Good Investments Bad Investments

There is another interesting post by Michael Hudson in yesterday's counterpunch. Here are some useful quotes:

The recent stock market and real estate bubbles are much like pyramid schemes in the sense that what is bidding up stock and property prices is an exponential inflow of new money from pension plans and mutual funds (for shares) and bank credit (for real estate). Venture capitalists are “cashing out” while corporate managers exercise their stock options.

Suppose that mortgage-packaging companies are honest in their appraisals of current price trends. The real estate bubble is nonetheless speculative and postindustrial. The analogy is found when financial managers endorse government policies that encourage the inflation of price for stocks and bonds, stamps and coins, Rembrandts and modern art by claiming that this creates wealth and hence, by definition, pulls living standards and culture onward and upward.

What is wrong with this picture? For starters, it fails to define value as distinct from price, windfall and capital gains as distinct from earned income. It also neglects the fact that market prices rise and fall, but the debts remain in place. And when debts cannot be paid, savings are wiped out. ...

What does this have to do with true capital formation? Individuals are getting rich while the economy is polarizing between creditors and debtors, property owners and rent-payers. Unproductive investment occurs when it takes the form of windfall “capital” gains, and when it involves going into debt for real estate, stocks or bonds, or “collectibles.” Unproductive credit occurs when commercial banks make loans that merely finance the purchase of property, companies or financial securities already in place.

As I have been driving around Southern California, I am stunned by the sheer amount of real-estate development that has occurred in the last ten years. Development has occurred in all sectors, residential, commercial, and government. The value of residential and commercial real-estate is now plummeting as anyone who reads or pays attention to local conditions can tell. Land values were raised with really no productive advantage attached to them. Now, the properties sit increasingly empty of tenants, rents will or are plummeting and it will take a long, long time (if ever) to make those properties income generators again.

Here in Orange County, the signs (literally and figuratively) are ominous. Just about every commercial strip center & building one sees in this land of sprawl has a "for lease" sign, or the whole property itself is for sale. Empty units abound. There are thousands of residential properties that are either bank owned or in the stages of the foreclosure process. In my little track of a few hundred houses, about 20 are now either bank owned or in the process, an increase of 6 since the start of the month. Given these trends, there will be NO recovery in the housing market any time soon. It is a good thing too! As Hudson points out in his article, there is no real productive economic value in increasing property values, it creates a sort of false capital gains based wealth and generates NO economic labor investment based value on its own.

The government building spree is no doubt in similar straits, the LA Times this morning has an image of county workers protesting announced job cuts in the unfinished $300,000 refurbishment of the Board Supervisor's lobby in the hall of administration. The image speaks volumes for how out of control the developer-based economy has become. New paint, pictures, and furniture add absolutely nothing to the functional use of the supervisor's lobby, just baubles or eye candy to false inflate the County Supervisor's sense of self-importance. But the $300,000 will certainly line the pocket of some contractor who no doubt will spend the money on other baubles for his home or office.

A recent trip to UC-Irvine further underscores this developer-contractor economy. The university has been on a building bonanza since I graduated there in 1999. Older buildings (less than 30 years old in many cases) have come down, new buildings have replaced them. All this new construction (simply replacing older contruction that was still functioning just a decade ago) in a state that projects a yawning 49 billion dollar deficit over the next 18 months. the UC system will be hit hard, layoffs will inevitably be massive and these buildings will sit, under utilized (and redundant anyway). Contractors pockets have been lined, but no real added value to the productive work of the university's mission has been created. Indeed, the debt based development is actually choking off the ability of the university to realize its mission as its operating budget falls into a black hole.

During this ecnomic downturn, we must wean ourselves off of the developer-contractor economy. It is a false economy that dooms us to the sort of wealth polarization that Hudson has been writing about. We must once again learn to distinguish the difference between investment of past gains into future productive returns, and the use of debt to gamble on rising value of nonproductive false wealth inthe future.

Some Thoughts on Money as Debt

I watched Paul Grignon's short video, Money as Debt, again last night and it finally dawned on me how money is created in our current system. I may have understood before, but then I forgot again.

When people need to purchase something that costs more than their cash on hand, they turn to the banksters who will create the money and deposit it into their banking account in exchange for the borrower’s signed promise to repay the debt at interest. According to the video 95% of all money in circulation is literally created out of thin air through the extension of credit from the bank and the acceptance of debt on the part of the borrower.

The new money that is created is used to purchase goods and/or services today. The resulting debt is repaid with a percentage of earnings from future earnings. So, through a legal fiction, the debt allows current consumption against future paid labor. The system is built on faith that the future will be prosperous enough to repay the debt.

What is interesting is that the money created today will eventually be returned to zero, over time, as the debt is repaid. What is more the debt will have to be repaid with interest, meaning that the wage earner will have to earn substantially more than the principle on the original debt to pay back the loan plus interest. For example, if you borrowed $5000 and promised to repay the loan in 5 years at 5% interest, then you would need to earn $5661.37 over the five years of the loan repayment period in order to meet your obligation.

Why charge interest? Obviously, that’s where the profit is in the loan making business. But, this creates a dilemma for the money system. When the bank created the $5000 it lent you out of thin air, that is all the new money that was added to the money as debt system. Another $661.37 will need to be added to the system over 5 years in order for you to earn enough money to pay back your debt with interest. So, someone else needs to take out a loan to add that money to the system overall. Trouble is, that person will also borrow at interest, meaning that even more money will need to be created to ensure enough money is in the system to pay for that debt over time. This creates a feedback loop, such that in order for the money supply to grow, so must the amount of debt overall in the system.

I suppose the total amount of money as debt in the system could theoretically infinite, so long as the earnings that workers get for deploying their labor, what earnings business get for deploying their capital, and what tax receipts government gets raises exponentially right along with the amount of money in the system.

If wages, earnings and tax receipts do not keep pace with the rate of money as debt creation, the overall money supply begins to exceed the value of real production in the real economy (the one that relies on productive labor and capital to add value to raw materials in the form of products that enhance human utility). The result … inflation…more and more dollars chasing after the available goods and services in the real economy, which often leads to price increases and a decline in the purchasing power of the wage earner, businesses, and government.

When prices rise faster than earnings a problem emerges for the money as debt system. An increasing percentage of cash earnings must be deployed to meet survival needs and other forms of needed consumption. The ability of the wage earner, business, and government to meet their debt obligations then begins to founder. In other words, the future envisioned in the signed legal fiction that allowed the creation of money as debt in the first place fails to materialize as envisioned. The result, debts cease to be repaid on time or even at all.

This problem is compounded by the tendency for people to try and cover their inadequate cash income by taking on more debt, meaning that there income needs into the future become ever greater. The housing bubble certainly could be read this way. As credit became all too cheap and easy after 2001, the sudden increase in money as debt that resulted got funneled into home purchases, improvements, cars and associated goods and services. Prices increased on homes, leading middle class residents and speculative investors to assume more and more debt in an attempt either to secure a culturally mandated sense of middle class comfort or to score a quick and seemingly ridiculously easy profit (sometimes both motives were at work).

Indeed, at this stage, the system must create more and more debt just to sustain itself. The whole history of financial innovations in recent decades could be read as an attempt to create more and more opportunities for workers, business, and governments to accept more and more debt so that more and more money enters the system to cover expenses associated with the ever growing debt burden on society.

Reality has a way of imposing limits on such a system. Wages, when adjusted for official US Gov’t CPI inflation, have long stagnated, and businesses can only produce so much given real world constraints of transportation, energy, raw material extraction, and productive capital. Moreover, businesses can only raise prices so much if they are to remain competitive given the limited ability of consumers to increase their spending. Government tax receipts are largely dependent on individual and corporate earnings, so its cash revenue is limited by their limits of growth.

If individual wage earners, businesses, and governments are being squeezed in terms of revenue possibilities inherent in the finite world and in terms of rising prices (due to the exponential inflation in money as debt supply), then a tipping point or crisis point in the system is inevitable. At some point, actors in the system must make a choice, either continue paying their debt obligations until they are homeless and starving or simply stop paying their debts in order to survive. Most people, being reasonably attached to living, choose the latter.

