Frank’s Case Book

One of the powerful disciplines of science is the requirement that the validity of a theory is judged by how well it makes predictions. For example, the physical laws of motion are incredibly well validated by their ability to make very precise and accurate long-term predictions of the motion of the planets. The virtue of this discipline is that it allows theories to be both validated and refuted. This separates science from faith. Indeed, any well-constructed prediction ought to have clear measures of success or failure. Unfortunately, this discipline is difficult to apply to the social sciences. Nonetheless, difficulty in application does not render this approach useless.In January of 2009, a President Barack Obama economic team following predictions for unemployment both with and without the President’s stimulus package. The web site Innocent Bystanders has reproduced the Administration’s graph along with actual data from the Bureau of Labor Statistics. The graph is shown below:

The key prediction was if the stimulus were not passed unemployment would peek at 9% while with the stimulus package the unemployment would not exceeded 8%. In actuality, the maximum unemployment peaked over 10% and has persisted much longer than predicted. According the the Administration, at this point we should have 7.5% unemployment rather than 9.9%. Most discouraging at this point, is that newest prediction of the Administration predicts unemployment lingering above 8% through 2012, falling at a slower rate than the Administration expected for unemployment with no stimulus package. One hopes that this prognostication will not be an under prediction.The facts above are not disputed, however their interpretation certainly is. Indeed, President Obama himself has said: “If the ‘just say no’ crowd had won out..if we had done things the way they wanted to go, we’d be in a deeper world of hurt than we are right now.”Consider the three possible outcomes of the stimulus package with respect to the unemployment predictions. If the unemployment rate dropped faster than predicted, then the President and his Administration would have justifiably crowed about their success. If the unemployment rate largely followed the original Obama Administration predictions, even with fairly broad margins of error, the Administration could have persuasively argued that their policies worked as expected. Now that the unemployment rate has soared past the original predictions, the Administration is arguing that the economy would have been worst had their been no stimulus package.The key thesis here is that regardless of the actual economic situation, the Administration supporters will argue that the stimulus package was beneficial. There is no possible outcome, (positive, neutral, or negative) that could, in their eyes, have demonstrated that the stimulus package has failed. The value of the stimulus has become a matter of faith separated from the facts. If you don’t agree with this conclusion, ask an Administration supporter, what set of economic facts would have been evidence that the stimulus did not work.

For many people, 401(k) or 403(b) savings form a key component of their retirement plans. When these plans were first instituted in the early 1980s, few people anticipated how important these programs would become in many people’s portfolios. Perhaps most importantly, such savings free individuals from dependence on their companies for retirement benefits. These accounts, in most cases, allow individuals to choose investments that would provide growth and income irrespective of the long-term prospects of their companies. The holdings in reasonably diversified 401(k) plans would not be significantly affected by the fortunes of any few companies.

During retirement, individuals have many choices with respect to what to do with their retirement account accumulations. They could maintain their own investments and withdrawal a portion every year to live upon. The advantages of such an approach are that individuals have control over their investments and that when they pass on they can leave some money to their heirs. The disadvantage is that people can make unwise investment decisions or they can simply outlive their resources. To mitigate this possibility, some people purchase annuities. For a fixed investment, an insurance company agrees to pay a person pension for a fixed period of for life (and sometimes the life of the spouse). The insurance company assumes the risk of longevity. If an individual retiree dies earlier than expected, the insurance company makes money. A long-lived retiree may cost the insurance company money. In essence, the risk of longevity is shared.

Apparently, the Federal government is looking at encouraging people to move more to the annuity option. The government may be reasonably concerned about encouraging rational evaluations of risk and the informing the choices about retirement options. The government could deal with this by making investment tools and advice available to aid in retirement decisions.

