other aspect of their grand experiment, agreed that America would survive and thrive only if there was widespread ownership of land and businesses.

John Adams: “The capricious will of one or a very few … the rich and the proud … will destroy all the equality and liberty, with the consent and acclamations of the people themselves.

James Madison described inequality as an evil, saying government should prevent “an immoderate, and especially unmerited, accumulation of riches.” He favored “the silent operation of laws which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigents towards a state of comfort.

George Washington: “[The US] will be the most favorable country of any kind in the world for persons of industry and frugality, possessed of moderate capital, to inhabit … it will not be less advantageous to the happiness of the lowest class of people, because of the equal distribution of property.

Alexander Hamilton, Treasury Secretary, champion of manufacturing and banking: “Whenever a discretionary power is lodged in any set of men over the property of their neighbors, they will abuse it.

Late in life, Adams, pessimistic about whether the republic would endure, wrote that the goal of the democratic government was not to help the wealthy and powerful but to achieve “the greatest happiness for the greatest number.

Trickle-down breakdown: Richest 85 people in the world have as much wealth as the poorest half

Trickle-down economics is the greatest broken promise of our lifetime

via Alex Andreou, TheGuardian.com

The richest 85 people in the world have as much wealth as the poorest 3.5 billion – or half the world’s entire population – put together. This is the stark headline of a report from Oxfam [Working For the Few] ahead of the World Economic Forum at Davos. Is there a reason why the world’s powerful, gathering at the exclusive resort to sip cognac and eat blinis, should care? Well, yes.

If one subscribes to the charitable view that neoliberal philosophy was simply naive or misguided in thinking that “trickle down” would work infinitely, then evidence that it doesn’t, should be cause for concern. It is a fundamental building block of supply-side economic theory – the tool of choice these past few decades for those in charge to make adjustments. The realisation that governments have been pulling at economic levers which, for some time, have been attached to nothing, should be a wake-up call to the deepest sleepers …

Concentration is rampant. Credit Suisse estimates that the world will have 11 trillionaires within two generations.

It is not so much that the supply-side principle “if you build it, they will come” is no longer true. It is more that we appear to have passed a tipping point, where so much wealth has been concentrated at the top, they no longer need bother to “build” anything. In short, it has become more economically efficient to buy countries’ economic policy than to create value in order to sell it on …

In a society that is hungry, desperate and devoid of political engagement or unionism, why would anyone offer terms and conditions that give individual workers any standing?

And yet, the realisation must dawn soon – one hopes – that this model is unsustainable because its effects are uncontrollable. The more unequal we become as a society, the faster the top’s earnings diverge from the bottom’s. “When so much of the purchasing power, so much of the economic gain, goes to the very top,” Bill Clinton’s former labour secretary Robert Reich explains in the film Inequality For All. “There’s simply not enough purchasing power in the rest of the economy.” At the same time, there is far too much loose cash sloshing around at the top, leading to unwise risks and toxic investments. Wealth inequality in the US was at its highest levels, historically, in 1928 and 2007, one year before its two biggest financial crises, notes Reich. The base of the pyramid atrophies and begins to crumble [my highlight]

We must shift this perspective. It will be the hardest, simplest thing we have ever had to do as a species.

Trust: without agreement no economy

There is an asymmetry between the different sides of contracts where economic exchange happens. There is often tension, marketplace noise and haggling, but the fundamental requirement for the exchange is agreement; remove that and there is no contract, no exchange, no price, no market. Remove the noise and you can still keep the agreement and its economy. Joseph Stiglitz makes these connections in the NYT article, In No One We Trust, in the context of the gigantic inequality that is burdening our democracy and its people, including, ultimately, the most monied who have the power to trash the foundations of wealth.

When 1 percent of the population takes home more than 22 percent of the country’s income — and 95 percent of the increase in income in the post-crisis recovery — some pretty basic things are at stake. Reasonable people, even those ignorant of the maze of unfair policies that created this reality, can look at this absurd distribution and be pretty certain that the game is rigged. But for our economy and society to function, participants must trust that the system is reasonably fair. Trust between individuals is usually reciprocal.

But if I think that you are cheating me, it is more likely that I will retaliate, and try to cheat you. (These notions have been well developed in a branch of economics called the “theory of repeated games.”) When Americans see a tax system that taxes the wealthiest at a fraction of what they pay, they feel that they are fools to play along. All the more so when the wealthiest are able to move profits off shore. The fact that this can be done without breaking the law simply shows Americans that the financial and legal systems are designed by and for the rich.

As the trust deficit persists, a deeper rot takes hold: Attitudes and norms begin to change. When no one is trustworthy, it will be only fools who trust. The concept of fairness itself is eroded. A study published last year by the National Academy of Sciences suggests that the upper classes are more likely to engage in what has traditionally been considered unethical behavior. Perhaps this is the only way for some to reconcile their worldview with their outlandish financial success, often achieved through actions that reveal a kind of moral deprivation.