If growing numbers of individuals and businesses stop repaying their debts due to increasing financial strain and fewer new debts are being created for similar reasons, the overall money system must contract as a consequence. This set up another feedback loop where money literally disappears from the system. This is because some existing debts are repaid causing the money that was created when the loan originated to disappear along with the payment. On the other hand, less new money is added to the system to cover the interest payments that are expected on the debts currently in existence throughout the system. Recall, that the interest on loans is paid with new money as debt that is added to the system after you the borrower accepted the principal inherent in your debts.

Now enter the banks. Banks need interest income to pay interest on savings accounts, run their day to day operations, to service their own short term debts, and to earn profits that underlay the value of their investors’ shares in the bank (perhaps even pay a dividend) – although, banks can also charge borrowers all sorts of up front fees in addition to interest over time for the privilege of creating money as debt in the form of loans to individuals, businesses, and government.

If banks are not getting the interest payments they had expected when creating the loan in the first place, and they are creating fewer new loans because borrowers either can’t be counted on to pay the loan back or because there simply is lower demand for credit as a result of growing austerity in the real, productive economy, then their entire business model is at risk. Their investors will run for the doors, leaving the bank poorly capitalized with declining income, and, ultimately, unable to meet its operating costs, service its debts, report profits, etc. etc.

Banks that are in financial trouble are in no position to make new loans, since doing so would place them at even greater risk for insolvency. Thus, what started as a collapse in demand for new money as debt driven by the inability of debtors to service their debts, turns into a supply crunch, where very credit worthy borrowers cannot get loans as banks are no longer in a sound financial position to lend.

The result, deflation or a lowering of the overall supply of money leading to rising unemployment, falling wages and prices as the result of fewer and fewer dollars chasing the available goods and services in the economy. In other words, a depression.

All of this leads to a final concern. Banks can certainly create massive amounts of money as debt in this system. But the government can create money as well. By fiat, the government can simply print new money into existence. Certainly, the government could invent money of its own to offset the money as debt that the banking system is no longer able to create, right? Deflation can be counter acted, right?

Remember government expenditures are made possible by (1) taxing property, current earnings or dollars spent when purchasing goods and services and (2) creating new money as debt, which the government promises to repay with future tax receipts (with fewer and fewer new receipts able to service new debts due to receipts already being committed to current principle and interest payments on existing).

In a declining economy, tax receipts likely also decline, meaning any new government money must be created as new money as debt. The government must get a bank to loan it some new money as debt with a promise that is will repay the debt with interest well into the future. But, here, the government runs into the same problem, lenders must have faith in the government’s ability to repay the debt plus interest into the future. Once that faith runs out, so does the government’s ability to borrow new money as debt into existence.

What’s more, the way government spends money is very different from the way individuals and businesses spend money. It is unlikely that much of this new money the government borrows into existence will come to the aid of many citizens, since existing government contractors already enjoys special ties for government expenditures.

There is the Zimbabwe Option! The government creates its own money which it has the power to do. Then the government uses this money to save the economy by giving it straight to the citizens and business to help make up for their own shortages of earned income. This approach would be a radical break from the current system of money as debt. As a radical break, the faith the still sustains the value inherent in the current money system could evaporate overnight. Such an action would run the risk of causing a collapse in the trust of the value of this new government money to be exchanged for goods and services. Radical increases in prices would result … the images of wheelbarrows of cash in Weimar Germany in the 1930’s come to mind. Indeed, this has been the experience of Zimbabwe in the present era.

Why, people will be uncomfortable accepting the “New Dollars” as actually representing items of value, since the government can, quite literally, invent a nearly infinite supply of New Dollars that would not be tied by legal fiction to either production or labor as was the case in the money as debt system that we currently have. Without these ties to labor and production, the limits of the real world that create problems for the infinite growth of the money as debt system do not apply. The government is free to create unlimited amounts of fiat money, but its value in terms of exchanging it for real goods and services will diminish rapidly as the value of real goods and services grow at much lower rates, remain stagnant, or, more likely at this time, decline sharply. Radically escalating prices would be the natural result.

The Future Gets Brighter Each and Every Day!

You ever wonder what happened to pay as you go? You know, that silly old idea that if you have the money for something you need or want you could buy it. But, if you did not have the money you could not buy it. If it was an expensive item, you would need to set some money aside each pay period until you had saved enough to buy that item?

As hard as it is to believe, this quaint old idea was promoted by major corporations (albeit for completely self-interested reasons). I have read that Henry Ford used to send social workers out to the families of his employees to help them understand that they should be careful how they spent their money. Not to blow it on short term wants like entertainment or booze, so that they could save and eventually buy one of Mr. Ford's cars and other home appliances the factories churned out. After the great depression, people tended not to buy on credit. They knew that the future might actually offer less that the present. The future was simply to uncertain to risk one's prosperity.

Of course, we have been living in the era of easier and easier credit over the past few decades. This is the era when we have been encouraged to spend freely, to buy today and worry about it till tomorrow. We live in the era of the unimaginably prosperous tomorrow. Tomorrow, we will be wealthier. Tomorrow, we will be healthier. Tomorrow we wont be such jack asses toward one another. Tomorrow, always tomorrow.

So what brings these musings on a cold fall night in late November?

There word coming out of Team Obama that very shortly after he takes office, the new president will sign into law a several hundred billion dollar 'stimulus' package as a means of 'saving the economy.' I suppose that this is laudable, though we have yet to see the details, and, given the Clintonistas that Obama is bringing back to the white house, I don't think there much hope that this will be more than yet another give away to large corporations. I don't think anyone realizes how conservative Barak Obama is. Well, we are all gonna find out, now aren't we?

In any case, I don't intend to complain about Obama's plan since so little is known about what it might include. My interest is in how the wheels have come off the fiscal ship of state. The idea that the USG is prepared to run trillion dollar deficits and more each and every year, for as long as it takes, to somehow solve the explosion of a global debt bomb is the very height of stupidity. More debt to solve the problem of too much debt, huh?

How is this possible. Well, I already wrote about magical thinking. But, more that that is a kind of magical thinking that befits the label Pollyannaish! The idea that, if we spend all of the future's prosperity today, the future will be so much more prosperous than it otherwise would have been that we will be able to have everything that we want today and still pay for everything we will want in the future and then some. Man, talk about the miracle of loaves and fishes. It is as if you went to the fridge for a late night binge with the expectation that by eating extra today there will be even more in cold storage tomorrow! It can happen! It's just like magic!

This is surely folly. Though, to be honest, the last thirty years have been mostly folly. You cannot borrow from the future ad-infinitum. One day, that future arrives, and it is much more impoverished than anyone imagined when they were robbing it blind all those years now past.

Fun with VMT and Gasoline!

When I did my fieldwork in the islands of Chuuk Lagoon in the late 1990's, one of the big concerns had to do with kids sniffing gasoline to get high. It was a serious problem for boys in the early teens. When I traveled there again in summer 2008, gasoline had hit $6.50 a gallon (US) and was creating a different sort of crisis altogether.

These islands were communities, after all, that had been 'developed' by the United States in an era of relative cheap petroleum. With American assistance, they had been able to abandon most non-gasoline powered transportation that they had once been famous for in favor of fiberglass skiffs with a 30 or 50 HP outboard motor. By the summer of 2008, the cost of gasoline consumption for daily business was really hurting these islander families. After all, the minimum wage was about $1 an hour, so much of one's daily earnings could have been easily eaten by the cost of traveling from one's home island to town (about a 20 min. to 1.5 hour trip depending on where you lived in the lagoon). People in the islands felt these costs acutely, and were keep to think of ways to offset their extraordinary fuel costs. Most often, people simply traveled less or traveled with more people in the boat to offset the per person fuel charge.