However, some people are concerned that the government is looking enviously on all the assets accumulated in retirement accounts. It is possible for the government to offer annuities at actuarially unsound rates to obtain current funds in exchange for government-backed promises of future income. The House Education and Labor Committee is focusing on ways of directing 401(k) funds into Treasury bonds. Indeed, the goal seems to be melding 401(k) resources into a Social Security like system – first as a voluntary choice, and perhaps later as a requirement. In the open market, Treasury bonds are priced at their market value. A government promise for future incomes in a government social program, need not be priced appropriately. The underfunding of Social Security demonstrates this.

Whether bailing out banks, car companies, or individuals,  the government exercises much of its power by transferring funds from people who make responsible decisions to those who make unwise ones. Those frugal enough to have forgone current income to save in 401(k) plans now are conspicuous targets. I suspect that people have such a proprietary view of the money they have saved, that any attempt by government to unfairly seize these funds (regardless of any promised benefits) will doom any politician that suggested it. People feel strongly about what they consider the Social Security they “earned.” How much more protective of will they be of funds they more directly earned?

Unequivocal campaign promises are useful in an election campaign, but usually nuisances once elected. In 1988 President George H. B. Bush clearly announced, “Read my lips. No new taxes.” After being pressured by a Democratic Congress while trying to garner support for the first Gulf War, Bush acquiesced on taxes. Never mind that Democrats wanted to increase taxes, they were able to effectively bludgeon Bush with his inability to keep a clear promise. It is rhetorically difficult to go back on a campaign promise.

President Barack Obama was not particularly consistent, but seems to have promised to “save or create” 3.5 million new jobs by 2011. Let’s engage in a little sentence parsing. We can assume that he is speaking about jobs created by the entire economy whole not just by the government, so he can claim jobs created in the private sector towards fulfilling the promise. Let us further assume that he is promising 3.5 million “net” jobs saved or created. If 3.5 million jobs are create, but 4 million lost, it would hardly be a boast that  Obama would be proud of.

Unfortunately, the economy has been hemorrhaging net jobs, and its is getting less and less probable that 3.5 million net jobs will be created by 2011. However, he apparently hopes to use creative accounting to at least claim some job creation. Unfortunately, the recovery.gov web site where these jobs are documented as proved to be an inflated embarrassment. Sometimes, cost of living increases are counted as jobs created and in some other instances jobs were created in non-existent Congressional districts. Moreover, created jobs are counted but there is no opposite side of the ledger where jobs lost to government policies are counted.

At the beginning of the year, the Obama Administration promised that if the stimulus package were quickly passed, the unemployment rate would never rise above 8%. At last count, it was 10.2% and still on the increase. Given the ability to calculate and predict economic statistics, people are entitled to be very skeptical of the administrations computation of  650,000 jobs saved.

The figure below shows the total employment since last year in blue. Employment is clearly dropping systematically. The red line is what the administration claims the job level would have been without the stimulus package. The stimulus seem rather ineffectual in the face of falling employment thus far, even if taken at face value. At best, if you believe the Administration’s numbers and if you believe that, without evidence, that the 650,000 represents net jobs not one half of the ledger, the stimulus is only a 0.4% effect on total employment. This seems like a modest benefit for which we raised the deficit to GDP ratio to the highest it has been since the World War II era.

It is understandable that Obama wishes not to be saddled with an unkept campaign promise. But it is preferable and perhaps even better political strategy to not be ridiculed for ludicrous claims or dishonesty than to face problems square on. The electorate can deal more effectively with honest efforts that have failed than dishonesty and denial.

Nearly two hundred years ago, Frenchman Alexis de Tocqueville toured the United States in a political anthropological expedition (though he would not have used such a description) to understand and document how this new form of government — a geographically large and diverse republic — was able to function. Europe had experience with hierarchical governments but the American experiment, based on assent-by-the-governed, was still very new. What kind of people could manage to rule themselves? What did the act of self-rule do to the character of a people? How could a free people avoid the religious, political, and ethnic conflicts that plagued other countries?

One of de Tocqueville’s observations was that in daily activities Americans tended to make economic self-calculations that trumped other considerations. He wrote. “In no other country in the world is the love of property keener or more alert than in the United States, and nowhere else does the majority display less inclination toward doctrines which in any way threaten the way property is owned” In other words, what difference does it make what particular religious doctrines or political views a person adheres to so long as those views do not interfere that person providing fair value in a transaction. In this way, Americans of different religions could manage to live relatively peacefully, a condition that Europeans of the time had difficulty achieving.

