7/18/16

Is The Administrative State Entering Meltdown?


              Keith's thought-provoking piece on the UK's recent anti-EU voter rebellion (American Counterpoint 7/5/16) touches on too many issues to allow a comprehensive response. The section of his essay entitled "Hatred for the EU", however,  I think warrants focused attention because it references the key not only to this particular imbroglio but to the more general existential crisis currently threatening welfare-state capitalism around the world.
          Keith mentions "the nearly universal loathing for the EU’s bureaucracy, which is slow, inflexible, and often incomprehensible." And while he goes on to blame this revulsion on the appeals process, which slows down regulation and makes it appear inefficient (perhaps my friend Keith is tempted by the prospect of authoritarian power which would disallow appeals), the point nonetheless stands that UK resistance to the EU is more fundamental than fear of refugees.   

         Another phrase of Keith's that sticks out, even though I'm about to pull it somewhat out of context, is "the detailed regulation that society needs." Herein, of course, lies the central conceit of the Administrative State, which tends to regard all spheres of human experience, no matter how small,  as perfectible through its agency.
                                         Lessons From The Private Sector

         I read a fair amount of business history, and two histories that have always been of particular interest to me and that I find relevant to the present discussion are those of IBM and Microsoft.
   
          During the 1960's IBM undertook a massive project to harmonize its convoluted offering of mainframe computers and peripheral devices, which corporate customers were finding increasingly hard to configure and maintain. The project's result was the IBM System/360, which would eventually dominate the computer industry for most of the next two decades. IBM's campaign to create System/360, however, was a make-or-break affair that nearly turned fatally bad. Desperate for success and having plenty of money, management piled ever-more resources into the lagging effort, only to discover that additional resources actually aggravated the problem. Competing agendas emerged among senior engineers,  and technical problem-solving got lost amidst corporate politicking and unfocussed bureaucratic procedure.

         Two decades later Microsoft found itself in similar straights as it pioneered the new industry of personal software for desktop computers. Development of the Windows operating system and related applications became bewilderingly complex, and Microsoft nearly destroyed its young franchise by releasing buggy software into the market. Like IBM before it, Microsoft had plenty of money to throw at the problem but soon found that every fix was introducing multiple new bugs. The development team responsible Microsoft Word coined the depressing phrase "infinite defects" to describe the mire in which they found themselves. The systems were becoming too complex to be viable.
          The notion of "infinite defects" calls to mind the physics of a nuclear chain reaction in which fissioning atoms trigger an accelerating stream of new fissions, potentially approaching infinity. When this process can no longer be controlled, all hell breaks loose in what is known popularly as a "meltdown".

          In the business world, the analogue to meltdown is financial insolvency, and the safety algorithm provided under law is bankruptcy, which relieves pressure and facilitates orderly liquidation of the failing enterprise. In private business, the threat of bankruptcy is a gun to the head of management, since it promises to terminate their  jobs and vaporize the company's share price. When bankruptcy occurs, however, the problem is contained after the responsible parties have been punished. IBM and Microsoft eventually solved their problems because the gun-to-the-head worked. Today decades later both companies are still producing useful products and providing employment.
                                        Governments Are Different

          Governments are different from private companies in that they have no built-in failsafe when their operations run amiss. Even more fundamentally, they generally lack certain knowledge that anything is even wrong. Anti-government zealots usually claim that nothing government ever does works properly,  while government employees and their political backers claim everything would be fine if only the oppositionists would just go away and leave the financial valves open for adequate funding. Opinions abound but there's never any way of proving who's right and who's wrong. There are no independent customers deciding whether or not the services offered to them by government justify the costs.