So, back here at home, we had high summer gasoline costs of our own. Like the people of Chuuk, we have long adopted a rather inefficient means of transportation, building one of the largest networks of roadways for transportation in the world. American cities are sprawlapaloozas: vast oceans of low density housing that emanate forth in all directions from multipolar urban centers. These centers have largely been abandoned, or were built to never be properly peopled, except by business use during bankers' hours. Most people live far from their places of work and must do a certain amount of commuting each day just to earn enough to pay the mortgage or rent in their standard issue American Dream House. This meant that households had to spend more and more on fuel costs just to make their living from week to week and had less and less for things like restaurants, shopping malls, and, of course, the mortgage payment for their overvalued standard issue American Dream House. This summer past seemed to represent some sort of tipping point, after not really changing their behavior much, Americans started trading big for small (cars that is -- not houses!) and began to drive less. The were eating out less, they were falling into foreclosure more. -- Though, to be fair this latter bit had more to do with stupid lending practices during the rush to buy overprices houses, than fuel costs per se.

Of course, that was last summer ... more then three months -- and one market crash ago....

Ah, what a difference a couple of months make! From their summer highs, gasoline prices have collapsed. My wife just paid $2.04 today, down from a summer high of about $4.50 a gallon in our neighborhood. Now, surely, the collapse in fuel costs is a welcome sign. But, for me it has raised an interesting question. Is this a reflection of falling demand in the face of over capacity in gasoline production? Shutter the thought, as such a situation would signal the sort of economic downturn the United States had not seen since 1980, the last time Americans consumed so much less in their pursuit of their sprawlapalooza dreams.

I wondered about this because it is possible that this price collapse represents some sort of perverse unwinding of bad bets in the commodities markets (though I profess true ignorance in these matters of commodity investors -- there are much better blogs for these sorts of more informed speculative tomfoolery). It certainly is possible that so many people had bet long on the price of petroleum that they now were racing to cover these bad bets, selling contracts to anyone who would buy them, driving the price of oil ever south, and the costs of refining the product southward along with them. The savings then being passed on to a welcoming consuming public. -- Though, again, I suspect that it doesn't really work this way ...

Well, all this sort of wunderin' got me to thinking about VMT (Vehicle Miles Traveled). This is a little statistic the federal government collects to see how much Americans are lovin' their massive highways and byways system. I got wind of it in a series of posts on The Oil Drum by Stuart Staniford by in 2006, who at the time, was working on VMT as a measure of economic productivity. Seems reasonable, I suppose to, wonder if economic activity is reflected in the Vehicle Miles Traveled from month to month, or year to year in the ol' U.S of A.

I wondered further, were there more recent reports of VMT from the USG than those from 2006? Did they tell us anything about how much folks are driving as it might relate to economic downturns and all that?

Well, turn out there is! Sort of. I pulled out this image from a report for the White House earlier this year:

This graph shows the VMT for each month from Jan. 1992 to Jan 2008. It tends to be jagged 'cause people don't like to drive in the winter when it is cold and snowy, but love to drive in the summer when it is warm and people are frolicking half-naked on beaches throughout the country. I added the polynomial regression line (with R-quared) to get a sense of average changes over time. The resulting line show slowing in 2006 with a pronounced leveling off through 2007 after continuous linear growth for the period staring in 1992. Also, of note is that the maximum VMT has been flat since summer of 2005, more or less, after growing substantially each year since this series began in 1992.

Conclusion: VMT not growing! Sprawlapalooza on hiatus.

Now, that Jan. 2008 date had me bothered this morning as well. I searched, but couldn't find more contemporary data available online. But, I have been tracking another measure in the Energy Information Agency's weekly petroleum report. It had been showing declining gasoline consumption for all of 2008 when compared to 2007.

The most recent "Short Term Energy Outlook" by the EIA (Nov. 12, 2008) reports the following for US consumption of petroleum products.

Consumption of all petroleum products is projected to decline substantially in 2008, driven down by the increase in prices and by a weakening economy during the second half of the year. Total domestic petroleum consumption is projected to average 19.6 million bbl/d in 2008, down 1.1 million bbl/d, or 5.4 percent, from the 2007 average (U.S. Petroleum Products Consumption Growth). This marks the first time since 1980 that annual total petroleum consumption is expected to decline by more than 1 million bbl/d. In 2008, motor gasoline consumption is projected to decline by 280,000 bbl/d, or 3 percent, and distillate fuel consumption is projected to decline by 250,000 bbl/d, or 6 percent. In 2009, total petroleum product consumption is projected to sink by a further 250,000 bbl/d, or 1.3 percent. This decline is more than twice that projected in the previous Outlook.

Ouch! Petroleum consumption down 1.1 million barrels per day, the first decline of such magnitude since 1980! Gasoline demand down 280,000 barrels per day. I know Toyota has sold a lot of their Prius line, but this cannot be a function of the increased efficiency of the gasoline powered US transportation fleet. VMT is surely down significantly for the year of 2008, any associated economic activity along with it.

All this is a sort of confirmation that this era of economic growth just past is now in recession. I for one welcome the savings in my household budget. But, it also reflects real economic contraction that has accelerated since the start of 2008, judging from the rise in unemployment rates. The associated unemployment and lowered household earnings almost certainly makes the news of declining gasoline prices bitter sweet.

Magical Thinking and Economic Stimulus

One of the classical anthropological concepts in the field of cultural anthropology is that of magical thinking. To get of flavor of what this phrase means, let's take a look at the wikipedia definition,

In anthropology, psychology, and cognitive science, magical thinking is nonscientific causal reasoning that often includes such ideas as the ability of the mind to affect the physical world, correlation equaling causation, the law of contagion, the power of symbols, and the meaningfulness of synchronicity.

Magical thinking can occur when one simply does not understand possible causes, as illustrated by Sir Arthur C. Clarke's suggestion that "any sufficiently advanced technology is indistinguishable from magic" (see Clarke's three laws), but can also occur in response to situations that are largely random or chaotic, such as a coin toss, as well as in situations that one has little or no control over, especially those one is emotionally invested in. (Indeed, this can be seen as a special case of failure to understand possible causes: specifically, a failure to understand the laws of probability that guarantee the occurrence of coincidences and seeming patterns.)

Sir James George Frazer and Bronisław Malinowski said that magic is more like science than religion, and that societies with magical beliefs often had separate religious beliefs and practices. The difference between science and magical thinking emerges in 17th century philosophy. Both worldviews are mechanistic and based on causality, but the scientific worldview is distinguished by the scientific method and by skepticism, requiring the falsifiability of any scientific hypothesis.

Now, in the old days of Frazer and Malinowski, magical thinking, as an explanatory concept, was used to distinguish the pre-modern peoples of the world from the modern. It took the work of more contemporary anthropologists and comparative cognitive scientists like Ed Hutchins and Michael Cole and many others to show that people, particularly non-"modern" people, are more "scientific" or "rational" in their reasoning that had been previously thought and the work of Bruno Latour and his colleagues to show that "moderns" like scientists deploy more magical thinking in their work than had been previously thought.

I am interested in magical thinking today because it seems to run rampant in contemporary discussions of what to do about the sagging economy in the United States, and the world more generally.

The LA Times for today, Nov. 9, 2008, has a front page article titled, "Economists see revival of of an old fix," reported by Richard Simon and Jim Puzzanghera. In the article, they report on the changing beliefs among policy advisers and law makers regarding the sort of "economic stimulus" that might offer a solution to the current economic malaise. I suppose that everyone remembers the stimulus checks that were sent out in the late spring and early summer of this year. Those checks were intended to get the American consumer spending again. The purpose of which, according to Douglas Elmendorf, a former economist for the bankermen at the federal reserve, was to stave off what was believed at the time to be, "a very sharp, short drop in economic activity." Once the consumers received their cash, it was believed, they would spend it in whatever way they though best, with multiplier effects extending out into the broader economy, allowing economic growth to accelerate, or at least continue.

Seems, though that the economic stimulus Plan A didn't work. We have crack reporting in the Parade Magazine that accompanies the Sunday LA Times this morning that of the $78 billion in checks that were sent to American households, only $12 billion were spent! The rest was either saved or used to pay down household debt. No wonder, household sector debt remains at record levels (having gone from about 70% of GDP in 1998 to over 100% of GDP just ten years later!). Moreover, the money that was spent did not necessarily help the American economy exclusively. I have read that of that $12 billion that was spent, much of it paid for items made in China and other countries, meaning that many of the purported multiplier effects of the new consumer spending went to help workers and their employers overseas!

