Suspended disbelief – why?

One of the questions I asked in my first post on this subject is why we can suspend disbelief for fiction. Oddly, I think it may be connected to how we process reality.

Philosophers have wrestled forever with the problem of solipsism. How do we know that our individual consciousness is not all there is, that everything we experience isn't just a figment of our imaginations? I think the odds are against it – if my consciousness is the only intelligence in the universe, how did that intelligence come into being? (Is it just you and me, God?) But there is no logical requirement that the universe consist of more than our own minds.

What makes solipsistic speculation possible is the fact that we do have to put the entire universe as we know it through our consciousness in order to be conscious of it. That doesn’t mean it’s not out there, but it does mean that what we see is our version of what’s out there, not really what is out there. I don’t mean to make too big a deal of the idiosyncratic nature of this translation. It’s not interesting to me, today anyway, whether you see “blue” differently from me. On many days we can agree that the sky is blue; we perceive such things similarly enough to do business, and that makes language and, therefore, civilization possible. So the differences can wait.

I recently ate at a restaurant where the menu stated “Substitutions are not allowed, but additions are welcome.” Adding is easier than substituting, and nowhere is that more so than in nature and, especially, evolution. I suspect that how we process reality differs from how a hamster or a fish or a puppy processes it only in added complexity. Thus, I think that our ability to process events is an extension of our ability to process things, that the machinery we use to see that an event is more than a series of random motions, or a process more than a series of random events, is really the same machinery that we use to determine that a chair is not a random assemblage of material.

Applying machinery powerful enough to construct narratives to figure out that a chair is a chair seems wasteful, so we probably do use neural shortcuts for such things, but those shortcuts seem to me to be derivatives, memories of the larger machine’s earlier workings. Nature creates machinery and derivative shortcuts rather than direct alternatives – additions, not substitutions – like Jack Nicholson’s famous order of toast in Five Easy Pieces. “Now, just hold the chicken.” (A case of “addition” by subtraction: Jack adds to the concept of a chicken sandwich the concept of absent chicken. In logical terms, adding mayo and removing chicken are analogous processes – amendments to the chicken sandwich template.)

How, though, do we know, for example, that a side order of toast is “like” a chicken sandwich without the chicken? To make that connection, we must be able to recognize patterns. There are lots of surfaces we can sit on besides chairs, and we know instantly that something is sufficiently “chair-like” either be called a chair or, at the very least to be sat upon. Categorization is about analogy – we make decisions based on our perception that something is like something else. Otherwise, how can we learn anything useful? Unless what we encounter strikes us as like something we have learned, how do education and experience help us cope?

If we are to be able to recognize things, we need to be able to recognize patterns, and if we can recognize things and patterns, we should be able to apply the same mental gear to recognize events and common narratives.

Which brings us to fiction. Nature abhors excess capacity as much as she does a vacuum. If we can learn by analogy to events, why should we be limited to events that actually happened? (Assuming for the moment that history, as Napoleon said, isn’t just lies agreed upon.) Maybe there are fictions that, if we could internalize them – if we could make them equivalent in teaching power to actual experience – would teach us common lessons, especially the cautionary ones, that are useful to know.

How, then, from an evolutionary standpoint, do we imbue fiction with the power to teach? Can we most profitably listen to a story, always aware that it’s just something some guy made up, something that didn’t really happen? Wouldn’t it be great, if, just while the story is being told, we could immerse ourselves in it as if it were really happening? Could any other posture elicit a greater dose of education from the story?

In other words, it seems to me that if we didn’t suspend our disbelief toward stories, we could not learn from them, at least not as well. We wouldn’t enjoy them as much, wouldn’t seek them out, tell them (to a bored audience), or, given the dull response, even bother to make them up. What I’m saying is that we have fiction precisely because we are willing to be a good audience for it, that is, to suspend our disbelief. And given the pedagogical power of stories, the idea that we could not come up with fiction as a way to deliver more of them just seems foolish. Of course, we have fiction, so, of course, we have learned to suspend our disbelief to accommodate it. Otherwise a race of story-tellers would have taken our natural selection lunch long ago.

The Funny Game of Suspended Disbelief

Another of those philosophical musings I promised myself. SPOILER ALERT – Movie plots discussed.

Why do we suspend disbelief? Why can we? And what are the nuances?

I found myself asking those questions after stumbling onto the last five minutes of “Funny Games” on cable. I knew what the movie was “about” – more on that later – and I knew that the action was too brutal for my taste. So I’ve never watched it all the way through. I did, however, watch the last two minutes some time ago to make sure that the central home invasion ends as Hollywood likes, with dead invaders, and I was surprised and disturbed to learn that it does not. But I did not know the details. By watching the last five minutes last night, I picked up that one of the victims is casually drowned right before the sociopathic villains start their mayhem over again with new players. It was quite a disturbing scene.

Today, I searched for reviews of the movie to see what there was to like about it – why people actually paid to see it. Many of the reviewers liked that the movie, as an exercise in terror, thwarts the viewers’ expectations of the bad guys getting their comeuppance. But several reviewers mentioned three related (to me) aspects of the movie of which I, having not watched all of it, was unaware. The first is the breaking of the fourth wall – in one scene (or more?), one of the villains speaks directly to the audience or mugs for the camera. The second is a scene where the female victim succeeds in killing one of her attackers, but the other then accuses her of “breaking the rules,” - an ironic reference, perhaps, to the fact that the movie was about to "break the rules" - and uses her TV remote to “rewind” the movie so that he can prevent that particular outcome. The third thing, which seems unrelated at first, is that, according to the reviewers, all of the violence in the movie takes place off screen (though not out of earshot).

What seems to have bothered some reviewers most was the “rewind” scene, the physical impossibility of the action. There we are, all caught up in suspended disbelief, treating the invasion as if it is actually happening, and then, pow, we are reminded by the illogic of the action that we are watching a fiction, and that sucks, at least it does if we are in some sense pretending that it is not a fiction. But should we be?

