Archive for the ‘Social Commentary’ Category


The Open Wounds of Class Warfare

October 12, 2008

The checkout line at the grocery store is generally an uneventful place. I’m usually moving as quickly as I can to get home and rarely hold conversations with anyone. My thoughts are focused squarely on domestic issues at that point, my work concerns have largely vanished. This Thursday was different. The person bagging the groceries in my line, perhaps to the chagrin of the store manager, was speaking in loud tones to anyone willing to listen. His voice could be heard not only in the line I was in but at least three lines in either direction. He was mad, and I mean mad in a way that kind of freaks you out if you are standing in the line in which he is working. He was mad because he had lost a substantial amount of his retirement money in the market free fall, and he was letting anyone within earshot know that he believed the criminals responsible for this loss should face the long arm of the law.

This feeling was echoed in several blog comments I received based on my “Bailout Envy” post and blog reference in an article that ran a few days ago on Yahoo! Finance . For the first time since I started this blog, I decided to reject some comments — their language unfit to print. A reasonable characterization of their position is that I should be ashamed of myself for coming to the defense of Wall Street executives and that the U.S. prison system should be enlarged to handle the inflow of financial services employees who should soon be residing there.

In both the case of the grocery store employee, and the comments (some posted others not) to my blog, the open wounds of class warfare are evident. The anger is palpable. 

Some banking executives deserve to go to jail. I have little doubt that this will occur. At the same time it is so incredibly convenient, so grossly unfair, to blame the entirety of what has happened on banking executives and mortgage brokers. Many of these people, just like you and I, saw and understood what was happening in only a very partial way at best. Perhaps they should have understood, but that is a tall order in such a complicated market. Let the first person who has never failed to mention a defect in the used car they were selling cast the first stone.  

The cold, tough reality here is that these banks would have never been able to profit from these loans if Americans had not, en mass, made a headlong rush into purchases they could not afford, debt they could not handle. It is easy to blame bank executives. It is somewhat harder to blame the people we know in our lives who took out mortgages based on highly speculative bets on home price appreciation, to blame those who used their houses as piggy banks — taking out home equity loans to finance their current consumption. And it is the most difficult of all focus our anger back towards ourselves, our individual failings. We are all to blame, collectively and individually. Our banks, our neighbors, and many of us lived a life of cheap credit and easy money — a life we could not afford. The demon lies not in the guilded towers of Wall Street, but in our ourselves.


Bailout Envy

September 25, 2008

One game that I often play with executive clients at The Darden School is called the Pepulator Simulation. In this game, participants can do better for themselves by being cooperative rather than aggresively competitive. Sometimes early on in the game that is exactly the behavior I observe, cooperation. But later in the game things often change, tough situations lure participants into an “us versus them” mentality. At the end of the game some executives will take actions which are demonstrably and obviously not in their best interest just so that they can keep another player from doing well.  During the debrief of the game, when strategies are discussed openly, they struggle to construct cogent explanations for their self-defeating behavior. The actual explanation is quite simple. They let envy, jealousy and pride cloud their thinking in what amounts to a very low-stakes class exercise. I’ve also run it with run it with non-executive participants and the result is the same.

U.S. Representatives and Senators now find their email and voicemail boxes full of vitriolic opposition to any government bailout package for the financial services industry.  There can be no doubt that the vast majority of these individuals who are so adamant in their views have a very thin understanding of what is actually being proposed (This is my profession, and there are parts I don’t understand). There are legitimate areas to be concerned about here, questions of power and oversight. Whether this ends up being good or bad for U.S. taxpayers is debatable, with much of the uncertainty tied to what the government pays for the assets it is buying and what it will receive for those assets when it sells them. But I deeply suspect that the details of the plan are completely beside the point for many Americans.

The strong public outcry against the bailout is about envy, envy of financial services executives who for many years have made incomes that are hard for many of us to comprehend. We would rather see them made low, humiliated and trotted about with scarlet letters than accept policies which might help ourselves but spare them their comeuppance. And some of them deserve just that, but many of them are probably guilty of nothing more than being successful and making a lot of money.  Right now that seems to make little difference to a lot of people. As does the fact that many of these individuals, both in firms that are the targets of government actions and those that are not, have seen their own equity positions pummeled of late. The market isn’t capable of throwing them in jail, but it has already exacted a heavy penalty on their wealth and future earnings prospects. But reason has no place when envy and jealousy instruct our thoughts. Get them all!!  Get them now!! And to hell with using any taxpayer money to help them out —- no matter how badly it hurts us.  We will go down with them, but at least they will go down. Bring on the Great Depression!


