Author: ken

But Why?

Confidence in the economy is up, but economic performance is down. New figures show over-all growth stalled at 1.3 % annually, while unemployment hovers between 8.1 and 8.3%. That’s disappointing to economists as well as the rest of us, but according to national polls people are feeling more secure. How could that be?

“The economic data has grown so dismal that the Federal Reserve this month announced a major new bond-buying effort to resuscitate the recovery once more,” wrote The New York Times. Lawrence Mishel, president of the liberal Economic Policy Institute, notes: “There is a recovery. There are jobs. There is more income. There is some improvement. But the improvement is obviously disappointing.” (See, “United States Economy Still Weak, but More Feel Secure.”)

Economists are speculating that the surprising surge in confidence is attributable to the election, but that is implausible. What could it possibly be about the loud and repetitive accusations and charges of incompetence and deception that the candidates are hurling at each other that would make voters want to buy more goods? This looks like another example of economists’ grasping for psychological explanations when they don’t actually understand human behavior.

The fact is that people tire of pessimism. They want to feel optimistic, especially in the U.S. where positive thinking is easily mistaken for signs of mental health and good citizenship. And if the economic trends are not clearly down, that may be enough for them to justify believing what they would prefer to believe. Moreover, when the trends are relatively stable, that, in itself, offers a certain amount of relief. If things are unlikely to get worse, people can continue to adjust to how they are. The reality may be “disappointing,” as the economists say, but that is not the same as insecurity and further threats to economic stability.

Perhaps the key point here is that the worst is over. The underwater mortgages have been foreclosed. The jobs have been lost. The retirement accounts, college funds and nest eggs have already lost much of their value. The recovery is slow, uneven and unequally distributed, but now there is nowhere to go but up. We had gotten used to faster recoveries in previous recessions, but a recovery is, after all, a recovery.

This may have some kind of link to the election, as economists think, but not as cause and effect. At first economists thought voters would favor Romney because they blamed Obama for the economy being down. Now some think they may vote for Obama because it is slowly coming back. But perhaps the fact that the economy is neither dramatically rising nor collapsing takes that issue out of the equation. That may make it possible for voters to be swayed by other issues: their trust in the candidates, the values and social policies they espouse, national security, and so on.

Economists tend to think it’s all about the economy, but that may be because that’s all they see. It is up to the rest of us to put that in perspective.

WHAT HAPPENED TO THE TRUTH?

“Facts are for Losers”

Charles Blow in The New York Times was non-plussed about the “lies” that came out of Paul Ryan’s mouth last week in Tampa. And he cited a number of journalistic colleagues similarly dismayed: “Business Insider called it “factually shaky.” A Washington Post blog called it a “breathtakingly dishonest speech.” Salon’s Joan Walsh said the speech was “stunning for its dishonesty” and contained “brazen lies.” Jonathan Cohn at The New Republic used the headline: “The Most Dishonest Convention Speech … Ever?”

That led Blow to lament, “Honesty is a Lost Art” and “Facts Are for Losers.” (See, “The G.O.P. Fact Vacuum.”)
Ryan may come to regret claiming he ran a marathon in under three hours. That falls more clearly in the category of boasting, particularly if it’s not true. Some of the other statements were wrong, and some closer to the kinds of distortions not unusual in a heated campaign. It does seem as if, as some commentators have suggested, we are living in a “Post Factual Age.”

But maybe Ryan knows something we easily forget. The mind does not hunger after the truth. It is not inherently logical. Essentially it looks for confirmation of what it already thinks so it can make a snap judgment – and move on.

Those who write advertising copy understand that their job is to stuff certain ideas and images into our brains, because once they are in there they will influence our behavior. Good or bad, right or wrong, it doesn’t matter, so long as it registers.

We were reminded of that before the Democratic convention when some of the President’s advisors hesitated to answer the question “Are we better off than we were 4 years ago?” I would have hesitated myself. It’s a complicated question, and one could be forgiven for thinking it requires some thought.

But hesitation proved fatal, because in a political campaign you have to be clear, convinced and unequivocal. It’s a battle. There’s no time for thought.

Having quickly realized their mistake, the democrats found a new slogan. WE ARE BETTER OFF! What better way to suppress an error than to shout out the desired answer again and again, and repeatedly try to push it into people’s minds.