Have you seen “The War of the Roses”? If so, can you summarize the plot? Hint: it has nothing to do with Michael Douglas and Kathleen Turner beating each other’s brains out. No, the plot of “The War of the Roses” is “A divorce lawyer tells a potential client a cautionary tale to test his commitment to the process.” The tale he tells, which takes up the bulk of the movie, and which tempts us to move inside its wrapper and suspend our disbelief as to it, is simply incredible. But instead of complaining that the “plot” is incredible, we need to understand that, even within the movie, the story is a fiction, an exaggeration of the perils of divorce litigation. By treating the excesses of the tale as mere embellishments by the lawyer character to make his point, we can dismiss the incredible as being intentionally so without disrupting the flow of the main plot, which, perhaps unbeknownst to us until we reflect on why the extravagance of the story is intentional, is the lawyer’s meeting with the potential client.

So, too, I think, was Director Michael Haneke’s goal in “Funny Games.” The story is too brutal actually to tell as if it were really happening in an imaginary universe. It certainly was for me: so long as I thought that the plot was “Two sociopaths invade a home and torture/kill a family,” I had no interest in watching it. But if the plot is “Some guys make a movie about home invasion to explore how the use or non-use of Hollywood conventions affects an audience” – if that is the plot of the movie I am watching, and not just (but maybe, also) the purpose of Haneke’s making the movie itself, then I can suspend my suspension of disbelief from time to time to remember that I am watching the making of movie, and not that movie itself. But I have to be able to go back into the movie within the movie in order to allow the moviemaker to find out how I would react to such a movie, if he actually made it.

The notion that we are watching what is essentially an academic exercise is heightened, I think, by the low-budget touch of off-screen violence. Yes, there is an inquiry to be made into the effectiveness of such action, but there is also the practicalities of the film budget. “Funny Games” is not necessarily a low-budget movie - $15,000,000 I think – but the film within the film clearly is. The real actors are highly paid in the real world, but the characters, if they are actors, too, within the movie, are nobodies as far as we know. Why waste money on stunt doubles and FX violence, especially when you can use the device to see how off-screen violence plays? Necessity as virtue. Nice.

And if any doubt remains, just listen to the apparently nonsensical jabbering of the killers in the last few minutes of the movie, where they talk about colliding universes of reality and fiction, and which is to be treated as “real.” That’s a lot of writing to be pointless. But the setting and action during that scene are so distracting that we don’t listen. These guys are crazy, right? And they speak so fast…

I think “Funny Games” is a masterful piece of moviemaking. That does not mean that I could stomach watching it, even thinking that it's about what I think it’s about. But I may give it a try, this time with my disbelief firmly in place, if only to see if that’s possible.

Of course, this little movie review doesn’t even address the question of why we can suspend disbelief much less answer it. Maybe next time…

C-CSPAN and the Law of Unintended Consequences

I admit to a sort of obsession with dominoes, how one thing leads to another. One of my domino constructions starts with C-SPAN – C-SPAN 2 to be precise – and ends with governmental paralysis.

Remember “Mr. Smith Goes to Washington,” where Jimmy Stewart’s young Senator holds the floor for days on end until public opinion turns to his view and his filibuster saves America? The movie is pure fantasy, of course: 65 senators (back then) could have cut off debate, which means that there were at least 30 other senators who shared our hero’s view of the pending legislation. Where were they?

Anyway, the fact is that filibusters used to be conducted by real senators giving real speeches. The current practice, though, is for senators who oppose a bill to announce their intention to filibuster it and, thereby, to require sixty votes for its passage. According to Wikipedia, Senate Rule 22, which, of course, is not written in English, allows for speechless filibusters. The same Wikipedia article also says that the Senate Majority leader can order that real speeches be made. I admit that I cannot find any evidence in the rule that any of this is so. Nevertheless, the Senate makes its own rules, and the Senate can change them – though even there Wikipedia says that one Senate rule requires a 2/3 vote to change the Senate rules – a Gödelian nightmare if ever I saw one. (What if the rule said that the rules could only be changed when Hell freezes over?) Thus, if there are speechless filibusters, the Senate rules clearly countenance them, and those rules clearly could be changed to get rid of them.

Why, then, are speechless filibusters allowed? I can think of only two reasons, although I’m well aware that that’s not the same thing as saying that there only are two reasons. One of my candidates is laziness. Both parties use the filibuster when they’re in the minority. Why should they oblige themselves to actually have to blabber on? If one side makes the other actually speak, the same will happen to them when their turn comes. My second candidate, though, is the first domino in my chain: C-SPAN 2, which provides coverage of Senate floor speeches. I don’t believe that filibusters are all that attractive, and I think that if the American people got to watch enough of that particular bit of sausagery, they would not react kindly. As a result, the Senators, in order to preserve their own jobs and to preserve the filibuster, per se, have agreed that they should not actually have to carry one out.

I am sympathetic to the Senators’ plight (but only to their plight). The filibuster is an important tool whereby the tyranny of the majority can be constrained. And I’m perfectly happy that this current Senate needs 60 votes on such major things as healthcare reform. But on judicial nominations, or Pentagon appropriations? On things for which Senators would not have taken the trouble actually to filibuster, or over which they would have looked foolish while filibustering, things for which a majority in all good conscience should be enough to get done? Nah, I think Senators should be made to play the game on those bills. But, I agree, that the cost of making them play the game is too high with C-SPAN documenting every wasted minute of it.

That’s why I’m sympathetic to the Senators’ plight. But the answer, it seems to me, is quite simple. The Congressional Record records every word spoken in the Senate, and members of the Press are permitted in the gallery. So, there is no fear that the Senate will become a secret society if the C-SPAN 2 cameras are turned off during extended debate. I think the senators should be made to filibuster the bills they really, really, want to stop, and the first hour of each senator’s speech should be televised, so that if he actually has something to say, the people will have access to it, but after that, the cameras are turned off until the next speaker rises.

A televised filibuster is not a baby; there is no reason not to cut it in half to preserve the device and yet to restrict its use to cases where it’s worth the trouble to use. Tom Friedman has been complaining about how our system is only capable of “sub-optimal solutions.” Maybe we could make them a bit less sub-optimal if some of them only required 51 votes to get out of the Senate.

Absolutely (not).

Dragged by events into policy issues, I have posted almost exclusively on politics and economics, when I had actually hoped to hold forth more on philosophical stuff. With what appears to be a break in the action, here’s something along the latter lines.