Why didn't stimulus Plan A work? My guess is that the policy essentially reflects magical thinking on the part of its designers. Rather than take a good hard look at how we got into the current economic crisis and how households in particular were coming to really struggle with unprecedented debt together with a nasty spike in commodity prices from corn to gasoline, the preference was to base the policy on an imaginary American consumer and an imaginary American, indeed global economy.

Anyone who rationally studied the credit bubble of the 2000's (and the slower paced credit expansion of the last 30 years) would realize that economists like Douglas Elmendorf, were simply fools on parade. The economy was clearly not in store for a "sharp, short drop in economic activity." The economy had already been in the early phases of a long, protracted credit crisis going back to early 2007! As we now know, the credit crisis has only worsened since that time. Indeed, many non-economists not employed by the bankermen had been working diligently in civil society communities on the blogosphere to do just that, rationally study the present economic disaster. To come to the conclusion that the economy was in for a short, sharp decline absent the economic stimulus, and with it likely to continue on a torrent of expansion was simply a case of magical thinking, not based in a careful study of our current economic situation at all.

So, do we have more policies inspired by the magical thinking orf our dear elites and their subordinate teams of crack advisers. Based on the reporting in the remainder of the LA Times article the answer clearly is, "YES." Elemendorf suggests that, "Now we're in a situation where it looks like were going to be in a prolonged downturn." So, since there is plenty of time to get going, the federal government can think of slower policy responses, specifically stimulus Plan B that would involve spending about $100 billion on improving the nation's infrastructure. The goal here is to create new jobs, rather than to stimulate the economy directly through instant consumer spending. The US Government could spend as little as $75 billion and create 1 million new jobs (again with the assumptions that there would be multiplier effects for each dollar spent by the federal government). Indeed, Mark Zandi, an economist for Moody's Economy.com estimates that each dollar of USG spending on construction stimulus will generate $1.59 of new economic activity.

This last bit should serve as warning enough that some magical thinking is driving the latest policy debate. If it were the case that government spending on infrastructure generated a 59% return we could safely rely on government construction spending as the mainstay of the entire US economy. Unfortunately, missing in such assertions is the critical question, "What the heck will those additional dollars, each and everyone borrowed from the taxpayers of the future, be spent on?" New roads? To where? The road infrastructure of the US is already highly developed. School improvements? Terrific idea for the kids, but this cannot generate additional economic growth in the near term! People do not use the schools to generate present economic activity, they are places for investment in future human capital (i.e, children who will become educated adults). It may be nice to have a school without leaking pipes or with nice new shelving, but this is not likely to make much of an impact in how well educated our children will be in the future. Once the money is spent, it is not likely to generate additional work. Green jobs? What the heck are those? And, if they cannot be sustained by additional revenue growth in those industries after receiving government support in the one time stimulus package, they will not remain long.

Indeed, it is this last point that has me worried about the magical thinkers of our policy makers and their bankermen. If the federal government spends $100 billion more this year on construction of the infrastructure, it is not likely to create more jobs at all! Rather the stimulus Plan B can only hope to keep some jobs in place that will otherwise be lost in this worsening downturn. California and other states are staring into the abyss as we speak. Layoffs of state employees are highly likely without some federal support to shore up their current fiscal year budgets. No doubt some of this stimulus will be targeted at faltering state budgets. So, in reality, the best anyone can hope for is that the additional $100 billion of federal spending will help keep some of the jobs (against the aggregate of jobs in the nation as a whole). It certainly cannot hope to add new jobs, nor can it hope to sustain growth into the future-- unless the additional spending becomes permanent--worsening the budget deficit all the more.

So, on balance, we probably could use less magical thinking, and more cold, hard realism. There is no way we can dig out of the bubble the bankermen created with additional government spending. The global economy needs to work off the credit excesses of the last three decades. The only way for that to happen is to bring spending in line with current economic realities (rather than in line with the fantasies of endless future prosperity and growth). Spending less of necessity means fewer jobs. Coming to grips with that reality and thinking of ways to financially help struggling families and individuals until the economy stabilizes once again (at a much lowered state) may be the least magical policy option going forward.

Household Expenditures in Historic Perspective

People who know me, know that I have been writing about economics from the perspectives of families and households for most of my career. The main agenda is trying to understand how people are able to forge a meaningful life out of the project of organizing and sustaining a daily routine of everyday activities. The organization of activities reflect the social, cultural, material, biophysiological, and temporal resources and barriers (both in terms of amounts and qualities) present in their local family or personal cultural-ecology. This is a theoretical project that reflects my work with Tom Weisner at UCLA since the late 1990's.

In recent years, I have been thinking about household or family expenditures and how these relate to perceived well-being among family members. Rashmita Mistry and I have co-authored a few papers on this theme, using data from the Milwaukee sample for the New Hope evaluation. This is a timely topic, as households, families, and individuals find themselves challenged in material terms by a rapidly worselning national economy.

One theme that often comes up in contemporary discussion of the national economy is in its comparison to the Great Depression of the 1930's. For example, Pam Mertens posted an excellent piece on counterpunch.org this weekend.

I often have a discussion with an economist friend about how much the USA today looks like the USA of that earlier era. Surely, there are parallels in terms of the creation of a massive credit bubble (much larger than that of the 1920's! -- or so I understand). But, there are subtantial differences in terms of other economic issues. It is useful to sort through the similarities and differences if we ever hope to understand just whatthe heck is going on!

Let's look at household expenditures as an example. The data in the chart below are taken from the US Bureau of Labor Statistics, which has tracked income and expenditures for much of the last 100 years in the United States. In putting together this chart, I was interested in mainly in those expenditures that are essential for the ongoing organization and sustenance of family routines. These include expenditures for food (blue), housing (red), apparel and services (yellow), transportation (green), and healthcare (purple).

One obvious consideration is that expenditures on these basic necessities required over 80% of the average family pre-tax income in the earliest decades of the 20th century up to and including the middle of the 1930's! By 2006, these expenditures had dropped below 60% of average families pre-tax income (technically average income of the BLS "consumer unit").

The earliest expenditure pattern reflects a harsh reality of wage labor in the first phase of industrial capitalism, wages were kept low enough to just ensure the survival of wage earners and their families as described by Zygmunt Bauman in his book, Work, Consumerism, and the New Poor. This was seen by indutrialist employers, Bauman argues, as a means of motivating the kind of routinized, soulless factory labor the most wage earners took on. The source of motivation came from in the comparison of the "dignity of honest work" over that of the wretchedness of the lives of the non-working poor that teemed in the underbelly of London or Paris, and later in cities like Chicago and New York. Bauman writes,

It was hoped [by the elite classes] that the more the life of the non-working poor were degraded and the deeper they descended into destitution, the more tempting or at least the less unendurable would appear to the lot of those working poor who had sold their labour in exchange for the most miserable of wages, and so the cause of the work ethic would be helped and its triumph brought nearer. (p. 12)

More interesting the BLS reports on who households likely relied on for its meager income in 1901,

• 95.9 percent of households had earnings from husbands
• 8.5 percent had earnings from wives
• 22.2 percent had earnings from children
• 23.3 percent had earnings from boarders or lodgers
• 14.4 percent of households had other sources of income

Similar data are not available for the middle 1930's. But, it is still instructive that so many households in 1901 relied on more than one source of income in order to earn enough to afford basic survival needs, of note is that 22% relied on earnings from children!

Things are certainly different today. Most households have come to rely on earnings from the men and women who head them, either as individuals or jointly. Certainly, any earnings from children are much rarer than 100 years ago. What's more, the contributions of wage earners today allow consumer units to afford considerably more beyond those essential needs that assured survival. And ... these additional expenditures would come to redefine notions of family life and family well-being in America ... but that's a topic for another day.

Rescuing Creditors?! ... Setting An Empty Table

I read two interesting commentaries today. There is a piece in the Financial Times by George Soros titled "How to Capitalize Banks and Save Finance." There was also a piece by Michael Hudson over on Counterpunch. The Soros piece argues that the US Treasury should ask banks how much money they need to reach their capital reserve requirement of about 8%. Then, trusting that the bankers have not gilded the lily, send them some cash post haste in exchange for special company shares of stock that would protect shareholder value by not really counting as normal shares. The idea behind this and similar schemes (a similar scheme is, in fact, in the works) is to get the financial institutions to a place where they can extend more credit to a troubled economy.