It’s hard to know just how far we’ve gone down the path toward complete trust disintegration, but the evidence is not encouraging.

Economic inequality, political inequality, and an inequality-promoting legal system all mutually reinforce one another. We get a legal system that provides privileges to the rich and powerful. Occasionally, individual egregious behavior is punished (Bernard L. Madoff comes to mind); but none of those who headed our mighty banks are held accountable.

As always, it is the poor and the unconnected who suffer most from this, and who are the most repeatedly deceived. Nowhere was this more evident than in the foreclosure crisis.

The study published by the National Academy of Sciences is described as follows.

Higher social class predicts increased unethical behavior:

Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals. Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

Joseph Stiglitz concludes:

We need higher norms for what constitutes acceptable behavior, like those embodied in the United Nations’ Guiding Principles on Business and Human Rights. But we also need regulations to enforce these norms — a new version of trust but verify. No rules will be strong enough to prevent every abuse, yet good, strong regulations can stop the worst of it.

Strong values enable us to live in harmony with one another. Without trust, there can be no harmony, nor can there be a strong economy. Inequality in America is degrading our trust. For our own sake, and for the sake of future generations, it’s time to start rebuilding it. That this even requires pointing out shows how far we have to go.

And how much ground we have lost. I remember when “greed” was not good, but we had heard of what I thought (wrongly) was a fringe philosophy of the goodness of greed. My research into nature’s asymmetry has yielded a couple of results here. One is the curious conclusion that pure symmetry in a contract is impossible and would entirely mitigate any agreement. There must be asymmetry of sides for an agreement to happen. The other is that pure symmetry of equality in social relationships is likewise not only impossible but undesirable; there is such a thing as a healthy inequality in the marketplace and in socioeconomic connections. But oppression happens when one side tries to misuse this social asymmetry. In the language of asymmetry, “oppression is the attempt to impose the absolutes of one self-centered symmetry,” unbalancing and stultifying the natural varieties of experience and opportunity. Here’s to the New Year and a return of the light in more ways than one!

Launch of the Washington Center for Equitable Growth

John Podesta’s Remarks at the Launch of WCEG,
including video of interview with Robert Solow (short version)

Interview with Robert Solow about Equitable Growth (long version)

ESA’s Planck space telescope reveals nature’s surprising asymmetry

On the European Space Agency’s website.

Asymmetric markets are not “self-correcting”

Joe Stiglitz, via Vox: The lessons of the North Atlantic crisis for economic theory and policy

In analysing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last thirty years – as liberalisation policies became dominant – have given us a wealth of experience and mountains of data. If we look over a 150-year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not “How did this happen?” but ‘How did we ignore that long history, and think that we had solved the problems with the business cycle’? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that this crisis forcibly brought home – one we should have long known – is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation:

  • One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.

There are not only short run endogenous shocks; there are long run structural transformations and persistent shocks. The models that focused on exogenous shocks simply misled us – the majority of the really big shocks come from within the economy.

  • Secondly, economies are not self-correcting.

More…

To add an asymmetric point on the question of “endogenous” and “exogenous.” If nature, including the economy, is fundamentally asymmetric, then it is interconnected is such a way as to make perfectly exogenous shocks impossible. But borderlines can and should be drawn to define circumstances and cases arising in models within the economy, within nature. But nothing can be totally outside the asymmetric economy. This endogeny, as described in Unicycle, provides a foundation to deduce a progressive ethics of the market, as well as more generally.

It is predictable that the political orientation of believers in a self-righting market would be temperamentally against endogeny and prefer to emphasize “outside” shocks to the economy that would supposedly upset its closed perfection, as though there are perfect circles in reality. The illusion is to think we can step outside the market (try fasting); if we want to help the market, we must do something positive about it.

Heraclitus, according to Plato, famously said something like: we can’t step in the same river twice; he might have added something like: nor can we step out of the “river of asymmetry,” where all our actions together include the bustling marketplace, day after day.

Austerratum

Colbert Nation: Austerity’s Spreadsheet Error

Et voilà! Life can be so simple.

Emmanuel Saez: “Income Inequality: Evidence and Policy Implications”

Here it is:

Berkeley economist Emmanuel Saez’ lecture presents evidence on income inequality from the World Top Incomes Database. The database includes top income shares time series over the long run for more than twenty countries. He summarizes the key empirical findings and discusses the role of technology and globalization, government regulations, and tax progressivity in explaining the empirical findings. Published on Feb 1, 2013.

And here via Mark Thoma: A Conversation with Emmanuel Saez: Taxing away Inequality

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