The natural tendency for the needs of commerce to overwhelm other concerns is part of the reason that the Jim Crow laws in the South of the late 19th and early 20th centuries were enacted. Given natural commercial tendencies, many people would be tempted to provide accommodations and other services for Americans of all races. If they would not be so tempted, there would have been no need for the Jim Crow laws. People would have segregated themselves without the need for specific legislation. It took government to ensure that races were separated.

A more recent example of racial feelings yielding to commercial ones is Marge Schott. She was the former president and CEO of baseball’s Cincinnati Reds. Schott was infamous for her racially insensitive statements. Many were convinced that she harbored racists feelings. Nonetheless, she was willing to pay black baseball players millions of dollars because they provided important value to her baseball team. Commerce trumped other, baser feelings.

It is only when governments or monopolistic industries get involved that the natural disposition to overlook personal characteristics in favor of commerce can be overwhelmed. In the 1940s and 1950s, Americans the entertainment industry who were or suspected of being sympathetic to the American Communist Party where blacklisted in Hollywood. Governmental and public pressure made it difficult for these people to work. If only the quality of their work was at issue, blacklisting would never have been effective.

In the 1950’s, the chief public sin, real or imagined, was being a Communist. Today, the gravest mortal sin, real or imagined, is being a racist. The recent charge of racism on the part of Rush Limbaugh, at least partially based on what is now acknowledged as falsified quotes, caused him withdrawal his name from a group of investors attempting to purchase the National Football League’s St. Louis Rams. His presence as a potential owner would have undermined  the group’s chances.

Limbaugh was effectively blacklisted from the NFL. Many of those involved in opposition to Limbaugh whom would be aghast if their actions were characterized this way, but it is accurate. Unlike most other businesses, the competitors of the Rams, the other football teams must approve potential owners of the Rams. Opposing Limbaugh was an easy way to win popular acclaim without the cost of a missed commercial opportunity. The peculiar nature of the NFL contributes to the ability to blacklist.

The NFL and entertainment industry are private entities that can do business with whomever they wish. But it should be remembered that both Hollywood (pressured by government) and football (largely pressured by other owners) blacklist people with great impunity because of the monopolistic or public character of their enterprise. Free enterprise smooths over differences in society. By contrast, governments and other large institutions can sometimes aggravate them.

One of the problems with Liberals is that they often look for tyranny in all the wrong places, and are blind to real conspicuous threats to liberty that come with a smile. While I disagree, there is some value of the Liberals clamoring  to extend full Constitutional criminal rights to terrorists at war with us when captured on the battlefield. It is certainly of value to question the limits of enhanced interrogation techniques. Conservatives would like to return the favor to Liberals. We remind them that if the US were to experience tyranny it would likely not be of the jacked-booted variety. Such a despotism would not wrap us in chains, but a warm blanket from which escape would be difficult. Many have pointed out that French scholar Alexis de Tocqueville described this after his visit to the United States in the early nineteenth century. I repeat his words here, this week in the shadow of health care reform, because of their uncanny accuracy and eloquence.

I want to imagine with what new features despotism could be produced in the world: I see an innumerable crowd of like and equal men who revolve on themselves without repose, procuring the small and vulgar pleasures with which they fill their souls. .  .  .

Above these an immense tutelary power is elevated, which alone takes charge of assuring their enjoyments and watching over their fate. It is absolute, detailed, regular, far-seeing, and mild. It would resemble paternal power if, like that, it had for its object to prepare men for manhood; but on the contrary, it seeks only to keep them fixed irrevocably in childhood; it likes citizens to enjoy themselves provided that they think only of enjoying themselves. It willingly works for their happiness; but it wants to be the unique agent and sole arbiter of that; it provides for their security, foresees and secures their needs, facilitates their pleasures, conducts their principal affairs, directs their industry, regulates their estates, divides their inheritances; can it not take away from them entirely the trouble of thinking and the pain of living?