Michael Hudson essentially covers the same ground in terms of describing the assorted and sundry "rescue operations" currently in the works. But Hudson is not happy about any of these schemes. They are, in effect, schemes to allow those who have profited hansomely over the past few decades to either (1) reflate the debt pyramid and profit some more using a business-as-usual bag of financial tricks, or (2) allow these same high-fliers enough cover to sell the toxic crap in the bank vaults to a greater fool and send the profits into various private accounts and leaving the remaining smoking heap to whatever fool takes it off of their hands (in this case, the United States Treasury -- and its tax payer).

But, Hudson adds more than just about anyone in the financial press has been discussing in the past several weeks. Hudson summarizes his reading of the schemes,

Making banks and insurers in the zero-sum derivative game whole, so that winners can collect their bets while losers can sell their bad investments to the Treasury, is supposed to re-inflate the credit pyramid. The idea is to solve the debt problem with yet more debt to prop up housing prices once again to unaffordable levels! This is not a long-term solution, but it would give insiders enough time to arrange a do-over and get out of the game more quickly, to sell out their junk mortgages and junk bonds to the proverbial “greater fool” – in this case, the “greater fool of last resort,” the U.S. Treasury.

But, and this is the part no one else talks about very often outside of the financial blogs,

The banks are to “earn” their way out of their negative equity position by selling more of their product – credit – to increase the economy’s debt levels and hence receive more interest payments. The problem is that most families are already “loaned up.” They have no more discretionary income to pledge to carry more debt. Without writing down their debts, there will be no fresh lending, and hence no source of credit and purchasing power for new autos, appliances, goods and services in general.

So, the idea is that we need to "make the banks whole" so they can start reflating the global debt bubble by offering minty fresh new credit to consumers around the world. Soros even suggests that once the treasury has recapitalized the solvent financial institutions to the 8% statutory capital requirement, that regulators allow them to lower minimum capital requirements so that they may once again loan out all of their capital and then some. The main goal, it seems is to get the credit out there and get it out there soon!

Ah ... but Hudson has thrown a wet blanket on the whole scheme. Debtors can not swallow more credit. Bankers can pretend that if they hand out credit to over leveraged borrowers, that the debtors will take on new debt, but wishing cannot make it so. So, the inevitable situation is that some creditors will be willing and able to extend the credit ... but the amount of new debt that borrowers take will not out pace the rate of credit destruction that occurs naturally when borrowers pay down their debts. New credit must constantly be introduced into the system to (1) replace the credit that is removed when borrowers make their payments and (2) cover the amount of interest owed on past credit extended. But, when borrowers cannot or will not take additional risks in betting on their future prosperity, new credit cannot bet turned into new debt at levels that will sustain the system at its peak, much less keep it growing. Doug Noland estimates that 2 trillion dollars of new credit must be created this year alone to keep the party from cratering. He's not optimistic (but hopeful). So, debt deflation is the inevitable outcome.

Ah ... so there's the 800 pound gorilla on the bankers table. They scream for any sort of state support to prop up their business, refusing to take any more losses after a decade on mindless financial shenanigans. They hope the consumer can swallow more of their junk to keep the current business model in place at least long enough to keep their net worth positive while off loading their bad bets onto the state. But, the real economy cannot possibly cooperate with the fantasy economy known as global finance. I suppose reality does bite after all.

Reading about Finance in the LA Times 1 (part 1 of an ongoing series)

This is the first post of an ongoing series to see how finance is discursively* created in the mass media. Mostly, in the Los Angeles Times, since it is the Southern California paper that I read daily.

There is an interesting piece in the Oct 19, 2008 issue of the LA Times, Business section, entitled, "Sure, it's scary, but resist the impulse to flee, advisors say" by Josh Friedman and Peter Hono. The basic story here is that financial advisors are getting calls from their clients who are worried about losing their investments in the equities market and who would like to move their money to 'safer' investments (i.e., those investments that don't risk losing value over time). Here's a typical story in the piece,

Investor Mark Adelson sensed trouble in the stock market last month and decided to bail. The 59-year-old San Bernardino resident moved about $100,000 out of several stock funds into a corporate bond fund.

A couple of weeks later, Adelson, an engineer, decided the bonds weren't safe either, and he now has that portion of his nest egg in a money market fund.

Adelson is aware that most financial advisors advocate staying put during market downturns. But he really felt he had to do something to safeguard his retirement funds.

"I understand you can't really time the market, but I just feel uncomfortable leaving my money somewhere when I see the bottom dropping out," he said.

Adelson is looking to 'safeguard' his investments, essentially trying to find a class of investment where "the bottom" won't "drop out." Seems like a rational attempt to mitigate his losses to me.

The financial planners interviewed for the piece recognize that these are critical times for the investment minded. There is a belief that the risk for some sort of financial collapse is quite high at the moment. Bob Smoke is interviewed about the US Gov't plan(s) to "bail-out" the banking industry. He is quoted as saying,

"If this isn't done correctly, our whole system could come apart," Smoke said. "If banks can't lend money, we're going to have so much panic in the streets. We already have so many people out of work."

Smoke is implying that should the Federal Government's efforts fail, "panic" will take over "in the streets," implying that people will make irrational choices en masse perhaps moving their investments out of riskier classes all at once!

The story claims that it is a "natural impulse" to want to "do something" during times of great financial upheaval. So, the advice given here is to,

"guide clients into new, more conservative places to park just a portion of their assets, while leaving the rest in place. That way, people can feel as if they're doing something while avoiding selling their entire portfolio at the bottom of the market."

Note the emphasis here on the ability to "feel as if they're doing something" while not really doing anything of substance. The argument being that, in the long run, equities will always return the best rate of return on your investments. The other argument being, not to sell at the market bottom.... The irony being you are also warned about selling at the market top!

The logic here is to keep your invested money in place, to trust that the "system" will provide in the long term. For the anxious many, the advice is to do little things that make you feel less anxious. Brent Kessell (another financial planner) offers this advice to assuage investor anxiety,

Rather than shift investments during downturns, Kessel believes, people are better off cutting their spending 5% to 15%. Doing so, he said, "has a huge effect on financial security. If you decrease your spending, you need a lot less to retire."

Kessell is arguing that investment portfolios should be left to the market managers, while consumers manage anxiety by cutting consumption. Naturally, this would also have a HUGE impact on consumer spending (which amounts to about 70% of US GDP each year). While this is a gross simplification, this line of reasoning suggests that it is much better for the national economy to suffer a 3% to 10% decline in GDP rather than encourage investor's moving out of equities.

The piece closes on a bullish note, citing comments made by Mark Wilson, a planner for an ironically titled firm called the Tarbox Group.

Mark Wilson, vice president of planning firm Tarbox Group in Newport Beach, said he had seen some signs that stocks are undervalued -- which means that they could come back. Investors who buy undervalued stock in healthy companies now might profit when the market turns around, he said.

Note the overall trajectory of the news story.

1. It starts with the idea that investors are nervous about keeping their money in risky asset classes like stocks. Some of these investors would like to move their money into lower risk categories like bonds or money market funds.
2. The story moves on to financial planners, who are presented as expert managers of personal investments, their advice is to make little symbolic changes, while keeping the lions share of investments unchanged (notably those investments in stocks).
3. The story finishes with a wholly bullish endorsement of equities by a financial planner, people who buy stock now "in healthy companies" might profit "when the market turns around."
   

In general, this story seems to fit a pattern that is very familiar in American culture.

• That people should invest their money and take a risk in losing it.
  
• That investments should generate a positive rate of return, year after year without fail.
• That when people see their investments losing money, they "naturally" fear losing their investments and "impulsively" act to protect their money from further loss. But they are then advised to "stay the course" that, in the long run, they will see a "profit."
• That investments should be entrusted to "the market" (meaning stock market) and its managers, who behave rationally and so do not act on "natural impulses" and "fear."
  

