Monday, February 25, 2013

Sequesters And The Madness Of Crowds

Sequesters And The Madness of Crowds

My good friend Cynical Cynic sent me a link to an article by Rik Myslewski of The Register about a speech given by Carter Mead, a pioneer in microelectronic technology, at the International Solid-State Circuits Conference in San Francisco.

Before you think I have unsuspected gifts, let me assure you that my understanding of the term “Solid-State” doesn’t go much beyond that it replaced the tube technology in my father’s beloved Crown and Marantz power amplifiers.  However, a few of Mr. Mead’s comments particularly interested me. 

Mead spoke about how the quasi-revolution in physics that began with Einstein, Special Relativity and quantum mechanics has stalled, and how new thinking is needed to advance it. 

"Modern science started with an idea that was really given to us by Galileo," he said. "The idea was the isolated experiment. You took something and you very carefully sheltered from all the influences around, and then you were seeing the fundamental physics of that object."

Mead felt this worked, up to a point, but to go deeper you needed to use a less dogmatic, less enclosed approach. “We have a list of fundamental constants that we're not allowed to ask where they come from."  He then announced that he planned to spend the rest of his life doing exactly that, retesting fundamental constants within a comparative framework.

Mead got me thinking about a book written in 1852 by Charles Mackay, “Extraordinary Popular Delusions And The Madness of Crowds.”  In it Mackay assays a variety of manias that seized the public, including the Crusades, witch-hunts, millennialism, and alchemy.  He adds to them three economic bubbles where price became divorced from value; the South Sea Bubble, the Tulip Craze, and the Mississippi Company Bubble. In all these, crowds become possessed of an idea, and acted with a passion that went beyond rationality.  Needless to say, these all ended badly.

Mackay and Mead are really talking about two different sides of the same phenomenon.  A belief, whether grounded in science, or simply faith-based, drives future behavior and, for a time, creates its own discrete self-reinforcing ecosystem.  That ecosystem shelters it from new ideas, even to the point of blocking information that could show it to be demonstrably false.  Mead tells the story of Charles Townes, the Noblest who invented the maser.  He took his ideas to Neils Bohr (Noblest in 1922) and Werner Heisenberg (Noblest in 1932) both of whom apparently laughed and told him he knew nothing of quantum mechanics.  Obviously, Townes got over it. 

You can see this encapsulated thought process in the sequester arguments.  First, there is the ludicrous dispute over who suggested it first--it now being acknowledged that sequester is a Bad Thing.  Then, it just degenerates into the same tiresome taxing and spending arguments we just presumably litigated in the last election, with the same buzzwords, or, put more simply, the Plutocrats vs. the Socialists.

Of course, this is nonsense.  Past the slogans, there is the fuzzy outline of an intellectual construct.  Instead of Newton and Einstein, we have Classical Economic theory slugging it out with Keynesian Economics.  Neither of these is a paragon of modernity. Adam Smith published The Wealth of Nations in 1776. Keynes’ seminal work The General Theory of Money, Interest and Employment at least made it past the Industrial Revolution to 1936.

Obviously, there have been a lot of changes in the world since 1936, to say nothing of 1776.  But, for now, the biggest elephant in the room is something neither Keynes nor Adam Smith could have anticipated; the initiation and growth of the major entitlement programs, and the extraordinary increase in life expectancy.  In Adam Smith’s time, life expectancy was under forty, in Keynes’ about sixty. Now, it is roughly eighty, and benefits (or suffers) from an unanticipated and somewhat perverse actuarial issue.  Medicare gives access to healthcare to those who might not have been able to afford it, and that allows them to live longer lives.  Put more bluntly, the better we do at keeping our seniors financially secure and medically cared for, the longer they live to use the programs whose cost we worry so much about.  As brilliant as both men were, neither Smith nor Keynes could possibly have been thinking about Medicare Part D, CAT Scans, or the hordes lined up for the early bird specials.

How we deal with this is at least one critical part of the sequester argument (the others are discretionary government spending and taxing.)   If we had infinite time, or this were just a theoretical discussion to be mathematically modeled, we could leave it to tweedy academics to fight it out over brandy and cigars. 

Obviously, the sequester shows it’s not theoretical, and we are certainly out of time.   But, even if policy could be determined by the best-trained minds, completely devoid of a partisan tilt, I think what Mead would say is that old theories were highly unlikely to come up with the correct solution. Just because an idea might be state of the art in 1776 or 1936 does not mean it still works now, particularly when all this new and unanticipated data has come in. He would probably urge you to clear your mind of all preconceived notions, and test your basic assumptions.  Then choose the optimal course.

That, of course, is not going to happen.  Gene Epstein, who writes for Barron’s, often refers to the late Nobel Prize winning economist James M. Buchanan “public-choice theory” where politicians reap short-term gains from spending money that can be paid back long after they leave office. They therefore have a strong incentive to preach and practice continued fiscal profligacy.  Epstein uses Buchanan to support his argument that entitlements are a Ponzi scheme that needs fixing or even ending.  But, if he weren’t as conservative, he might have easily said that public-choice theory also provides short-term gains from spending on defense, or spending on tax preferences, or even asking people for less money in taxes than the government legitimately needs to keep running.  I admire Epstein’s writing greatly, but he suffers from the same myopia that the rest of us do.

So, is the political system at all capable of finding its way through the sequester thicket and, ultimately, towards a more rational economic policy? Do election results give a direction?  I wrote above that these taxing/spending/entitlement reform issues had just been litigated this past November.  Actually, that was incorrect.  What was litigated, or more accurately, demonstrated, was public-choice theory.  Mr. Romney, afraid of losing the senior vote, promised them that there would be no changes to their benefits.  They rewarded him with a fourteen-point edge on Election Day.  And he refused to say which tax expenditures and deductions he would reform, merely that the whole would be net revenue neutral.  No point in frightening people he intended to take money from later.  None of this disproves Adam Smith, as neither Mr. Romney nor the GOP are exactly free-market capitalists; they are, instead, pro business, pro wealthy, and pro getting elected.

Mr. Obama, for his part, spoke as if raising taxes on the wealthy would be the cure-all.  Everyone would be able to hold his or her own and even prosper if only the rich would pay their fair share, the government “invests” and we did a little cutting on defense.  Mr. Obama and his party aren’t Keynesians; they are pro-labor, pro social contract and also pro getting elected.

And that makes this last election a lost opportunity, because the political viability of serious entitlement reform, hard-nosed budget reviews, and transparent tax reform hasn’t been tested. People are still dreaming of a world in which, if there is a price to be paid, it will be paid by others. 

For this, we can blame both our political system, and ourselves.  Irresponsible politicians, afraid to tell the truth to the people who elect them, have engaged in the same behavior described in Mackay’s book. They have metaphorically sent children to liberate the Holy Land, burned people at the stake, and stoked apocalyptic fantasies.  They feed the fanaticism that leads perfectly rational people to insist on completely irrational positions. And we are equally to blame, because it serves our self-interest and our ego to do so.  Read the comments in any on-line forum, and you can see how average citizens declaim as if they were experts. 

Mackay also tells us that popular delusions destroy the ability to see value (recall the GOP primary candidates all rejecting a hypothetical deal that would have been 90% spending cuts for 10% tax increases.)  He lists the following as payment tendered for one tulip: Two lasts of wheat, four of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tuns of butter, one thousand pounds of cheese, a complete bed, a suit of clothes, and a silver drinking cup.

That must have been some rare bulb.  I wonder if that seller is still around to give bargaining lessons? Either that, or maybe we can hire Carter Mead to start questioning fundamental constants?

It has to be worth a try.