The subject is moral absolutes. In what follows, I may use the terms “morals” and “ethics” interchangeably in some places and not so in others. I can't find a reliable distinction that makes one word always preferable to the other in every context. But where the distinction can be observed, I will use "ethics" to describe behaviors from the actor's perspective, and morals to describe them from the perspective of the community that the behaviors affect, either directly or as a consequence of the community's being made up of members who exhibit them.

But back to moral absolutes. Are there any? I say “no.” But then what? Relativism, at least as it’s commonly understood, is not necessarily the only place one can go without absolutes.

I start from the premise that we think about morality with the object of forming principles on which to base our ethical decisions. I recognize that some people reject the whole notion of “thinking" about morality, favoring instead the notion that one ought to strive to acquire the aretaic virtues, extracting ethical principles only as descriptive of how virtuous people are observed to be, not prescribing them as deontic rules to be observed. But to me, aretaic and deontic ethics are the vinyl and CD of the same music. I will say, though, that the aretaic school has one thing right: if there are no rules, per se, then a fortiori there are no absolute rules. And that’s really the point of this post: to harmonize aretaic and deontic ethics on the issue of absolutes.

At the outset (four paragraphs in, and I’m still at the outset – yikes!) I must declare my affinity for aretaic ethics. It’s like the old line “Don’t marry for money; go where money is, and marry for love.” Good people don’t need rules; the rules need them. But we live in a world where much of ethics is debated on the deontic plane, and rather than say that the issue of absolutes merely demonstrates the futility of deontic analysis, I prefer to refine that analysis so that it can be of use to those who find it useful, even as a way to grow in arête.

Actually, I want to, er, press the vinyl analogy. Leaving relativity and quantum mechanics aside for the moment, there is no set limit on how high or low a sound an analog disk can record. But a CD is expressly limited to the range that can be represented by the 0’s and 1’s available to code pitch. And yet, one assumes that for most ears CD technology is adequate for recording all of the music that has ever been recorded on vinyl. Some audiophiles can hear analog nuances that are lost in digital recordings, but those of us who are not audiophiles get along quite well with CD’s as our music source.

Can we say, therefore, that CD technology is “always” adequate? Well, for some people – most people, really – it is. If one of these people has to decide whether to buy a CD, is there any point in that person inquiring as to whether some audiophiles might find a particular CD inadequate? Or should the person, being one of those people who cannot tell a CD from a vinyl recording, simply order his or her musical life on the “absolute” principle that, for him, CDs are absolutely adequate? Even if we tell this person that there could be a piece of music for which even he would find a CD inadequate, unless he can actually identify such music easily, what good does the information do him? In other words, whether or not CD technology is always adequate, many listeners are best advised as a practical matter to behave as if it is.

In the ethical realm, this logic brings us to a question of human engineering. Is it better for a society to teach its children that (i) honesty is the best policy, or (ii) we cannot be 100% sure that honesty is the best policy, but there are no known instances in which honesty is not the best policy, i.e, it is the best policy so often, and our ability (dulled by both ignorance and bias) to discern situations in which honesty is not the best policy is so suspect, that we ought to behave as if honesty were the best policy? (I’m using “honesty” here in the sense of deception intended to defraud someone for the benefit of the defrauder and the detriment of the defrauded. Little white lies don’t count: no harm, no foul.) For some people, it makes sense that they be taught that there are moral absolutes and that honesty is one of them. For others, it’s ok, I think, to say that there are no moral absolutes, but there are some principles that are so often true that we are best advised to act as if it they were absolutes.

If, as a matter of selective pressure, the people in a society are most likely to survive if as many of them as possible behave as if honesty were the best policy, what follows? Moral absolutes, I think. Thou shalt not bear false witness. Teaching moral absolutes (like honesty is the best policy) works better than teaching the truth (how ironic!). How, then, can we be honest and still teach the simplified version? I submit that we must believe that there are moral absolutes so that we can honestly teach that there are moral absolutes, because it is in our community interest that the absoluteness of those moral rules be accepted, and we cannot teach it if we don’t believe it. (The Soviets tried to teach things that they knew were false, and look where it got them.)

Moral absolutes thus join Voltaire’s God among those things we would invent if they did not exist - not coincidentally, seeing as how morality is one of God’s principle contributions to our purported understanding of things. So maybe it’s immoral for me to argue that there are no absolutes, just things that are true often enough that we should act that way. But I can’t lie. That would be wrong.

A Convenient Lie

The “Dead Peasants” thing has a bearing on the economic mess. As I have argued, we need to bring back tariffs. But the bad name of Smoot-Hawley haunts the effort. A case can be made, however that Smoot-Hawley had the deleterious effects that it did, not because it protected domestic industry, but because it protected domestic industry at a time when America was running a massive trade surplus. We were prospering off of other countries’ unemployment, and Smoot-Hawley turned the knife. Still, the surviving myth is that protecting industry is bad, not that protecting a trade surplus is bad. And no matter how much evidence is adduced to demonstrate that the trade surplus is what matters, that China’s yuan policy is really a form of Smoot-Hawley, the free-traders will continue to use Smoot-Hawley as a conversation ender at every turn.

The poster child for such indifference to truth is Charles W. Wilson, who asserted his belief that General Motors was so tied to American prosperity that “what was good for the country was good for GM, and vice versa.” The potential ambiguity of such a remark was known as long ago as Plato. In Euthyphro, he asked: "Is the pious loved by the gods because it is pious, or is it pious because it is loved by the gods?" Is something good for GM because it is good for America, or is it good for America because it is good for GM? Wilson’s point, I think, is that there was no causation involved, just a community of interests. To suggest causation, to allege that Wilson intended to imply causation, is at best to err, and, to do so with animus is to lie. And yet, the implication that he saw GM as the source of all good things persists, because the lie is too useful to pass up.