What is not overt in this story is how the market managers are positioned to profit from this advice, in the long run. Moreover, it is not clear whether or not anyone has any idea as to why there is a financial crisis at this time, with the notable exception Bob Smoke's comment,

"If this isn't done correctly, our whole system could come apart," Smoke said. "If banks can't lend money, we're going to have so much panic in the streets. We already have so many people out of work."

Smoke is worried that banks need to be able to "lend money" and if they cannot, "our whole system could come apart." Smoke is alone among his peers in this piece however, the other financial planners are of one mind: don't move your money around too much ... that locomotive that appears to be headed straight for you is likely only a figment of your anxious mind ... Indeed, now might be a good time to put more of your money right down in the middle of the train tracks, because you might profit when that train (the market) "turns around."

But, Smoke's comment is quite revealing, in the sense that it acts as a symbolic rupture in the otherwise dominant narrative of "stay the course," profit is inevitable, as markets always recover to the up side.

Smoke's comment suggests the precise reason for the bull market of the last 30 years, banks have been extending credit in greater and greater amounts. This is something called a "hyper-expansion of credit." Check out the following graph of credit market debt as a % of GDP from the St. Louis Fed.


1952 is a good year, because it is a relative low point after the credit hyper-expansion that preceded the deflation of that credit bubble in the 1930's (aka The Great Depression-- where credit debt reached about 270% of GDP). Note that where credit debt had remained relatively flat during the two decades between 1960 and 1978, the amount increased sharply after that.

What happened in the stock market during this period? Check out the following from stockcharts.com


After the bull market of the early 1960's (and associated credit expansion), the overall S&P index flatlined for the better part of a decade, then just as credit expanded at the close of the 1970's, the S&P took off! That is until the dot com bubble burst in early 2001, this was followed by the real-estate boom that ended in 2006.

So, we are left with a question for our financial planners. Should we be planning for a boom in equities? A boom in any asset class for that matter? Bob Smoke seems to be on to something, the banks must continue the expansion of credit to keep the markets growing. Can banks do so? The total credit debt outstanding is now 350% of GDP. It has never been this high before!

Seems to me that the newspaper needs to review its assumptions. Running for the hills seems pretty rational given the current state of indebtedness. My bet is that banks cannot create more credit and individuals, businesses, and government cannot take on more credit debt (I owe Mike Shedlock & the mysteriously named ilargi and Stoneleigh a debt of gratitude for much of my understanding of these financial matters).

Bob Smoke's comments create an eruption in an otherwise business as usual piece of reporting that should command our notice, "our whole system could come apart."

In closing this post, I am reminded of a children's rhyme that seems more meaningful now than ever.

Humpty Dumpty sat on the wall.
Humpty Dumpty had a great fall.
All the kings horses and all the kings men,
Couldn't put Humpty Dumpty back together again!

PS: Don't read this post as investment advice. You are on your own in that endeavor!

PSS: Thought folks might like to see the pattern of nominal GDP growth for the period 1952-2006 to help make sense of the 1st graph above.



* Note: By discourse, I am thinking of how understandings of daily life are produced in the everyday use of language and symbols. Discourse is not merely in the symbols or language themselves, but emerges through the interaction between their authors and their readers. So, naturally, these investigations will inevitably involve my reading of the symbolic content, other may certainly come away with a very different interpretation of meaning.

Science need not always be contrasted with philosophy!

According to Michael Pollan, Sir Albert Howard railed in his book, An Agricultural Testament (1940), against what he viewed as the N-P-K mentality of farming the emerged in the 19^th century, as the result of Justus von Liebig soil chemistry work that demystified the ‘mystery’ of soil fertility by reducing it to the presence of three chemicals (nitrogen, phosphorus, potassium). It was Liebig work that set farming on the course of industrial production.

“The NPK mentality, according to Howard, serves as a shorthand for the powers and limitations of reductionist science. … If you give plants these three elements, they will grow. From this success it was a short step to drawing the conclusion that the entire mystery of soil fertility had been solved. It fostered the wholesale reimagining of soil (and with it agriculture) from a living system to a kind of machine: apply inputs of NPK at this end and you will get yields of wheat or corn on the other end. Since treating the soil as a machine seemed to work well enough, at least in the short term, there no longer seemed any need to worry about such quaint things as earthworms and humus … To reduce such vast biological complexity to NPK represented the scientific method at its worst. Complex qualities are reduced to simple quantities; biology gives way to chemistry…. The problem is that once science has reduced a complex phenomenon to a couple of variables, however important they may be, the natural tendency is to overlook everything else….When we mistake what we know for all that there is to know, a healthy appreciation of one’s ignorance in the face of mystery like soil fertility gives way to the hubris that we can treat nature like a machine. Once that leap has been made, one input follows another, so when the synthetic nitrogen fed to plants makes them more attractive to insects and vulnerable to disease, as we have discovered, the farmer turns to chemical pesticides to fix his broken machine.” (Pollan 2006, p. 146-148).

What is interesting here is that reductionist science is faulted for creating the machine metaphor as a model for modern farming. While this may be true, it also suggests the question of who or what reductionist science serves? The answer is plain in Pollan’s description of organic farming from the model of Howard (built on a biology reminiscent of Goethe) to the massive industrial model that makes up the lions share of “organic” farming today. The point is that reductionist science of this sort does not serve human understanding and enlightenment, rather it serves the rationality of industrial production and modern capitalism. Reducing living complexity to three variables allows for the rational control of these “inputs” the process and farming, as a means of controlling production costs given the demands of serving a market -- outputs. These outputs, incidentally, must also be controlled if the logic of industrial, mechanized, production is to be sustained over time. It is the role of the reductionist scientist to identify those inputs that relate to the desired outputs most efficiently, such that they maximize profits of the going enterprise.

Howard proposed another model, to model the farm after those natural processes observed in the forest or prairie. He wrote,

“Mother earth never attempts to farm without live stock; she always raises mixed crops; great pains are taken to preserve the soil and to prevent erosion; the mixed vegetable and animal wastes are converted to humus; there is no waste; the processes of growth and the processes of decay balance one another; the greatest care is taken to store the rainfall; both plants and animals are left to protect themselves against disease.” (quotes in Pollan, p. 149).

Obviously, Howard is describing an ecological model of farming, recognizing the complex interdependencies that sustain natural ecosystems. “Everything is connected” as the story goes. Pollan goes on to describe the contrast between modeling farming on nature, on the none hand, and building it from reductionist science and the factory metaphor on the other. Indeed, Pollan states that Howard’s model seems patently antiscientific, stating that we don’t need to know all of the intricacies of humus in order to nurture it as a living part of the healthy, organic farm. So, long as it works, why bother? Such a view can make the organic position advocated by Howard seem more like philosophy rather than science, where one comes to understand those elements of nature through intuition, rather than segmentation into parts and the manipulation of the basic parts one-by-one.

But, I want to suggest that “scientific” is not necessarily the same and “reductionist science” that Pollan so nicely describes in his account of Howard’s work. Surely, if science is the rational pursuit of knowledge of the natural world, and reductionist science leads us to throw away all those variables that don’t seem to matter the most, than reductionist science is irrational in its practice. It is irrational in the sense that there is a value placed on most versus least in terms of each components explanatory power. Lost in this formulation is the value added of whole systems of components interacting such that, while individual components may not matter most in a variable by variable analysis, should they be removed from the system, the whole system will no longer function well, in the case of farming, the farm will be come prone to infestations of pests, vulnerable to disease, even the buildup of toxins in the organisms that are the focus of the farmers activities. In other words, the system will be less healthy.

As I read Pollan, I was reminded of Goethe’s phenomenological science of nature. So much so, that I ordered a collection of his works online. The reason I went for Goethe is that he proposed a very different model of science that was notable for its holism and its insistence on the formation of intimate and participatory scientific knowledge of the subject. The point is that science need not be only contrasted with philosophy (or poetry for that matter); there are other models for the systematic and empirical pursuit of knowing the natural world (including our own complex relation with it). It is this other approach that offers a sort of third path to human understanding, one that serves to blend the contrasts that are always made in the science vs. philosophy framing of knowledge production.