          Government spending accounts for between 40 and 60 percent of the GDP's of most developed economies today, with European nations tending towards the upper end of this range.( In Greece the ratio was approaching 65% in the years prior to the country's breakdown in 2010.) When governments are responsible for this much of a nation's economy, they quite rightly feel not only entitled but obligated to regulate their investment to ensure taxpayers are getting what they pay for.
          The problem is that the objective is hopelessly impractical. The life-threatening problems that IBM and Microsoft encountered decades ago were child's play compared to what governments face in trying to regulate complex modern economies.  Rules, paperwork and bureaucracy abound everywhere in all spheres of society, yet few people are in position to see clear connection between all this and any economic or social benefit. Everything is too complicated, and suspicions abound that it's all bunk and that government regulators are there primarily in service to their own careers or political agendas.  Because nothing ever seems to be working quite well enough,  there is an incessant demand for more resources which, if granted, may further complicate operations and lead to still more dissatisfaction. The syndrome feeds itself.

Rules On Top Of Rules In Europe
          Every developed nation in Europe evolved its own system of economic control during the twentieth century. The gradual advent of the European Union following World War II starting superimposing yet another set of strictures on top of what was already there. Discomfort with the EU grew particularly acute in the United Kingdom because of its island history and deep-seated mistrust of anything emanating from continental Europe. The result of the June 23 referendum  should not really have been a big surprise to anyone who had been watching the poll numbers move back and forth in the weeks leading up to it.

          Even more troubling to the EU's defenders should be the fact that, according to polls, most of the other developed nations of Europe, including France,  show a degree of EU-aversion that is equal to or even greater than that of the UK prior to the referendum. As always, factional elites have been quick to impose their own favored interpretations on voter data and usually blame inconvenient results on cynical manipulations perpetuated by the other side. The refugee crisis is the easiest explanation but, again, not the most fundamental.
          It's my own observation that the collective behavior of voters might best be understood as resembling the expressions of a pre-verbal child. Such a child experiencing pain can communicate its existence plain as day without being able to articulate the nature or location. The June 23 vote in the UK was, however we want to interpret it, a cry of blind pain about their nation's continued political affiliation with Europe.

Common Political Dynamics In Europe And The U.S.
          Many observers have noted the similarities between the anti-EU agitation in the UK and Europe and the anti-government sentiment that has been a staple of American politics since the rise of Ronald Reagan, when he campaigned on the promise of "getting government off our backs." In the U.S., this slogan found resonance with, among others,  small and medium-sized businesses and their employees, who felt suffocated by taxes, rules that often created more problems than they solved,  and the constant threat of nickel-and-dime litigation. These were all perceived as part of a control-obsessed welfare-state mentality emanating from Washington.

          This sentiment went on powering the Republican Party for two decades after Reagan's retirement. Bill Clinton even grafted some of Reagan's ideology onto the  Democratic Party's program, successfully fighting the Republicans at their own game and facilitating his own rise to power.
          The old rhetoric of economic independence started going stale during the presidency of George W. Bush, however, and the Democrats capitalized on the 2008 financial crisis to revert to form with a vengeance. Resurgent welfare state economics combined with high-handed enforcement of regulatory diktats under the Obama administration took the country further to the left that anything seen since Franklin Roosevelt's presidency. The ongoing carping of the "far right",  as even relatively moderate critics of big government came to be branded in the liberal blogosphere was, in the U.S., marginalized in same much as way was anti-EU sentiment in Europe and the UK. It was all seen as coming from ill-informed rubes financed by Big Money or manipulated behind the scenes by neo-fascist isolationists.

The Transmogrification Of Rational Dissent
          Yet marginalizing criticism without addressing it rarely makes it go away. Opposition tends to disappear underground only to re-emerge later in more virulent and less rational form. The growing and seemingly universal unhappiness with the current state of things is turning democratic political contests into dark and inexplicable carnivals. In the UK, a conservative prime minister has been forced to resign in the wake of June 23, unable to re-bottle the genie he himself released on the voting public. His opposite number in Britain's Labor Party, obviously reading the same tea leaves with equivalent ineptitude,  has faced a virtual coup-d'├ętat within in his party as a result of the same phenomenon. Where were the adults in the room here?