I have written to Mike Myers, the lawyer who says that “Dead Peasants” referred to dead employees to tell him that the term actually referred to former ones who were still alive. So he now has reason to know that his explanation of how “Dead Peasants” insurance got its name is false. Will he change his story? Will he express at least some personal ownership of his inference, as opposed to his current flat statement of fact? I doubt it. The lie is too valuable, and, it has become sufficiently entrenched that he can pretend not to be responsible for its perpetuation even as he perpetuates it. Of course, I could be wrong. I could get an email from him any day thanking me for correcting his misapprehension, or he could amend his website to tell the story about how the media found the expression “dead peasants” in a memo and appropriated it to name the product, all on its own. One never knows. But one can guess.

In the scheme of things, Myers's inaccuracy isn’t that big a deal. Like the difference between calling it “janitor insurance,” as was done, and calling it “dead janitor” insurance, which was not. Indeed, I suspect the term “dead janitor insurance” was a corruption of “janitor insurance” in a sense “licensed” by the industry’s allegedly calling the product “dead peasants” insurance. (The little lie has babies.) But without the “dead peasant” or “dead janitor” label, outraged bloggers could not get all huffy about how “even the name” makes them cringe. Sort of like Obama’s death panels. Even the name makes me angry. (What, you say there are no death panels? Prove it, Commie bastard!)

A lot of comments on the aforementioned blogs are themselves mini-rants about how bad corporate America is. Care to lay odds that any of these posters will offer a heartfelt “oops” when they are told that companies who bought janitor COLI plans only made money while the employees lived? These are people who would happily admit that they know absolutely nothing about how COLI plans work – that the term “experience rating” is gibberish to them – but they will remain certain that the employers got rich when employees died, because, well, that’s what corporations do, isn’t it?

My claim that the COLI companies made money off living employees and not dead ones will be dismissed, coming as it does from someone who does not share the ranters' clear perception of corporate evil, someone who, therefore, must be lying. It’s a form of denial, really. They have a certain amount of emotional momentum, and no amount of truth is going to change that, not when there is a “bigger truth” (corporations suck) to support the rage, and the object of the game is not to know the truth but to pretend to have a reason to vent the rage.

And yet everyone in this drama would swear on a stack of Bibles that they are themselves not liars, and that they don’t like liars, like, for example, those big corporations and their apologists who say that COLI plan purchasers only made money while employees lived.

Not enough is riding on the rehabilitation of dead peasants insurance for anyone to care whether it was a good thing or a bad thing for employees. It’s been assigned to the “bad for” bin, and there it will stay. But Smoot-Hawley is another matter. We desperately need to end our addiction to foreign goods. We cannot run an economy if our only comparative advantage is in capital-intensive goods. I believe tariffs are coming, and I think the harbingers will be increasingly public questioning of Smoot-Hawley’s role in its time. Two rhetorical titans - “Protectionism caused the Depression” and “China is stealing our jobs” are going to duke it out. Just letting Smoot-Hawley into the ring is progress. Whether it can punch its way out of its historical prison remains to be seen. Our fondness for convenient lies argues against it. But stay tuned.

Dead Peasants Insurance – Fifteen Minutes that Came and Went

So there I was watching CSI: Miami, when one of the characters said that the life insurance policy his corporation owned on another character’s life was “Dead Peasants Insurance,” a term I had never heard before. I had, indeed, heard – and used – the term “dead peasants” in connection with corporate-owned life insurance, but I had never heard this particular usage. Whereby, as they say, hangs a tale.

I used to work for a company that sold life insurance to corporations. One of our main products was what we called “Broad-based Corporate-Owned Life Insurance (COLI).” Less charitable observers called it “janitor insurance,” because the policies in question covered the lives of all employees from the CEO on down the payroll to, for example, the janitor. (It’s no accident, I suppose, that the deceased in last night’s CSI: Miami episode was, in fact, a janitor.)

Broad-based COLI programs were first and foremost tax-avoidance schemes. Life insurance proceeds are exempt from tax, but the tax advantage of broad-based COLI program did not arise from the tax-free windfall on an employee’s death. Rather, the advantage arose because the company could borrow the money to pay the premiums, deduct the interest it paid on the loans, and then receive a death benefit that effectively refunded the interest without tax. This particular gambit had always been permitted by the tax law, and was to some extent regulated and limited by then-existing law. But whether or not the tax benefits were valid, broad-based COLI worked best if the employees lived a long time. The death of an employee terminated his policy, leaving the employer with one less source of tax advantage. It was, therefore, in the interest of the employer that the employees live, not that they die.

There was no windfall when an insured employee died. A provision of the COLI plan allowed the insurer to raise future premiums to recoup any mortality losses, so the employer didn't get to keep any money it made by reason of early deaths. In case of catastrophic loss, the recoupment mechanism would fail, and the employer would receive a net gain on the insurance. But the loss of that many lives would almost certainly cost the company more money than the insurance could cover, so that was hardly the object of the game. The insurance element of the plan was not a profit engine, and, pace Michael Moore et al., the employer had no reason at all to seek or wish for the early deaths of its employees.

The tax advantages accruing on account of an individual remaining insured explains why employers continued to carry insurance on former employees long after they could claim any insurable interest in their lives. It is these former employees that we, at our company only, and for internal purposes only, referred to as “dead peasants,” an allusion to Gogol’s Dead Souls, in which the main character seeks to buy the registered ownership of dead serfs from feudal owners so that he could secure a loan against their future outputs, something he could do because banks used outdated census rolls to underwrite such loans. Our clients were securing loans on life insurance on “employees” who no longer were employees, so the analogy to peasants who were, in a sense, no longer peasants seemed apt. It never occurred to us that the term “dead peasants” would be applied to dead employees, in part because we already had a different use for the term, and in part because, as described above, the plans we were selling were designed to work best if the “peasants” lived.

But the football of life takes some odd bounces. In 1999, the Tax Court labeled the broad-based COLI program at Winn-Dixie Stores – a program that we sold – as a sham and denied Winn-Dixie the deductions it had claimed on the ground that the program had no business purpose, in part because it was never expected to show a pre-tax profit. Buried in the record of the case was this memo that I wrote. Mike Myers, a lawyer who has made Broad-based COLI his meal ticket, links to the memo in his blog, adding that “the ‘dead peasants’ referenced in the memo were deceased Winn-Dixie employees whose deaths resulted in policy benefits to the company.” On this score, he’s just plain wrong. As I said, “dead peasants” was short-hand for former employees. But reporters – he cites a couple – seemed to have reached the conclusion Myers offers, and that, as they say, was that.