Slate polled Americans on the issue last week. Did they think
that “Ryan’s speech [containing false and misleading information] will harm Mitt Romney and Paul Ryan’s chances of winning the election in November?”

The result: “Incredibly, 45 percent of those surveyed didn’t think that a candidate delivering a speech littered with fibs would do any harm to Romney and Ryan’s chances.” (See, “How Did Mitt Do? Will Paul Ryan’s Lies Hurt Their Chances?”)

To be sure, Slate is not neutral. Covering the story is yet another way to keep it alive and to emphasize the moral shortcomings of the candidates you oppose. And yet the survey undoubtedly revealed that people do believe the truth hardly matters anymore.

Perhaps, bombarded with slogans, endorsements, ads, testimonials, and rival claims, people defend themselves with cynicism. It may even feel like a form of stubborn integrity to affirm what you believe even in the teeth of “facts.” Perhaps, our access to so much information cheapens the facts that are true.

But if so, that means that increasingly we will only notice the truths that upend our world.

— and then it may be too late.

Loving Them and Fearing Them

Robots are getting better and better, and easier and easier to manage. Recently Tom Friedman described robots that are easy to use and flexible, that help workers instead of replacing them.

“Our robot is low-cost, easily programmable, not fixed and not dangerous,” said the founder of Rethink, a company producing the new robots. As a result, he added, “Companies will become even more competitive, and we will be able to keep more jobs here.”

Friedman reported on his visit to a factory to see the new robot in action: it “was brought in to handle overflow, while the same single worker still operated the machine. ‘We want the robot to be the extension of the worker, not the replacement of the worker,’ said [the company’s] director of technology.” (See, “I Made the Robot Do It.”)

That’s the “good” robot. But just a few days earlier, the Times reported on the other side. The Chairman of Foxconn in China, the giant maker of electronic equipment, spoke about his desire to use robots to replace his armies of employees: “As human beings are also animals, to manage one million animals gives me a headache.” A robot that renders a worker obsolete is a “bad” robot.

The full story is somewhat more complex. As even Friedman pointed out: “Actually, the robots will eliminate jobs, just as the PC did, but they be will lower-skilled ones. And the robots will also create new jobs or enlarge existing ones, but they will be jobs that require more skills.” And the army of new robots needed to replace Foxconn’s “animals” will also require skilled workers to build and program them.

So what is really at stake here is the unskilled worker. Just as steam engines replaced laborers, and mechanical looms replaced weavers, robots are replacing the average worker, those who’s thoughts and movements can be imitated by machines. The work that remains to be done by humans is less physically stressful, so there are fewer injuries on the job. But then a different kind of stress comes into play. As the Times put it in its report: “Because a computer sets the pace, the stress is now more psychological,” and that too will require high-level coping skills. (See, “Skilled Work, Without the Worker”)

“We’re on the cusp of completely changing manufacturing and distribution,” said Gary Bradski, a machine-vision scientist who is a founder of Industrial Perception. “I think it’s not as singular an event, but it will ultimately have as big an impact as the Internet.” Machines are faster, more accurate, tireless and uncomplaining.

But this leaves us with two questions. The first: Who will profit from this greater efficiency? The industrial revolution displaced millions, but in the long run the increased efficiency of mass production created millions of jobs and improved the standard of living across the board. This, on the other hand, looks likely to increase the growing divide between the rich and poor, those who own the new machines and have the skills to use them — and those who don’t.

And the second: what will happen to those without the more sophisticated skills the new jobs require? Will our enthusiasm for the good robots obscure the human cost? If working with computers produces stress, what about the stress of being rendered obsolete?

Financial Fraud

More and more people are noting that when banks and other financial firms settle charges of fraud and pay out large sums of money as fines, it’s their customers who end up paying the bill.  Worse, those actually responsible pay no penalty at all.

Britain’s Chancellor of the Exchequer, George Osborne, commenting recently on Barclay’s settlement over its manipulation of the Libor rate, went so far as to say, “Fraud is a crime in ordinary business; why shouldn’t it be so in banking?”

A similar thought was expressed by Senator Jack Reed, chairman of a subcommittee that oversees securities regulation in the U.S.: “A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed.”