          In the U.S. presidential primaries, Trump and Sanders supporters throughout the early months of 2016 vied constantly to outdo one another in their expressions of contempt for the status quo. Even though neither of their champions advanced programs that went much beyond slogans and symbols, the true-believers exuded an enthusiasm that made political extremists of every stripe right and left begin to take note and to consider perhaps slowly inching their way out of the background.  To nearly everyone's astonishment,  Trump actually succeeded in outmaneuvering every one of the sixteen rivals he faced at the beginning of the primary season, most of them establishment figures. Sanders for his part, the avowed Socialist, never intended to win the Democratic nomination, but he has succeeded in his real objective, which was to pull the Democratic Party so far to the left that a new Clinton Administration will be almost indistinguishable from anything Sanders himself would have put in place.
          Rational debate has virtually disappeared from the arena, which has degenerated into little more than a grim miasma of conflicting symbols. No one knows what the next president of the United States is actually going to do.

The Meltdown
          The problem, of course, is not confined the Europe and the United States. China, Japan and the rest of Asia are experiencing their own versions of what happens when economic complexity outruns the capacity of the centralized administrative/welfare state to control it. Governments have pulled out every weapon at their command to revitalize stagnant economies, but efforts are coming up short and everybody seems dissatisfied. Political factions blame their rivals' malfeasance, but the real problem is systemic. More is demanded yet more cannot be delivering without triggering worse problems. Governments have seemingly entered the realm of infinite defects where every action they take creates multiple new problems. This situaiton threatens to transform itself into meltdown without anything akin to bankruptcy available to relieve the pressure.  Economic dysfunction is often largely hidden from public view in the beginning, but people feel it nonetheless and these visceral sensations are finding their way into bizarre forms of  political conflict. Hence our current situation.

Where Does This Leave Me
          Despite everything I've said here, I'm probably as horrified as Keith is by the result of June 23 referendum in the UK. Even though I sympathize with the grievances of the "Leave" campaigners, the reality is that the European Union is one of democratic capitalism's  backbone institutions. The UK's vote to exit the Union has already re-energized the Scottish independence movement,  and the dissolution of the UK itself seems again potentially in the cards. The vote has also re-energized exit supporters in other European countries. Should the Union itself start showing real signs of cracking, the common currency - which has never been on entirely sound footing anyway - would come under renewed attack. Collapse of the Euro would have disastrous implications for the global economy, and add another layer of self-fueling destruction on top of existing woes.

          And as for the rise of Mr. Trump, I'm probably even more concerned than Keith, since it's my party the man is in the process of eviscerating. Yet in depriving the Democrats of rational opposition, the Trump phenomenon may be encouraging them towards their ruin as well. The Democrats represent a far more fragile coalition than might now be apparent, and they have proved in the past that they can be their own worst enemies when their native inclinations are left unconstrained.
          Like the European Union, America's two mainstream political parties are part of the firmament of democratic capitalism in the world. We need all of these institutions in sound working order if democratic values to hold their own in a world threatened by so many violent centrifugal forces.  

7/5/16

Brexit and us

Brexit
This little essay offers my thoughts on two questions: why Brexit won, and what are the most likely economic consequences. I started writing this when the stock markets plunged in the days following the Brexit vote, but even though the markets have now recovered my initial views remain the same. I do hope that my view of the likely economic consequences proves wrong in the longer term, but I’m making careful bets in the other direction.

I. Why Did Brexit Win?

I read various and complicated reasons for the success of Brexit, such as bad tactics by the “stay” people, the Labor Party leader’s lukewarm support for staying, falsehoods from the pro-Brexit leaders, and so forth. But I think there are more fundamental reasons:

1. The Refugees

Most immediately obvious was the failure of the EU to deal with the massive flood of refugees during the last few years, coming atop others like the mess it made of Greece and Europe’s continuing doldrums after the Great Recession.

But the biggest, most visible, and to Brits most frightening was a threatened flood of Moslem refugees. When the refugee crisis first became apparent, the EU faced a choice: it could repel the arrivals; it could plan to accommodate and integrate them into EU countries in a measured way; or it could do nothing. Unfortunately, the EU fell into the latter choice.