An interesting aside: the “section on dead peasants” mentioned in the memo would have addressed a quirk in the tax law that made certain limitations applicable to a policy if the insured “is” an employee. Since a former employee was no longer an employee, the limits arguably did not apply to a former employee, i.e., someone who no longer is an employee. It was soon after our investigation of this subject that President Clinton held forth on the meaning of the word “is” in connection with Ms. Lewinsky. Needless to say, we enjoyed that bit of tap-dancing immensely.

I left the COLI business before the Winn-Dixie case was decided, and I never saw another reference to dead peasants until last night. I now find, on further Googling, that Michael Moore used the term in his farce “Capitalism: a Love Story.” He presents a family outraged by the notion that their loved one had been insured and that the company got paid the amount of the policy when he died. No mention is made of the fact that the company didn’t get to keep the money but had to give the cash back to the insurance company as an adjusted future premium on existing policies. That would’ve spoiled the mood, I suppose. Indeed, one of the reasons the tax case was so weak was that, at least to the satisfaction of the IRS and the courts, the “insurance” wasn’t really insurance. The plan failed its purpose precisely because its purpose was not to profit on the deaths of employees. But the fact remains that profiting from lives, not deaths, is what the plan was about.

So, if the subject of dead peasant insurance comes up at a cocktail party, you tell 'em that you know the guy credited with providing the sobriquet, however unintentionally. It's not Susan Boyle type fame, but it's a start.

Technorati Tags: Dead Peasants,COLI,Janitor Insurance,Michael Moore

Whither Chimerica?

I’m trying to figure out what becomes of Niall Ferguson’s Chimerica. The US and China are locked in a tight embrace. But, as described below, I think the Chinese are better positioned to break away and leave us hurting.

My analysis depends on a certain view of the creation of money. Unfortunately, I don’t know anything “official” about how money is created. I only know what I think about how money is created. So, it only seems fair that I say how I think things work.

In the days of the gold standard, a guy with a gold bar went to the Treasury and said “Here’s some gold; give me some money.” The Treasury gave the guy some money and put the gold in its vault. The guy then put the money in the bank, and the bank lent it out to borrowers.

The money the bank had to lend was “backed by gold.” But there is only so much gold, and a growing economy needs more capital than the gold supply can support at a fixed price. Of course, there is no a priori reason why gold should be the only thing backing currency. German money after Weimar was backed by land. Saudi money is effectively backed by oil (and dollars). And if tangible assets can back money, why not intangibles like an ongoing business? Or an idea and a business plan? When I get money, I don’t care what specific thing of value stands behind it. So long as the money will buy something of value, the money is, well, money.

A well-known Soviet-era joke explained Soviet economics as follows: “We pretend to work, and they pretend to pay us.” Soviet Russians had lots of rubles, but they couldn’t buy anything with them; there was nothing to buy. So, were the rubles really money? Robert Frost wrote that home is where, when you have to go there, they have to take you in. Money, I think, is what, if you have to spend it, they will recognize as payment. All the Soviet Union had, once the price of oil fell, was the ability to force people to pretend to work. Not much value there.

Guys like Ron Paul criticize our financial system by claiming that so-called “fiat money” is worthless because it isn’t backed by anything tangible. They are right that it isn’t backed by anything tangible. But they are wrong to think it matters. What matters is whether anyone who receives a dollar believes that America has something worth a dollar available for sale. The problem with fiat money is not that it isn’t actually backed by real value, but that there is no way to be sure that it is so backed, so the temptation to issue it without any backing is politically overwhelming.

That temptation is exacerbated if a major recipient of your currency actually doesn’t care whether it will buy anything. That, I think, is how China views the dollar, and why the Chinese are not about to revalue their currency or sell dollars any time soon. (But may eventually do both.) And it is why we are not hesitating to print dollars unbacked by assets and products, dollars that others may soon reject.

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China doesn’t care what the dollar is worth because China is using the dollar to keep score in its newly competitive economic regime. China’s goal is to become self-sufficient in just about anything it could buy from the US. Buying stuff from us is the last thing on their minds, so what the dollars can actually buy is of no moment to them. They are happy to own zero-interest T-bills that produce a negative return if that will keep their factories humming.

China faces the daunting problem of booting up a capitalist society. Chinese entrepreneurs need customers above all, and the US has the most and best to offer. We provide a demand for quantity and quality, both essential to the long-term success of any enterprise. We are, in effect, the judges in their game of “So You Think You Can Run a Business.” We buy the outputs of their most effective companies, and that’s (a) how they know who those companies are, and (b) how their people and the rest of the world know that the yuan is “backed” by the productive capacity of a real economic engine.

The Chinese pay us for service as judges by selling us stuff at artificially low prices and lending the money back to us at artificially low interest rates. Such largesse is not, however, without consequences: we have lost jobs to cheap imports and borrowed too many cheap dollars at both the private and public levels. But that’s not China’s lookout. And, as described later on, cheap labor is cheap labor, whether or not it is even further subsidized by a cheap currency.

To understand China’s indifference to the value of the dollar, try this thought experiment. Suppose the Chinese government announced that Chinese exporters no longer needed actually to export their goods to America. Instead, Chinese companies can simply dump their outputs in the ocean and receive yuan equal in value at the official exchange rate to the dollars the company would have collected if the goods had been sold in America. (Think cash for clunkers.)

Why would this not work? Certainly, it would stimulate outputs, and thus jobs, and it would give Chinese workers and entrepreneurs money to spend. One reason it would not work is that there is no way to prove that Americans would have bought a merchant’s products at the price he says he could have sold them. As they say about upsets in the world of sports, that’s why they play the game. So, without regard to whether China actually needs to get dollars for the yuan it issues, the American consumer serves a valuable purpose just by buying one Chinese company’s outputs rather than anyone else’s. They play the game, and what we buy from them is their score. The winner has actually proven an ability to produce desirable goods at a good price, and that means that the yuan issued to it with respect to its sales are “backed” by productive capacity, whether or not they are also backed by the dollars the Chinese government gets for them.