House Prices & Household Income

Seems like folks out there are all aflutter over declining house prices (rapidly becoming a serious problem in the industrial world). A huge bubble was blown as reflected in the parabolic increase in mortgage debt over the last decade (peaking in 2007).

One question that came up yesterday while I was lurking in some of my favorite blog haunts (the automatic earth) is how much house prices will decline before "hitting bottom" -- like a drunk in need of AA I suppose. One number that appears in the media from time to time is 30%, others predict a 50% decline in median house prices from their peak in 2006-2007. Others are obviously more pessimistic. According to the LA Times this morning ("Southern California home sales jump..."), the decline in median home price for the region is well above 30% from its peak.

It seems that the attempt to predict the severity of the fall in home prices nationally stems from the historical analysis of home prices relative to household income. Makes sense -- as nominal or real incomes have increased, they should roughly keep pace with the prices of homes (unless people, on average, like to pay a greater percent of their income on mortgages and property tax). Or so the logic goes.

One frustrating thing for me was that I didn't have any numbers myself to see the historical trends and how much the recent run up in prices breaks recent historical trends. So, I dug up some data and made some graphs for a visual analysis. I found some nominal and real house price data at housingbubble.jparsons.net. Then got some historical household income data over at the good ol' US Dept. of the Census. I put these data together into the following graphs.


So what do we see in this first image? Two points:

1. Both median house prices (light blue) and median income (dark green) increased throughout the period in nominal terms (i.e., not adjusted for price inflation). Moreover, starting in the late 1990's, the median house price went positively parabolic, peaking in 2006. Median household income did not make a similar move.
2. When house prices and median household incomes are adjusted for price inflation (dark blue and light green lines), the median house price becomes flatter over time, with more obvious boom-bust cycles. There is also less real growth in median household incomes over this 32 year period with a modest decline and recover in real terms during the 2001-2006 period -- the period that house prices clearly go "off the reservation".

So, the pattern in the first graph left me wondering... Was the ratio of median house prices and median incomes more or less constant during the 25 years between 1975 and 2000? Also, how much did the ratio change during the historical anomaly between 2001-2007? Here's another graph showing the ration between (nominal) median house price and median income.


Well, two things are pretty clear in this picture:

1. The ratio between house price and median income pretty much stayed around 3:1 during the first 25 years of this period. The ratio went up a bit above 3:1 during real-estate booms, and fell a bit below 3:1 during the bust.
2. The ratio climbed to just over 5:1 in 2005-2006, a 66% increase!
   

So, how do these data help us decide what will happen to house prices nationally? Well, if median household incomes hold up (in 2006 dollars), prices would need to come down about 50% to return to the 3:1 ratio that had been the historical norm for the 25 years or more that preceded the current housing price bubble. Of course, since we are at the start of a very nasty recession (the result of the unwinding of all the credit generated by this housing bubble and other associated bubbles generated during the same period), the likelihood of the median income holding at 1996 levels aren't so good. So, there may be a race to the bottom that way overshoots the 50% decline. And that ain't even considerin' the massive oversupply of housing that was built up during this same 10 year period (1997-2007).

I guess we should all hold on to our seats, it's going to be a humdinger of a ride these next few years!

Fromm and Chuuk -- social life outside of modernity

One of my projects right now is to come to terms with the historical development of the modern era and how it comes to be articulated in our own lives today. I have found Erich Fromm to be really helpful in this regard. Partly because, like me, he shares a concern with the psychological dimension of living in the modern era.

In one of his earliest books, Escape from Freedom, he characterizes an ideal social type in the medieval era. Essentially, it is a model of the organic community. People had a place in the larger social organization, their lives were in large measure defined by this place. Individual expression was largely confined to personal touches on your craft, occupation, or trade. It was an era where ethics and economic concerns were co-present, as a result...economic behavior (i.e., activity oriented toward material production and accumulation) was often of second concern to one's moral position in the community. That position depended on the execution of the duties associated with one's station in life.

What was striking about this characterization is that it reminded me very much of the way that people talk about their lives in Chuuk, the islands of Micronesia where I have conducted fieldwork. They see the community in much the same way, as characterized by different social positions in a social organization. People are very concerned with their position within this organization as it is reflected in the perception of their performance of their social positions (which is tightly connected to their displays of behavior toward others). As I am going through my fieldnotes and tapes, there is a palpable sense of anxiety about how one's activities reflect their ability to enact the social position they occupy.

This is interesting because, in the roles of the modern bureaucracy some individuals occupy, there is less concern about how their activities reflect their performance. This will be something I will work on as I go forward with the project.

Oil Price Conumdrum: Estimates vs. WAGs

I remember sitting in a diner in Manhattan in the winter of 2003, before the Iraq invasion, reading both about the impending war and about the rise in oil prices (then around $30 a barrel, up from a low of about $12 in 1999). As for the rhetoric surrounding the war, I was thinking that people could not be so gullible to simply believe the government’s wild assertions about Iraqi WMD, when every independent source (UNSCOM … or whatever the letters used at the time) failed to verify even a single claim coming from Washington hawks. As for the price of oil, well, I really didn’t know that much about it; but, like many I probably believed at the time that the “boyz in big bidness” had something to do with it.

Later that spring, while reading online sources about oil prices, I discovered a perspective that has come to be known as ‘peak oil.’ The basic idea here being that aggregate oil production in the world, after exponentially building in the first phase, would reach a peak at about the time we have consumed roughly half of the recoverable oil in the ground. Thereafter, production would decline, slowly at first and then gaining speed for a time, with an asymptotic leveling in the final stages. This process, it turns out, is a basic fact of the production of all non-renewable natural resources, not just oil. We know it is a basic fact, because we have observed the pattern over and over again in producing non-renewable natural resources around the world through time. Never has a non-renewable resource mine, once depleted, magically replenished itself.

But, as I often tell my students, basic facts are just the beginning. All facts are shrouded in uncertainties, mainly because our ability to access enough empirical information about things to gain certainty is extremely limited, and the parts we cannot see, we make up. Sometimes we make up knowledge using careful reasoning and analysis based on adequate theories that explain the data, and call those made up bits of knowing “estimates.” Sometimes, we make things up without careful reasoning or adequate theory, we should call those assertions of fact WAGs (for “wild-ass guesses”). Our habit as academics and experts is to say, “estimate,” when, by definition, we are really just giving WAGs. The point, dear reader, is that both estimates and WAG’s are often wrong, we just hope that the well-reasoned estimates are less likely to be wrong, and we stake our reputations on it.

Obviously, when Colin Powell stood before the UN in early 2003 asserting that he was giving the best “estimates” of the Iraqi capability to manufacture an deploy various nasty weapons, he was actually presenting WAGs, cooked up in the bowels of the national intelligence agencies -- well perhaps in the bowels of Dick Cheney’s basement, but that’s another story.

The same controversy has been going on in our understanding and knowledge of the reasons for rising oil prices over the last decade. The main source of the problem is that we simply do not know, and cannot know, how much recoverable oil sits underground. Like most things beyond our control, we can only estimate, using the available empirical data and the best reasoning possible given our theories that help explain the data. Or, we can offer WAG’s based on an irrational attachment to things our leaders and media pundits might tell us … yes, the very same leaders and pundits that created the human tragedy in Iraq.

So, today we are confronted with a global energy crisis. The challenge is to come to an understanding of what we can do about it, collectively and individually. The problem goes back to what we “know” about the crisis and whether what we know is built upon well-reasoned estimates or WAGs about the current global situation.

One view is that, using the available evidence for past-oil production to date, rates of the discovery of new oil fields, and the dominant theories regarding the geological formation of oil fields and oil field patterns of depletion, we are at the mid-way point of global recoverable oil RIGHT NOW! Of course, this view is only based on a well-reasoned estimate, and could be wrong by several years in either direction.

