Two Links and a Plug: 10/16

Sometimes you read a piece by a writer you really admire (and I do greatly admire Williamson's work) and are disheartened to discover you find his latest argument ridiculous. I don't know if we should tax Wall Street investment earnings as income, but to contend that this is going to lead to them all getting 70% raises is absurd. If the money was there for them to be paid 70% more, would they be leaving it on the table now out of goodwill? Are their clients not sensitive to any price increases that would support a 70% raise? To imply that raising taxes on finance guys will just cause those evil magicians to conjure up more income ascribes to them a level of power that would make leftist critiques of capitalism a lot more valid. Hell, if I thought these guys could collectively jack up their salaries like that, I'd be sitting in a drum circle with the hippies downtown right now.

Is your city Greece? Pennsylvania's capital city (Harrisburg, for those of you who have forgotten 4th grade geography) is going bankrupt, and it looks like many other cities in the Northeast, California and elsewhere could be right behind. So ask yourself: if you think debates in Congress are ugly, what is it going to look like when your town council announces they can't pay the police force? (Bonus link: Michael Lewis captured the despair of bankrupt cities magnificently in this piece for Vanity Fair.)

PLUG: Many of you probably saw Arcade Fire's customizable video for "The Wilderness Downtown". Now that same technology has been used by State Farm to blow up your house. Check it out here.

Won't You Be My President?

My wife has had to put up with my enthusiasm for Chris Christie for a while now: she strongly suspects that he was the reason we bought a house here in New Jersey. I think he is the rare politician who makes his position crystal clear in almost all circumstances, and I think he understands the severity of the financial problems that plague our nation and is prepared to do something about them, even if it is difficult.

I was a bit disappointed when he dismissed the idea of running for President earlier this year, but I respected that he thought he wasn't ready for the job. And at that time, I thought Mitch Daniels would be the best possible Republican candidate. And hey, I'm selfish: I wanted to keep him as my governor, if only to protect me from additional property tax hikes.

Now, of course, there are rumors swirling that Christie is reconsidering his earlier decision. (And it would be a reversal of some very clear statements that he was not running.) On the one hand, this would cut against one of the most appealing aspects of his personality: that you can really believe what he says. On the other hand, I am reminded of a scene in the movie Gladiator:

Emperor Marcus Aurelius (to General Maximus): I want you to become the protector of Rome after I die. I will empower you to one end alone: to give power back to the people of Rome...and end the corruption that has crippled it. Will you accept this great honor that I have offered you?
Maximus: With all my heart, no.
Emperor: Maximus...that is why it must be you.

Now, Chris Christie isn't an action hero. (He doesn't have the physique for it...) But I believe this moment calls for a man who has a sense of duty, a man who doesn't necessarily want the Presidency for reasons of vanity or to wield power, but because he sees a job that must be done and is willing to do it.

I think the financial foundation of this country is crumbling, and I am willing to do what I can to support someone who understands that and will give it his all to fix the problem, especially if that person has a track record of making progress on these types of issues. I'm also looking for a person who can articulate the problem and its solution in a way that might inspire people to support the difficult choices that must be made. Which is why I am so heartened by a speech Christie gave tonight at the Reagan Library, and especially by this quote:

I believe in what this country and its citizens can accomplish if they understand what is being asked of them and how we all will benefit if they meet the challenge.

There is no doubt in my mind that we, as a country and as a people, are up for the challenge. Our democracy is strong; our economy is the world’s largest. Innovation and risk-taking is in our collective DNA. There is no better place for investment. Above all, we have a demonstrated record as a people and a nation of rising up to meet challenges.

Today, the biggest challenge we must meet is the one we present to ourselves. To not become a nation that places entitlement ahead of accomplishment. To not become a country that places comfortable lies ahead of difficult truths. To not become a people that thinks so little of ourselves that we demand no sacrifice from each other. We are a better people than that; and we must demand a better nation than that.

I don't know if a politician like Chris Christie can become our President. But I hope he takes the daunting step of running, so we can find out. Because the candidates we have now, including our current President, are far more likely to perpetuate our problems than to solve them.