Now let’s look at how important it is that the Chinese actually get those dollars, or, more realistically, whether those dollars hold their value or earn a positive investment return. Instead of the merchants destroying the goods in our experiment, suppose they have to make real sales, but that the Chinese government destroys the dollars it gets for the yuan it issues. (After all, lending to us at zero interest is as close to burning the money as the Chinese can realistically come.) The only real issue for the Chinese is whether the yuan issued on account of the goods sold to the US would be respected by those asked to accept it.

Those yuan are fiat money, but lots of countries issue fiat money. The yuan are nominally backed by the dollars received, but they are, I submit, also, increasingly (and more importantly) backed by the entrepreneurial infrastructure and labor of the Chinese people. Real factories will have produced real goods for this money, proving that the money can be spent on real products from real factories. So, what’s the difference to Chinese yuan-holders whether the dollars received for the exported goods are overvalued when received or become more so in the Chinese government’s hands? More and more, it is the Chinese economy, not the dollars, that make the yuan credible. Thanks to our willingness to buy good Chinese products, the Chinese workers do not have to pretend to work, and the Chinese government does not have to pretend to (provide the money) to pay them. No wonder the Chinese government has no interest in revaluing their currency: getting more dollars for less product might make economic sense, but it makes no political sense at all.

So we and the Chinese are for now co-dependent. We are addicted to their products, and they are addicted to our custom. Which of us, if either, will get over our addiction? China, I think. The very prosperity that China seeks to create must inevitably lead to consumption there. Even modest consumption would be significant. One little car in each of 1.2 billion garages, a chicken in every one of 1.2 billion pots, is a lot of consumption. When their own consumers are buying their own outputs, we won’t be so valued a customer, and the yuan will be allowed to appreciate against the dollar (again, “destroying” China’s dollar reserves, as in our experiment).

Chinese prosperity can cure China’s addiction to American customers. But what will we do when the Chinese don’t need us to buy from? One possibility is that like a bee, we will simply move on to the next flower. Other countries may want to emulate China’s entrepreneurial path, starting as China did with no indigenous consumer class. But the Chinese flower may be unique. The sheer number of people, the policy coherence, the level of education, the cultural work ethic may all have conspired to make China a once-in-a-century opportunity for economic symbiosis. There may well be a place that doesn’t care what the dollar is worth, but it probably won’t be able to absorb as many dollars as we have become accustomed to printing. (And we will still be attached to the oil teat, exacerbating the trade deficit. We desperately need an energy policy that provides certainty that home-grown energy will not be rendered uneconomic by global action.)

What makes our situation so troubling is that the villain in the piece is something most of us, including me, think of as usually benign: international trade. I like the idea of comparative advantage. When two economies have comparative advantages in mutually desirable goods, trade between them is good for both. But the law of comparative advantage ignores the effect of trade on displaced workers. Trade may be advantageous to the traders precisely because it displaces workers. Of course, the gains from trade can create capital that then reemploys the workers at higher wages. But that’s a contingent event: sometimes it happens, sometimes it doesn’t. And when one trading partner’s comparative advantage arises from its people’s willingness to live poorly (broadly defined to include preferring poverty to torture or death), the other partner’s workers are likely to be dragged down to that level if they hope to stay employed.

I’m not making a moralistic argument about how our trading partners treat their people. That argument is available, but there are counters to it that don’t need to be addressed if the argument isn’t made. Whatever one may think of slavery as a form of economic specialization, one ought not to volunteer for it lightly. A national trade policy that costs jobs here because labor of equivalent skill is cheaper elsewhere is a mistake: such practices create a race to the bottom; we get stuff cheaper, but we can afford less of it. And “trade” in which they send us stuff and we send them money is not “trade” at all.

To understand the ramifications of dealing with cheap labor sources one need only apply the classic comparative advantage paradigm. If England sells Portugal wool and Portugal sells England wine, there are fewer vineyards in England and fewer sheep farms in Portugal. Presumably, the people who would have produced English wine or Portuguese wool are busy making English wool or Portuguese wine. But if the Third World sells us all of the labor-intensive goods we need, we can only sell them capital-intensive ones. A country cannot sustain a workforce by selling only capital-intensive goods. Such a country becomes a land of rich entrepreneurs (and bankers) and underemployed proletarians. Sound like any place you know?

We have to stop living for deals. We need jobs not bargains. We need protectionism, not because it’s “good” or because free trade is “bad.” We need it because the Chinese – and everyone else with coolie like labor – should not be allowed to exploit a comparative advantage in labor per se. Any comparative advantage they can get from geography or innovation or education or organization is fine. But we ought not to compete on whose workers are willing to live worst.

I understand that if we impose tariffs or quotas on Chinese goods, we may have a trade war. But that assumes that we are not already in one and losing it. If our trade imbalance with China goes away because they don’t import from us, I believe that our domestic consumers will more than pick up the slack over time, and the stronger dollar will enable us to maintain low interest rates permanently. I know Smoot-Hawley is said (increasingly by people who don’t know anything about the matter) to have made the Depression worse, but that idea seems to have been largely discredited by a host of economists with the perspective that only time permits. China will not revalue the yuan voluntarily, and even if it does revalue it, other cheap-labor states will fill any void created unless we impose real quotas that enable well-run American companies to employ well-educated and well-paid workers. Otherwise, what good are cheap toys?

Decisions Only a Lawyer Could Love – Part I

Two recent court cases reminded me how differently from real people lawyers are taught to view the world. Both decisions support Mr. Bumble’s pronouncement that if the law is as described, “the law is a ass,” as both decisions produce bad results. But neither decision, I submit, is wrong.

The first case involves JFS, a Jewish private school in London. Under British law, religious schools receive state support, and they may give admissions preferences consistent with their religious orientation (as determined by a religious authority). They must not, however, discriminate on the basis of ethnicity. This puts Jewish schools in an odd position, because one of the tenets of orthodox Jewish belief is that a child is Jewish if, and only if, his or her mother is Jewish, by birth or orthodox conversion.