So it is that every day it renders the employment of free will less useful and more rare; it confines the action of the will in a smaller space and little by little steals the very use of it from each citizen. .  .  .

Thus, after taking each individual by turns in its powerful hands and kneading him as it likes, the sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which the most original minds and the most vigorous souls cannot clear a way to surpass the crowd; it does not break wills but it softens them, bends them, and directs them; it rarely forces one to act, but it constantly opposes itself to one’s acting; it does not destroy, it prevents things from being born; it does not tyrannize, it hinders, compromises, enervates, extinguishes, dazes, and finally reduces each nation to being nothing more than a herd of timid and industrious animals of which government is the shepherd. .  .  .

I have always believed that this sort of regulated, mild, and peaceful servitude, whose picture I have just painted, could be combined better than one imagines with some of the external forms of freedom, and that it would not be impossible for it to be established in the very shadow of the sovereignty of the people.

“He is a hypocrite who professes what he does not believe; not he who does not practice all he wishes or approves.’’ — William Hazlitt.

“Hypocrisy is the homage which vice pays to virtue.’’ — François de la Rochefoucauld.

During a plenary session at  a large scientific conference I attended last year in Boston, Dr. Berrien Moore, a member of the International Panel on Climate Change, gave a thoughtful presentation on the dire consequences of global climate change. His well-received presentation suggested that unless there were radical reductions in future carbon dioxide emissions into the atmosphere, the world would experience grave environmental consequences. It is not clear how many others were conscious of the irony of the situation. We were all at a conference having flown hundreds or thousands of miles from many parts of the world fretting about the consequences of modern society’s large carbon footprint. If we all took the thesis of the presentation seriously, why were we all flying many miles to attend a conference that might have been held virtually?

Now, I fully appreciate the benefits and importance of face-to-face contact at scientific meetings, but should not those who appreciate and understand the impact of climate change be the first, buy their example, to adjust their lifestyles as a witness to the importance placed onminimizing the impact of man on the environment. The fact that we ignored this implicit hypocrisy does not make the case for concern about global climate change any less or any more valid. Hypocrisy, however, corrodes credibility. If former Vice-President Al Gore can refer to the passage of the cap-and-trade bill as a “moral imperative’’ and Nobel prize-winning economist can describe opposition to the bill as “treason against the planet,’’ it seems little to ask that we save the fuel by conducting a conference virtually.

This distinction between personal behavior and public pronouncements was also conspicuous this week as Governor Mark Sanford admitted ignoring his marital pledges and jetting off to Argentina to spend time with a mistress. Sanford had publicly argued in favor of traditional family values, but clearly has difficulty in meeting these aspirations. It thus afforded an opportunity, for those who prefer a world where traditional family values are given less weight an opportunity, to ridicule Sanford. Given some of Sanford’s peculiar post-scandal behavior, it is hard to imagine a character easier to ridicule.

Pointing out the hypocrisy of advocates represents a convenient way to avoid dealing with very real issues. The high carbon footprint of those who argue for limiting carbon missions does not make the threat to the climate any more or less severe. The inability of those who argue in favor of traditional family values meet their own aspirations does not make the attenuation of these values any less socially destabilizing. Indeed, when people harp excessively on the hypocrisy of others, it is reasonable to suspect that they are motivated less by aversion to hypocrisy than the opportunity to score political points. Perhaps a better measure of consistency would be if those who fundamentally agree with an advocate of a certain position are first to criticize deviations. For example, do environmentalists take to task those of their own who live high carbon footprints, or are traditionalists quick to criticize those of their own who do not live up to their aspirations?

In Mark Sanford’s home state of South Carolina, 13 of 27 Republican Senators are calling for Sanford resignation. However, at a meeting of those who take the possibility of global warming seriously, there was nary a concern for the carbon footprint of the meeting. The latter, at least seems a bit too convenient.