Greed, Sex and Public Morality

Republicans, according to stereotype, are overly concerned with what other people do with their bodies, while Democrats are overly concerned with what other people do with their money. So it was interesting, and unexpected, to read an article encouraging a renewed aversion to greed in the latest issue of First Things magazine, which decidedly falls on the conservative side of the spectrum. It forced me to reconsider some basic assumptions I have made about wealth, capitalism, and morality.

The author of the piece, Edward Skidelsky, argues that our elites have lost the traditional, still-popular view that there is something wrong with being greedy, that it is an essentially disordered, wicked activity. This notion, which your average modern economist might dismiss as juvenile, has a rich heritage. As Skidelsky puts it:

Explanation of this point requires a brief excursus into Aquinas’ theory of acts and ends. An act, for Aquinas, has two ends: one “proximate,” which is what makes it the kind of act it is, the other “ultimate,” which is what the agent aims at in acting. If either end is bad, the act as a whole is bad. A good ultimate end cannot redeem a bad proximate end; thieving to help the poor is still thieving.

He goes on to say that most thinkers in western history, up until the Enlightenment, took it as a given that trying to accumulate more money or things than you needed is wrong, no matter if it leads to good things happening. But one of the views of the Enlightenment was the economic view of man, the belief that our wealth-building activities enhance human progress as a whole. Skidelsky notes:

This transformation of attitudes to wealth creation cleared the ground for the new science of political economy. Having been demoralized, so to speak, economic acts became open to analysis and assessment in terms of their effects, intended or otherwise. They could enter into a calculus. It now made sense to ask, for instance, whether it might not be more beneficial in the long run to let corn prices fluctuate freely, even in a famine, than to regulate them—a question that could not have been decently posed when the duty to feed the poor was regarded as absolute. Without this prior demoralization of economic activity, [Adam] Smith’s enterprise would have been unthinkable. Aquinas, for instance, would have regarded it as akin to an earnest discussion of the benefits of cutting up a hospital patient and distributing his organs among others.

Now, I have accepted uncritically that the best way to improve the well-being of all is to allow individuals to pursue their own self-interest. And I don't see how you can renounce that principle without setting some group (whether the command-and-control planners of the Soviet Union or the divine-rights kings of old Europe or some body of clerics) as the arbiters of what is allowed and what is forbidden. But do we need to promote the idea of material success as a complete good? is there room for guilt about greed in a capitalistic society?

I struggled with these thoughts for a little while, but then was absorbed in another First Things article, I began another, this time "Religion, Reason and Same-Sex Marriage" by Matthew J Franck. In this piece, Franck expands on an earlier article where he argued that anti-gay marriage arguments are not based solely on irrational bias and have a place in the public debate. I have outlined my position on gay marriage on the blog in the past: namely, that we have gone so far away from the traditional sense of marriage already, and it makes so little sense for the state to license romantic companionship, that we ought to eliminate civil marriage entirely. Franck, as you might imagine, takes a different view:

Yet another danger may await us in the event that traditional views of sexual morality are overthrown and same-sex marriage is established. We see a sign of it in the driving of Catholic Charities out of adoption services in Massachusetts. The freedom to participate fully in civic life, to offer oneself to others in civil society, conscientiously on one’s own terms as a religious person professing one’s beliefs, may be jeopardized by this new dispensation.

Franck, along with many other observers, thinks the adoption of gay marriage and the host of cultural assumptions that go along with it will push Christians out of public life. This may be possible in the long term, though it is unlikely to happen any time soon in a majority-Christian nation.

So, to recap: we have two articles. One is about the ubiquity of greed in our society and of the need to curtail it, and one is a reaction to the legal advance of gay marriage. What do they have in common? In my view, both authors commit the fallacy of equating laws and government action with public morality as a whole. Look at this quote from Skidelsky:

Democratic states use economic incentives all the time to encourage motives and ways of life considered to be civilized. They limit hours of work, restrict or forbid Sunday trading, regulate where and how advertisers may operate. In a utilitarian political culture, such legislation is usually justified on grounds of economic efficiency or “health and safety,” but its unacknowledged motive is ethical. These states wish to erect safeguards against the powerful human tendency to rapacity.