JFS gives an admission preference to “Jews” of all level of observance. The school’s admission policy is intended not only to enable the observant to remain so but to enable the uninitiated to become observant. This policy may be perfectly laudable, but it is not consistent with the purpose of the English law, which is to allow parents to send their kids to schools that teach the parents’ religion. One can easily imagine non-observant Jewish parents sending their child to a Jewish school not to get a religious indoctrination but in spite of it. Such children would be given preference at JFS, contrary to the purpose of the state support. The school’s admission policy is thus inconsistent with the law, and, according the the English Court of Appeal, a mid-level appellate court, its implementation violates that law.

The JFS case involved a boy whose mother was converted by a non-orthodox method and was denied admission by the school on this ground under the schools’ policy of giving preference to “Jews” as defined by the Orthodox rules. The court held that a school may not use the matrilineal test because that is an ethnicity test, not a religious one.

The case has raised a big stink for a couple of reasons. First, if one doesn’t look too closely, the court appears to be deciding who is a “Jew.” But it is not. The court doesn’t care who is a Jew. The court is saying that a school for “Jews” is a tribal, discriminatory place, whereas a school for the children of people who practice orthodox Judaism is not.

Second, inside the Jewish beltway as it were, the ongoing battle of orthodox and non-orthodox rabbis over the nature of conversion is being played out. If the boy’s mother’s non-orthodox conversion had been accepted by the school, the whole thing would never have come up. Of course, the legality or not of the admissions policy would remain the same, but there’d be no plaintiff to make a fuss. The political furor over the case is stoked by this internal battle, but it seems to me wholly irrelevant to the legal case.

To the lay press, the case seems to be about the state meddling in the internal affairs of a religious denomination, deciding to whom a Jewish school may give preferences. But to a lawyer, the case is about whether there can be a “Jewish” school at all, as opposed to a “Judaist” one, a straightforward question of statutory law. The matter is clouded by what many see as a bad result – an orthodox Jewish school not being able to restrict admission to people who can be orthodox Jews – but that result is bad only if you think such a school is worth having, and if you think the state should pay to subsidize it. These are interesting policy questions. But they have no bearing at all on the correctness of the court’s decision.

And Another Thing (about driving in Europe).

Lane discipline. What’s so hard about driving on the right unless passing? Why can’t/won’t Americans do it? It’s the law here. It’s the proper etiquette here. But good manners are simply un-American.

The autostrade in Italy have a speed limit of 130 kph (about 78 mph), except when it rains, when it’s 110. (What’s up with that? Two speed limits, like two flush buttons. Those furriners can handle some complex stuff, by golly!) They enforce the speed limits – laxly, it appears - with roadside cameras rather than patrol cars. And lots of people speed. It’s not at all uncommon to see someone zoom by in the left lane going 100 miles an hour. But on a perfectly maintained (or maintenance-free rubberized asphalt) road, with no morons on cell phones clogging up the left lane, there seems to be no problem.

I think there’s something to be said for the American disdain for rules. Rules are how the undeserving rich stay rich and the undeserving bosses stay bosses. But no one ever accused the French or Italians of being a particularly ruly bunch, at least not recently. The Germans and Brits, yes. But not the French and Italians. Yet they seem to have figured out that driving on the right is a good idea. It lets them go faster. They break the rules by speeding, and they observe lane discipline so that they can speed. They observe a rule so that they can break a rule. Chew on that one for a bit.

Too Big to Fail?

What, exactly, is it that’s too big to fail?  I don’t mean “How big is too big?”  I mean, what thing is it that is too big?  We have been operating on the theory, I think, that the thing is an entity - that GM or Chrysler or Lehman or Merrill or AIG is too big to fail.  But I think that’s a bad mistake. 

As I argued in my earliest posts, what matters is the brand – the USA AAA paper brand.  And if the brand is what matters, it is the brand that is too big to fail, which means that the size of the entity selling it is unimportant.  And what matters to the brand is what is being sold under it.  If subprime mortgages were sold only by smaller investment houses, would there have been any fewer of them, or would they simply have been spread among more distributors?  What difference would it have made if the issuers were not “too big to fail”?  The systemic risk would have been the same, because what has killed the credit markets is not a lack of faith in the distributors, but a lack of faith in the paper itself.

What would have happened if AIG had been allowed to collapse that would not have happened if twenty smaller companies one twentieth its size had been writing the same type of contracts?  If AIG did not have the capacity it had (or thought it had) to write the CDS contracts it wrote, would no one else have issued them?  AIG’s capital would have been somewhere in a world where AIG was not allowed to have it.  Would that capital not have imitated the business practice of industry leaders (e.g., AIG)?  If one of those twenty little firms had been allowed to fail on account of those practices, would they not all have failed?  And would it have made any sense to say that one big firm would have been too big to fail, but the many doing the same thing were not, in the aggregate, too big to fail?

The major policy error being made is the failure to think existentially.  Tradable Credit Default Swaps are, existentially, a bad idea.  It makes no difference how like any other instrument the contracts are.  A CDS allows someone to profit from the occurrence of a bad thing.  No amount of technical or formal analysis can change this simple behavioral fact.  Likewise, systemic risk arises because players may lose faith in the system itself.  The size of entities is a detail.  The question is whether the failure of any player or players of whatever size to deliver on its promises taints the system.  Just how many bad bottles of Tylenol did it take to cause a panic?

Whatever we do to limit the size of entities so that they are not “too big to fail” will be irrelevant.  We’ll feel better maybe, thinking that we no longer have institutions that are too big to fail, but we won’t be any safer.  If our ratings agencies figure out how to rate, and investors, especially foreigners, regain their faith in those ratings, things will get better.  If not, then not.  And if that faith is regained, and it is then lost again, the damage will be as severe regardless of the size of the entities involved. 

I suspect that the only effect we will see from “outlawing” too big to fail is that we will lose the economies of scale that come from the bigness.  Otherwise, the risks will remain unchanged, exacerbated by the Government’s mistaken notion that smaller companies are not “too big to fail.”

A Few Good Ideas

Traveling in Europe in the past two weeks, I saw some things that, as an American, I am embarrassed to admit we are either too dumb or too corrupt to adopt. Here are a few.