It made little difference that the immigrants currently in the UK were from other EU countries or the Commonwealth.  The popular media, untruthful leaders of the Brexit movement, and a long UK history of difficulty dealing with radical Islamist immigrants all created the strong popular impression that the floodgates would open unless Britain exited from the EU.

2. Hatred for the EU

A second reason is the nearly universal loathing for the EU’s bureaucracy, which is slow, inflexible, and often incomprehensible. Although people blame the bureaucrats, or a distant and unresponsive EU government, there is another reason that makes this problem almost inevitable:

In both Britain and the US, much regulation is through the common law. In common law regulation, judges decide cases by applying general principles to specific past conduct. The accumulated body of such applications provides, in effect, the detailed regulation that society needs. Although respectful of past decisions, common law judges can modify old approaches to fit current realities, overruling old cases or finding differences between them and the one they are deciding now.

But the EU, and administrative agencies in both Britain and the US, apply general principles to prospective conduct by writing or rewriting regulations that specify the conduct that will be impermissable. The writing process is often often lengthy, expensive, and onerous, involving endless hearings and revisions with affected interests lobbying and litigating all along the way. A recent example is a 2004 Labor Dept. attempt to change an old regulation of worker wages and benefits that denied protection to home health aids and household employees. A revision to now protect those types of employment has only now been scheduled to take effect. Lobbyists opposed to the measure litigated against it for years until a final decision rejecting their completely spurious arguments recently came. So it can take years, even decades of expensive legal work to enact or modify a regulation. After all that trouble, nobody wants to repeat that process every time conditions change. So in time many regulations become outmoded and unreasonable. The system itself makes the regulatory agencies look slow, inflexible, and incomprehensible.

3. Class Resentment

The leave vote expressed the rise of serious class resentment, which exists in the US as well. Since the era of Reagan and Thatcher automation, globalization, financialization and computerization have transformed economies and employment. The beneficiaries have also sought and won enormous political favors. The combined result has been a tremendous concentration of wealth in their hands, and stagnation for virtually everyone else. The winners have paid scant attention to the losers. Even the representatives of ordinary people who gained office during this period (Tony Blair, George Brown, Bill Clinton, Barrack Obama) favored globalization, technology, and financialization, and left ordinary people largely unprotected from the gales of change. As a result, many very resentful people want to roll back many of these changes and the unequal results. Skillful communicators have learned how to mobilize these people, with Brexit the first notable result.

4. The New Media

Fourth in this list, but perhaps most importantly, there has been a sea change in the nature of public affairs media, shifting it from a predominant focus on factual and reasoned political arguments to a predominant focus on emotional and intuitive appeals. This shift became possible, and profitable, because of radically new modes of communication that technology created since about 1990. As a result, the profit-seeking firms that dominate the media can effectively address peoples’ emotions, and find it highly profitable to do so. These firms now dominate the media, and even traditionally rational and factual media have tried to follow their approach.

Formerly, people got their information about public affairs primarily from newspapers, broadcast TV, and radio. Most of these outlets, whatever their political position, dealt in known or logical facts and rational thought. Since 1990, however, the media has largely shifted to electronic forms. Newspapers have declined, and cable TV, internet web sites, and even billboards now make intensive use of graphics, fast takes, and rapid movement to attract attention. To best capture audiences (and hence advertisers) they seek presenters adept at emotional communications, and spend much more time than traditional media on emotional candy like scandal, gossip, sex, and claimed betrayals of traditional moral and religious values.

Modern technology enables profit-seeking media to capture more audiences and advertisers by arousing strong feelings than by truthful or logical utterances. As has long been true, conservative media do this much better than liberal media. Where liberals see complexity and doubt, media conservatives provide their electronic audiences with simplicity and certainty. While liberals ignore personal appearance, sound of the voice, and personal values, conservative media stresses moralistic values and retains beautiful blondes or men with authoritative voices and manners. Combined with gripping graphics, constant moral outrage, and a disregard for truth and logic, this business model has become predominant in much of the US and UK media. Accordingly, the simple and emotionally compelling idea of Brexit gained overwhelming support in British media, and many voters ignored or failed to understand the more complex arguments in favor of remaining.