If we acknowledged the legitimacy of such motives, we might think of many further ways in which the power of the state could be harnessed to discourage avarice. Of course, such proposals will encounter the objection of “paternalism,” but there is nothing inherently paternalistic about a citizen body collectively deciding to encourage certain forms of life and discourage others.

It's true that society's laws are an important benchmark of what is acceptable and what isn't, but they are far from the only ones. The culture of a society can be an equally powerful force in shaping behavior, and yet both Skidelsky and Franck are primarily concerned with whether the law advances or challenges their beliefs about the well-ordered life.

It is probably easier to change the laws to reflect the kind of society you want than to change the culture, but I would argue that a truly Christian response to the problems of materialistic greed and sexual amorality are to build up a virtuous alternative in Christian communities, prove the superiority of that way of life and then share it with others. This may be a libertarian point of view that borders on the naive, but the law that supports our beliefs on Monday may change to oppose them by Friday. (This is, in fact, what is happening with marriage laws.) If we can encourage a truly neutral state in matters of morality and culture (which I admit is a high challenge itself) than Christians should be confident that living out their beliefs will show others a better way. Public morality should be built (and renewed) from the ground up by moral individuals, not imposed from the top down by the state.

Obama, the Budget, and Political Calculation

After the State of the Union, I wrote that Michele Bachmann will get Obama re-elected. That bit of poorly informed speculation was based on my impression that Obama was going to attempt to make a meaningful compromise with the Republicans, which would satisfy most Americans but would be insufficient to the Tea Party, causing them to blow a gasket and split the Republican party. (I wish I had written it that succinctly at the time.)

My readers will be shocked to know that either Obama's team doesn't read this blog, or else values the advice at the price I charge for it. The budget he released recently is a defiant declaration of his intention to do nothing about our fiscal problems. By doing so, he seems to be daring the Republicans to put their neck out and suggest unpopular cuts, which means his calculation is that people don't really believe there is a budget problem, and he can win reelection by pandering to the interest groups that form the core of the Democratic Party.

Aside from my dismay at my inability to set the agenda in Washington, I have a few thoughts:

1) The politics of this situation are interesting. Yuval Levin suggests that people are not as short-sighted as Obama's approach seems to expect. I would guess that Obama's team has a lot of polling showing that we are, as a country, short-sighted and incapable of focusing on a debate as abstract and impersonal as the one over our budget. But I think his strategy fails to take into account the passion levels within the electorate. This budget, and the approach to governing it represents, will unite the factions within the Republican party, and give energy (and a larger voice) to the Tea Party. Meanwhile, his supporters will be lukewarm: yes, he didn't cut much, but he did offer to cut programs they hold dear, and the liberal blogs have been calling on him to stand and fight the Republican enemy. He had all the passion on his side last time: can he win without it?

2) Liberals like Paul Krugman are already attacking proposed cuts by the Republicans, so are some Republicans. But even Krugman is now acknowledging that something has to be done. He says:

In a better world, politicians would talk to voters as if they were adults. They would explain that discretionary spending has little to do with the long-run imbalance between spending and revenues. They would then explain that solving that long-run problem requires two main things: reining in health-care costs and, realistically, increasing taxes to pay for the programs that Americans really want.

I think his solutions ('reining in health-care costs' I would guess means further nationalizing care) are not going to be popular ones. But if both sides of the debate start saying there's a problem, and only the Republicans offer a solution, it might help them, even if the solution isn't entirely popular. If Obama's do-nothing strategy wins over voters even when every expert and pundit on both sides is saying something needs to be done, it means we've become essentially an ungovernable nation.

3) People tend to see meaning when it isn't there. And people tend to believe their opponents have a well-thought-out long term plan. But often, politicians are swept up by events, or carried along by their desire to stay popular and get re-elected, and aren't thinking more than one move ahead. Stanley Kurtz thinks Obama is a socialist, has written a book about it, and views this budget as a step closer to his imposition of socialism on the United States. Obama's definitely far to the left, and probably wishes the US functioned more like Europe. His beliefs are no doubt reflected in the budget. But I don't think he has some devious plan to manipulate the US into a socialist position: I just think he's trying to get reelected and thinks this is the way to do it.