There are several competing views, all of them less estimates than WAGs. The US Geological Service (an agency of the federal government) produced the most estimate-like in a year 2000 report. That group relied on empirical evidence of past-production and rates of past oil discovery, but added an imaginary element for rates of future oil discovery, in effect adding imagined oil to their estimates to come up with tremendous growth rates into the future. This element of adding imaginary new oil to the estimates, using an arbitrary mathematical algorithm and ridiculous threshold of certainty (50%) as a justification, is what makes it more of a WAG than a true estimate. However, since this report allowed decision makers to remain optimistic about the near term availability of oil in a growing global economy, it was happily accepted by many as the gold standard for policy making.

There are many other views, all of them WAGs, built up without adequate empirical support, adequate theory, and/or adequate reasoning. Some imagine that there is a sea of oil deep in the earth’s crust, if we drill deep enough, oil will prove to be practically infinite. Note, the use of imagined oil here, once again. Others rely on their suspicions of large corporate and financial interests that use their wealth and institutional power to manipulate prices for unfair profit (meaning prices and profits that are unreasonable given the “normal” balance of supply and demand). The solution to this problem, of course, is to regulate the industrial and financial interests involved more effectively. Once again, verifiable evidence of such institutional malfeasance is never adequate. An argument based on imagination is, by definition, a WAG. Not necessarily wrong, just more likely to be so.

So, what are we to do? Given the perspectives outlined above, two very different courses of action are implied. If we take the optimists arguments, those I believe fall into the WAG category, we can (a) pressure businessmen to get off their butts and find the hidden oil! Or (b) pressure the government to enact meaningful regulations on greedy business interests. Other than that, we grin and bear higher prices until these others sort out the mess. These courses of action have some chance of working, but, since they are built upon WAGs, the likelihood of them working is low.

On the other hand, if we take the other view, one that I believe argues a case that is closest to the definition of a reasoned estimate of the current oil situation, than we need to consider much more than the lobbying efforts and patience described above. We need an immediate global discussion of how to manage ourselves and our economies as world oil production declines over the course of this century. The first place to look for solutions is in the transportation sector. Why? Because about 70% of oil consumption comes from transportation alone. Of course, that would just be the beginning of a much broader discussion of the problem and potential solutions and active renegotiation of our economies and politics.

Many Americans and many world leaders allowed the WAG to hold sway in the run up to the Iraq war. Millions are suffering and will continue suffer as a result of our collective failure to understand the limits of human knowledge and the difference between well-reasoned estimates and the WAG to fill gaps in our knowledge. To do the same in the case of rising oil prices, would likely result in needless suffering for hundreds of millions in not billions of people in the near to medium term.

Two Universities

As I am preparing material for the Faculty Teaching Forum, I am struck by the strong pattern in the reading materials between two visions for undergraduate education. The first involves the idea that teaching undergraduates involves the dissemination of expert knowledge. The student's job is to acquire important knowledge claims from their expert instructors and the supporting texts. This is what Larry Spence is describing as the Talk-Test model of teaching. In any case, students are passive recipients of knowledge, rather than active constructors of knowledge. It seems that most college text books are designed with this model in mind. That most knowledge has been settled on by the experts and the students role is to acquire it. Certainly, when I think of Edward Wilson’s model of the university characterized in Consilience, this is what one comes away with. One might call this model the medieval university of divinely inspired expert authority.

This model corresponds to a level of cognitive development characterized by Perry as dualism. And certainly, it sets up a dualistic structure in the university. One of a small elite of knowledge providers and a large mass of knowledge recipients. The artifacts and practices of power within the university seem to support this view.

The second model of the university that comes to mind from the reading, is a model that sets the promotion of the cognitive and values development of young adults. Rather than placing invariant, received truths at the center of its model, this view places the process of inquiry and mature, contextually sound, values-based knowledge construction at the center. The sort of classroom experiences emphasized in this model put uncertainty and the process of inquiry at the forefront. The idea is that knowledge is not fixed, invariant, final, but, always in the process of becoming, both in terms of human endeavor, but also in terms of individual development. The goal is to move students from their early stages of dualist thinking (where they passively receive absolute knowledge) to a view that emphasizes their ability to construct knowledge on their own, moreover to be able to take a principled, meaningful position in the face of uncertainty and ambiguity =, even though other knowledge claims exist along side their own. This is essentially the enlightenment model of the university. [I should note that the ancient debate between Becoming and Being is inherent here = both for Plato and Siddhartha].

In my view, this second model is the one that promises a path to human liberation. It proposes the project of aiding individuals in finding the path for a more meaningfully engaged life. – a life free from the bondage of dependency on authority for direction and purpose. One where they are critically engaged in life, rather than being so easily enslaved by those in power or who have power over them.

It is also the model most consistent with the demands of modern living. Where people must take in a dizzying amount of information and varied opinion. They must have some means of sorting through these to find the solution or knowledge position that suits them the best. They must be wary of becoming another lemming in mass society -- to avoid being another passive lamb lead to the slaughter.

Credit Crunching Meets Neighborhood Envy

I was doing the rounds today on some of the financial blogs and portals (Mish, The Automatic Earth, Prudent Bear). Also, happened to read a bit about the Fed's actions yesterday in the LA Times this AM. There's a lot of talk about the machinations of the big bankers and their friends in the government. Seems these folks in the world of Big Finance are pretty desperate to find some way of getting the good people in American households to restart their consumption bonanza of the last decade.

Note to assistants to Big Finance who troll blogs for their bosses: It isn't going to happen. Not only because households are financially pinched now more then ever before. But, also because of the downside of envy and status seeking, the former is on the rise while the latter is on the wane.

Most people know about status seeking in American households as "keeping up with the Joneses." You know, if your neighbor gets a new car or new paint job on his house, it just makes you and the other neighbors want to keep up with his apparent display of prosperity. This has been the norm in the United States since the end of World War 2.

As price adjusted wages for individuals have stagnated over the past few decades, families and individuals have had to make any number of adjustments just to be able to maintain appearances in the neighborhood. This has meant household adults working more hours (largely through the steady increase of women's financial contribution to households) and taking on greater amounts of indebtedness. The costs to family functioning and family financial well-being seemed worth it, so long as everyone was able to add to their visible displays of stuff & the appearance of leisure.

Now, this sort of status seeking involves a particular sort of psychological orientation. People need to fear falling to the bottom and seek to feel in some sense superior to others. To feel successful relative to the other people around them carries its own sort of emotional reward.

But, in American neighborhoods, it seems that this is the case so long as others have the potential to stay in the game themselves. People don't mind the status game, so long as others in the immediate community are perceived as also fully able to participate. If people in the neighborhood fall behind, people assume that is either because they "don't belong" (e.g., are income restricted) or because they lack certain personal qualities that would otherwise allow them to display greater financial success (e.g., too lazy to care for the lawn).

The keeping-up-with-the-Joneses game works on a cultural and psychological level so long as the assumption that economic opportunity for all in the neighborhood remains. But, when hard times strike, this all changes. When friends and neighbors encounter their fellow Joneses and discover them to have lost their jobs or taken a massive pay cut, status seeking can quickly turn to avoidance of envy.

Envy is a particularly corrosive human emotion (it has been observed in other primates too!). It is built on the idea that the apparent success or well-being of others relative to one's own is ill deserved, a reflection of an unfairness of some sort at work in the community. Envy can drive a powerful desire to see successful others fall from grace. It can spur malicious gossip and various form of witchcraft accusations.

Envy turns the psychological and cultural rewards of overt status seeking negative. Apparent success can bring on feelings of envy from others and this in turn can lead to malicious behavior from others in the community directed toward one's self and one's family. To avoid envy, one begins to gain greater concern for maintaining appearances of austerity, rather than prosperity. People spend less (at least less obviously) and are less likely to share stories of their good fortune (O.K. brag) with their neighbors.

This can promote a sort of positive feedback loop, perceived hardship in the neighborhood, leads to maintaining appearances of austerity (to avoid engendering envy in others). This can further reinforce the appearance of austerity leading to even greater attempts to avoiding appearing materially successful. An so forth.

So, while many Americans can neither work more hours to earn more or take on more debt , keeping them out of the status competition, other, more prosperous Americans who could take on more debt, are less likely to. Why? Mainly to avoid attracting any sort of neighborhood maladies spurned by feelings of envy their neighbors might feel should they discover the ongoing success of some of their number in the face of so much economic stress for themselves.