Teaching Reckless Spending By Example

September 16, 2008

When you go to Las Vegas you enter a surreal world of fake Eiffel Towers and Venetian gondolas that wander through shopping malls. After a couple of days, you walk right past Elvis without bothering to ogle. Vegas is a temple to faux-culture. Yet, there is something distinctly honest about what happens there. When you play black jack at the Rio you know that management is not terribly concerned about your financial well-being. They are out to make a buck on you, as many bucks as they can. Their motives are pure and well understood.

State run lotteries are the real sham. They put Las Vegas to shame. If I feel like I’m ready to “Go for the Gold” Virginia has a lottery ticket for me.  If I’m nostalgic for my old Who albums “Pinball Wizard” might be my ticket that day. But, the lottery cloaks itself in moral goodness. Go to the Virginia Lottery web site and you will see proudly displayed  “More than $3 billion for public education.”  For most people, playing the lottery is an act in financial irresponsibility….in reckless spending. But, more than just allowing this kind of behavior, the State supports it.

Depending on your particular political persuasion you probably believe that:

  1. Financial decisions are strictly personal. Federal and state governments should not seek to influence personal financial decisions by constructing policies aimed at encouraging thrift — or
  2. Federal and state governments should seek to encourage citizens to save more through active policy measures.

Short of deep cynicism, “I think the lottery is a tax on stupidity and stupid people should be taxed,” no reasonable political philosophy would advocate the state encouraging financially reckless behavior. And make no mistake, lotteries are successful not because some of us spend a buck once in awhile to have a good time, but rather because many people who have very little spend a lot of their bucks. If you doubt this for a minute, you can look to the recent uptick in lottery sales driven by the financial downturn to convince yourself. The worse off some people are, the more likely they are to buy lottery tickets. Lottery money is like crack cocaine for the State. It is wrong, and we all know it is wrong, but we just keep on shooting up.


The Pope Visits Mile High

August 29, 2008

Rising from the floor of Mile High Stadium, perched on a perfectly symmetric series of ascending circular platforms, stood Barack Obama. This was no blue-collar man, maybe not even a presidential candidate. The Pope was in town, and he knew exactly what the assembled worshipers wanted to hear.  He blamed American’s economic woes on Satan himself, Mr. Bush, and promised redemption. 

Middle-class wages have stagnated over the last few years. This has little or nothing to do with the current President’s policies. They have stagnated because technology has allowed businesses to move not only unskilled but skilled labor around the world, to find the skilled but meagerly paid to perform work. There is no President, no Congress, that will stem this tide. People who have marketable skills will be paid, people without marketable stills will struggle. Without adopting North-Korean-like strategies, governments can do little to reverse history’s march towards the boundriless movement of ideas and resources.

The problem with the above argument is that it doesn’t make good TV. And good TV is what everything is going to be about until at least early November.

This single biggest thing that government could do to raise the economic prospects off all citizens is to increase the educational opportunities for children born into disadvantaged circumstances. Such programs benefit the less fortunate directly, and the more fortunate by increasing the pace of our economic engine and ultimately returns to capital. The Democrats have rightly criticized Republicans for advocating some policies that favor the wealthy, but in this most critical area the tables are turned.  Mr. Obama, following Democratic orthodoxy and at the behest of the teachers’ unions, has proposed nothing creative or different in any substantial way to help students trapped in poor schools. The status quo, where wealthy families send their children to private schools, those of middling means move to the suburbs where the public schools are better, and low and lower-middle income families are left with the educational scraps will not be changed under his policies.

Allowing school choice for parents, as favored by many Republicans, is currently the only policy on the table that has any realisitc chance of dramatically changing the educational playing field for disadvantaged students. And dramatic change is what we desperately need.

Despite Mr. Obama’s rhetorical flourishes about how often Mr. McCain votes with the President, Mr. Obama has shown less willingness than Mr. McCain to break with party orthodoxy when necessary for good policy. Mr. Obama will not be able to tax, and wealth-transfer, his way out of the global movement of labor resources. To protect the earning power, and what little savings we have, of Americans he will need to break with the Democratic Party’s belief that only wealthier families should have a choice as to where they send their children to school.

Here’s hoping that a hugely effective Pope knows how to become an effective President.


Fat and Broke in Suburbia

June 26, 2008

Does living in suburbia cause us to get fat and go broke? Maybe.