I think it is possible, even likely, that Obama is not as smart as either his supporters or opponents think. Sure, he's very intelligent, but his reaction to the increasing budget crisis and the last election is essentially more of the same. Perhaps he just isn't visionary enough to come up with any good alternatives.

The Wall Street Two-Step

I've long harbored the suspicion that our modern financial sector is something of a parasite, sucking wealth out of the American bloodstream. This suspicion intensified when I moved to New York, when I started meeting wealthy people who weren't obviously doing anything valuable to justify their wishes. (I know, a nervy statement coming from someone in advertising.)

But this article, from Tyler Cowen, brought these fuzzy thoughts into sharp relief. Cowen starts with the mission of explaining income inequality, but transitions to focusing on how Wall Street, in his words, "has learned how to game the American (and UK-based) system of state capitalism." How? By "going short on volatility," or by making financial bets that assume what is likely to happen will always happen. Cowen explains it well here:

To understand how this strategy works, consider an example from sports betting. The NBA’s Washington Wizards are a perennially hapless team that rarely gets beyond the first round of the playoffs, if they make the playoffs at all. This year the odds of the Wizards winning the NBA title will likely clock in at longer than a hundred to one. I could, as a gambling strategy, bet against the Wizards and other low-quality teams each year. Most years I would earn a decent profit, and it would feel like I was earning money for virtually nothing. The Los Angeles Lakers or Boston Celtics or some other quality team would win the title again and I would collect some surplus from my bets. For many years I would earn excess returns relative to the market as a whole.

Yet such bets are not wise over the long run. Every now and then a surprise team does win the title and in those years I would lose a huge amount of money. Even the Washington Wizards (under their previous name, the Capital Bullets) won the title in 1977–78 despite compiling a so-so 44–38 record during the regular season, by marching through the playoffs in spectacular fashion. So if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad.

This is essentially the same as Nassim Taleb's Black Swan argument, but Cowen explains why it in fact makes sense to ignore Black Swan possibilities. Taleb argues that there is opportunity betting against the herd (and also that the herd is too stupid to see these risks), but what if the Wall Street herd is actually smart enough to know that the government will have to step in when these unlikely events happen, to 'save the system'?

So far, Cowen is simplifying and clarifying arguments I have come across before, that essentially we are held hostage to Wall Street because it is the lynchpin of the economy. But one could still argue that it in best interests of individuals not to fail, because they will lose money, prestige, and opportunity. That is where Cowen makes his most devastating observation:

Another root cause of growing inequality is that the modern world, by so limiting our downside risk, makes extreme risk-taking all too comfortable and easy. More risk-taking will mean more inequality, sooner or later, because winners always emerge from risk-taking. Yet bankers who take bad risks (provided those risks are legal) simply do not end up with bad outcomes in any absolute sense. They still have millions in the bank, lots of human capital and plenty of social status. We’re not going to bring back torture, trial by ordeal or debtors’ prisons, nor should we. Yet the threat of impoverishment and disgrace no longer looms the way it once did, so we no longer can constrain excess financial risk-taking. It’s too soft and cushy a world.

If, to pick one example, Wall Street traders who lost billions of dollars lost every dollar they had, or spent years in prison, or were exiled to Zimbabwe, individuals would have incentive to resist following the investing herd. But they end up only slightly less rich and successful if they fail than if they succeed. This allure of big money without big risk, as Cowen and others observe, draws smart, driven people away from other fields (creative endeavors, entrepreneurialism, scientific exploration) where success is a prerequisite of financial reward.

The only problem is that this whole no-lose system depends on governments to be able to bail out the banks when the periodic crashes happen. But depending on this will encourage financial firms to take bigger and bigger risks until they overwhelm the government's ability to intervene. Whether what follows is another depression or societal collapse is unclear, but we can be sure it will be ugly.