These are not the words of ordinary people, of course.  They know the reason is that it is far easier to get a bank to pay a fine than to get a conviction in a court of law.  Moreover, the fines are a kind of public confession that does something to appease public outrage, and may even make the firms more cautious in the future especially as the fines help to pay for on-going investigations.  Still, the fact that such prominent figures are speaking up now suggests that it is time to take the next step and actually prosecute the responsible individuals.

As The New York Times pointed out recently:  “The difficulties of prosecuting executives were highlighted last week . . . where a federal grand jury acquitted a Citigroup manager who had been involved in selling an exotic financial security involving residential mortgages . . . and failing to disclose that Citigroup was betting against the investment.”

“In a rare move, though, the jury sent a note to the Securities and Exchange Commission after reaching its decision, urging the agency not to give up. ‘This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary.’”  (See, “Corporate Fraud Cases Often Spare Individuals.”)  The evidence for conviction may have been lacking, but clearly the jurors felt the outrage.

Simon Johnson, former chief economist of the IMF, noting that financial firms are losing their legitimacy, asked some unusually pointed questions for a mainstream economist:  “Do you really believe the increasingly dubious notion that megabanks, as currently constituted, are good for the rest of the private sector, and thus for economic growth and job creation? Or do you begin to consider more seriously the increasingly mainstream proposition that global megabanks and their leaders have simply become too powerful and dangerous?”

He points out that “the big showdowns between democracy and big bankers are still to come – both in the United States and in continental Europe. On the surface, the banks remain powerful, yet their legitimacy continues to crumble.” (See, “Finance’s Crisis of Legitimacy.”

This is the step-by-step erosion of belief and support that inevitably precedes collapse.  It might take just one more scandal.

 

 

The Danger is Here

The recent high frequency trading disaster at Knight Capital brings home the danger of turning key decisions over to computers.

A recent report cites research by Prof Frank Zhang of Yale University and other experts showing that “High-Frequency Trading is positively correlated with stock price volatility and is

1. Stronger during periods of high market uncertainty;

2. Stronger among stocks with high institutional holdings; and

3. Stronger among the top 3,000 stocks in market capitalization.”

In other words, it is not only super fast it also targets exceptionally large sectors of the market.  High speed and high volume combine to amplify swings in the market.  That makes it particularly dangerous when its goes wrong, when glitches and bugs distort its “choices.”

According to critics, the problem is not just technological.  It also distorts markets.  By concentrating on small differences and anomalies in share prices, where such amplification can make huge profits, it diverts the attention of investors away from the prospects of long-term growth.  If the social utility of markets is that they send money to where it will be useful in underwriting new products and services, HFT undercuts that justification in the service of short-term gains.  Developing countries suffer as well as investors now don’t want to wait to get their returns.

But perhaps the most significant danger is that HFT is also amplifying the split between the wealthy and the rest of us.  “This is where all the money is getting made,” according to William H. Donaldson, former chairman and chief executive of the New York Stock Exchange. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”  In effect, we have moved towards a two-tiered global financial marketplace consisting of the high-frequency arbitrage players garnering ‘first class’ travel access and privileges whilst everyone else has been relegated to ‘economy class’ status.” (See, “Could Speed-of-Light Trading Trigger The Next Systemic Crisis?”)

The report prepared by The Asymmetric Threats Contingency Alliance in London summarizes the problem:  “Investors have been replaced by machines that trade securities not based on intrinsic value decisions but on small trading edges and price-momentum-based algorithms.  High-Frequency Traders have taken over the wheel in an uncertain period in which there is already too much fear and doubt about future economic prospects and exposure of wealth to the global financial markets.”

In the original story, Dr. Frankenstein’s creation ultimately was destroyed because he suffered from loneliness, an unintended consequence of the fact that his brain inhabited a human body.  His basic human need for contact continued to drive his actions, but his approaches frightened the villagers who rose up against him.  A story that better fits what happened at Knight Capital is “The Sorcerer’s Apprentice,” in which the apprentice figures out how to get a broom to do his chores but doesn’t know enough to get it to stop.  He found a substitute to do his work, but lost control.

The bankers behind HFT also want to minimize human effort and maximize gain.  They are not lazy, but they also have not yet figured out a way to shut downa their programs when they run amok.