According to a recent article article in Slate (Hey fat spender) having love handles and a bare wallet are related. The crux of the argument is that eating out is both expensive and at the same time also makes you fat. All that butter and cheese costs money you know. And as every restaurant cook knows, the key to very tasty food is —- add more fat. So, a very casual look at the U.S. savings rate and obesity rates finds that they are inversely related. So, maybe we could all go on a diet and increase the savings rate!

I doubt it.

The issue that is helping drive both of these outcomes (big and broke) is suburban living (see my post “Can High Gas Prices Help Us Save”). Yesterday’s NY Times had an article about families rethinking suburbia in light of high gas prices. And there has been a flurry of recent articles about the implications largescale re-urbanization (e.g. Suburbs a Mile Too Far and Ghosts of the Cul de Sac). You can now add high food prices to high gas prices as components of the increasing cost of the long commute .

Eating out has always been a lot more expensive than cooking, but restaurant prices typically rise faster than food prices on a per dollar basis because a common pricing rule at restaurants is to use a constant percentage mark-up based on the cost of the food. So, if the mark-up is 300% (not uncommon) a $1 increase in food price for a particular dish leads to a $3 increase in the menu price. A restaurant could lower its margins, but there is a limit to this as many of their other costs (heating, gas for cooking) are increasing as well. So food is getting more expensive, and eating out is getting a lot more expensive.

People with long commutes eat out (or get carry-out) more often. They spend more money on gas. They walk less and drive more when they run their errands So, we are back to the link found in the Slate article, fat and broke in suburbia.


An Unintended Consequence of Student Loans

June 24, 2008

My own institution, The University of Virginia (UVA), has undergone a transformation in funding that is not substantially dissimilar from the changes in funding at many public colleges and universities. The proportion of the annual operating budget that is derived from state funds has declined precipitously over the course of the last decade and now stands at only 8 or 9%  of the overall budget. UVA is one of the lucky ones as its ability to attract private dollars far exceeds that of most public institutions, but even from this relatively privileged vantage point the state budge cuts have produced real economic consequences for the School. As public monies have dried up for higher education tuition rates have moved up rapidly. Although many public universities have collected and allocated more private money for student aid, an increasing number of students leave college with a great deal student loan debt. 

What I have just written above is not news. Tamara Draut’s book “Strapped” examines the issue of the rise in student loan debt in detail and a recent  report published by Demos updates and extends that discussion.

But I think there is a side effect of this debt that is important to explore. One common psychological phenomenon that occurs when people make decisions about money is that they tend to compare the amount they are thinking of spending with other dollar figures that seem most salient to them at the time. They form ratios between these dollar figures as a way for them to decide if the amount they are thinking of spending is “a lot” or “a little.” For example, on most days spending $200 for car seat fabric protector might like a very bad idea, but on the day you just spent $25,000 on a car it might seem like a very reasonable idea. It is easy to convince yourself that $200 is “nothing” in the grand scheme of things even though that same amount that would have seemed large a week ago. 

I fear that student loan debt may work in a disturbingly similar way. Once a 22 year-old has $30,000 in debt it is easy to justify other kinds of debt because it “really is not that much money.” An extra $3,000 in credit card debt only moves the needle on overall debt from $30,000 to $33,000.  The large debt overhang also dampens the psychological pain associated with a new car loan. Am I sure this is true? No, I am not. To my knowledge no one has studied this phenomenon. But, my speculation is that it is true for many students and that the changes in funding for higher education have resulted in a self-reinforcing debt cycle among recent college graduates that is much more powerful than a strict economic analysis of student loans suggests.


Yes, It Matters Whether Your Neighbor Saves

June 17, 2008

A recent blog posting on Cafe Hayek, from the chair of the George Mason University (GMU) Economics Department, asserts that it does not matter whether those who live in the U.S. are saving enough money as long as foreign capital inflows are sufficient to allow U.S. businesses to borrow and expand.

I could not disagree more.

True, to the business looking to expand it does not matter whether the money they need to borrow is coming from the U.S. or China. Either one will work just fine. But that is only one of several reasons I should worry about whether or not the savings rate in the U.S. is low. Let me give you another very concrete reason — one that money from China will not solve. If many people in the U.S. are short of funds upon retirement they will pressure the federal government, through organizations such as the AARP, to pass new taxes and increase current taxes designed to transfer wealth from those who have saved responsibly to those who have not. Older Americans vote in large numbers, and if this historic voting pattern persists who could doubt they will be successful in their petitions. A strict economic analysis of capital flows is by itself not capable of capturing the political implications of this phenomenon.

Even in this world of global capital flows, it still matters who is saving and who is not. The political power of countries as well as the domestic policies they will pursue depends in no small measure on it.