II. What Does Brexit Mean for the US and world Future?

Nobody really knows the answer, of course, but for those who have to act or invest, it’s necessary to formulate some ideas. Here are a few:

1. Political

 Although the immediate consequence of Brexit is to embolden Trump supporters, Brexit is a strong warning to sensible people that complacency can indeed lead to disaster. So I suspect that Brexit will ultimately do more to scare moderate Republicans and Sanders Democrats away from Trump, if not into the Clinton camp, than to give Trump new voters. Of course, an even stronger threat could arise if Brexit or something else significantly slows the US economy before November.

A more serious danger is the strength Bexit clearly gives to nationalist, xenophobic, anti-EU parties in Europe. If they prevail politically, they could return their countries to an era of nationalism, with firm state boundaries, limited immigration, authoritarian governments, and reduced globalization. Their chances would be even better if, as seems likely, Brexit damages the already weak economies of Europe. As Poland and Hungary have already done, some states may turn to fascist-style governments; others, like Holland and France, may seek to leave the EU. Scotland and Northern Ireland may leave Great Britain. The potential for political and perhaps even military conflict will grow, and the EU’s offer of freedom and prosperity, however tarnished it may be, will fade.

• Economic

I am pessimistic about the economic future over a fairly long period. Brexit’s political implications have created massive uncertainty everywhere. It seems unlikely that Britain will negotiate a smooth departure from the EU, so that process could—like many EU political processes—take bad directions; at the least, Brexit should result in extended economic uncertainty for a long time.
 Whatever the stock market does in reaction, economic uncertainty clearly causes investors and consumers to hold back, saving and hoarding rather than spending. This would damage the already fragile EU recovery. There will be less immediate damage to the US economy, but the EU accounts for about 25% of US exports. Although not a large part of the US economy, exports support high wages. So even a small decline in exports could worsen the reduction in demand that I expect to follow economic uncertainty.


As the US and the EU are already growing very slowly, and China’s transition from export to domestic consumption is difficult, even small negative changes could put us into a snowballing recession. The paralysis of the federal government and of many GOP-controlled State governments will certainly magnify and lengthen the potential economic difficulties. Even if Clinton wins the Presidency, Republicans will probably retain control of the House, and as they did in Obama's Presidency, could stymie efforts to ease any recession. The many Republican-led State governments may well make things worse. In addition, the quantitative easing overhang and very low prevailing interest rates leave the Federal Reserve with little room to do anything useful. So the prospect is much dimmer for public policies to save the economy than after the collapse of 2008. Although there is no such massive initial impact, a decline may well occur and continue indefinitely.

7/1/16

Response to David Brooks, July 1 2016

Mr. Brooks's last statement, "if facts still matter," is at the crux of the political dilemma facing virtually all democratic countries. To those who support Mr. Trump, facts as Mr. Brooks and I understand them really don't matter. Nobelist Daniel Kahneman explained that we all think in two incommensurate ways, which he called fast thinking and slow thinking. Fast thinking is instinctive, emotional, and instantaneous; it's what saved our ancestors from poisonous foods and dangerous animals, and helps account for the grace of extraordinary athletes. Slow thinking is reasoning from facts, and we use it to solve complex problems like how best to plant crops, how to navigate city streets, or how to win a war. When people vote, those who operate in fast think mode are highly susceptible to emotional appeals and conjecture-based thinking. A "fact" for them is a plausible assertion stated repeatedly, loudly, and with certainty, the way Rush Limbaugh and Donald Trump do it. Facts as Brooks and I would understand them are assertions based on verified observation or logical reasoning. If not presented to fast think voters in the emotionally effective way that Limbaugh, Trump, and others like them use, these assertions mean little or nothing. The coming elections in the US, France, and the Netherlands will be decided by whether fast thought or slow thought voters predominate.