Credit card lanes on toll roads. It's so simple. You drive up, stick your credit card in a slot, and go. On "turnpike ticket" type roads, you insert the ticket in one slot, the card in another, and you're done. It's quick because you don't have to wait while the machine processes the transaction. If the machine can read the card, and the card is of a type it accepts, the card is returned and the gate goes up. Defaults are dealt with later, and just aren't a big deal, as the numbers are always small. Of course, they have an RF system like NY'NJ's EZ-PASS, too. Still, the card is a big deal because tourists don't have tags, and so many EU visitors travel freely around the continent but don't all speak the same language.

I don't know why our toll booths can't take credit cards. I suspect union opposition is an issue, but it's hard to accept that our unions are more obstructive than those in France.

Eye-level trafic signals. This one seems like a no-brainer. At intersections where it is difficult for the first car in line to see the overhead signal, the signal post has an additional, mini- signal at eye level that is easy to see. It's just a great help. Why don't we have it?

Variable flush toilets. Ever heard of "country rules"? (If it's yellow, let it mellow; it it's brown, flush it down.) Anyway, the Euros have their own version. The toilets have two flush buttons, one big and the other little. Picture, for example, a circle divided unequally into two parts. The small button produces a "small" flush, which is perfectly adequate for removing liquid. The big button produces a bigger flush. The average flush is probably less than the 6.0 liters our toilets allow, but the big flush is big enough to get the job done. Seems like a much better arrangement than our one-size-fits-all approach. Are we too dumb to use it? Too whatever to use the small button? What? (Dual-flush toilets are available here - just Google on "dual flush toilets" - so maybe they're coming to a public restroom near you. But I haven't seen one yet.)

The question isn't why we can't think these things up. Surely, we can, and even if we didn't, we could adopt them. The question is what about ourselves or our systems prevent that from happening.

Oslo Syndrome

A psychological condition in which one thinks he is the Trustee of a more fun foundation. Sometimes called “genius envy.”

BHO won a MacArthur Foundation award on Friday. That’s the one that goes to very promising people in the hopes that they will someday win a Nobel Prize. The prize was awarded by the Nobel Committee, but that’s a detail. Clearly, it’s more fun to look for people with great potential than to provide the anticlimactic icing for cakes already baked. So the Nobel Prize Committee has decided to reward aspirations. Hey, it’s their money, right? (No point in consulting Mr. Nobel’s will, which has pretty much been ignored for so long that its provisions don’t matter.)

Now all we need is a prize for major achievements. There are lots of almost-dead billionaires. Someone will step up. Not to worry.

Health Care - Some Substance

The trouble with commercial insurance companies is that they are not in the business of reducing risk. They are in the business of lending money. The risk thing is just their way of collecting deposits and determining which depositors to repay. As a general principle, however, they want to insure the largest possible risk, as that creates the largest amount of deposits and, therefore, the largest amount of profits.

Insurance companies compete for premiums on price, but that does not give them an incentive to reduce the risks for which those premiums are collected. An insurer cannot own an insured’s best practices. If your insurance company teaches you how to reduce your risk, you can still shop elsewhere and offer your new, improved risk profile as an inducement to the new carrier to lower its rates. So what’s in it for the commercial carrier to reduce your risk?

Captive insurers provide a different dynamic. They can have lowering their premiums as an objective, as they do not seek to make money for their stockholders on money they get from their insureds (the two groups being identical). So captives are a source of risk-reduction innovation. Nevertheless, mutual insurance companies, which are really very large captives, are not thriving. Mutuals tend to have difficulty raising capital, don’t get the focus from their owners that true captives get, and end up being bureaucracies that exist to provide claims-handling jobs to their employees.

Still, there ought to be a way to tweak the health insurance company’s business model so that it seeks to reduce losses. One way to do that, I suggest, is for the insurance companies to ally themselves, through investment or otherwise, with providers of medical technology. In other words, just as a car company offers financing, medical technology companies should offer health insurance, with enhanced benefits to users of their products. But since no one company offers enough cost-saving technologies to support an entire insurance company’s worth of enhancements, the medical technology industry needs an insurance company that advances a wide array of devices and technologies and makes its money if those technologies actually work to reduce costs.

Imagine, then, a health insurance company that offered reduced co-pays and deductibles for treatments with (or, in some cases, relapses or sequellae after using) a given treatment. Just as patients shop for “in network” docs and hospitals, they would seek out practitioners who use “in network” technology. Because the insurer would receive money from its arrangement with the vendors, it would not seek to maximize the risk it insures. That would give it the ability to pressure competitors into adopting similar subsidies, which would in turn encourage the use of the company’s technologies, making more money for the company even as it loses market share on insurance.

To put it another way, just because insurers have always been bankers, it’s not at all clear why bankers are the only ones who can be insurers. If bankers can use insurance to attract deposits, why can’t manufacturers use it to attract customers? If your product will save lives and reduce costs, why not agree to sell insurance against those costs at a price that reflects the savings you think you can generate? All the manufacturer needs is someone to provide the insurance function, and that someone ought to be a free-standing operation that can make each manufacturer’s product more appealing by offering incentives for the use of many manufacturers’ products.

Indeed, the insurer should offer subsidies for the use of competing products, so that each manufacturer prospers only if it makes the best version of the thing it makes, with that call being made by medical professionals, not by the insurer. Of course, the manufacturers will have to pay to be granted favorable treatment under the insurance policy, a preference analogous to in-network and out-of-network coverage of providers. But competition among in-network technologies should be encouraged.

Anyway, the idea of an insurance company that makes its money from the enhanced sales of “in-network” technologies could facilitate the adoption of good technologies, lower the cost of insurance, and improve the health of insureds. Just a thought…

The Economy – what’s next?

So I have this high-altitude narrative working. According to me, too much money found itself chasing too few goods, only the goods weren’t real goods, they were investment assets, and safe ones at that. The surge in demand for good paper came about because (i) our baby boomers increased their savings rate as their age went up and their risk tolerance went down, and (ii) our trading partners found nothing on our shelves that interested them.

Too much money chasing too few of anything causes the average price of that thing to rise. Most often, the increase in price is achieved through an increase in the actual selling price of the item. But other mechanisms can achieve the same result. Most notably, the product can be adulterated or counterfeited. In that case, the price can stay relatively stable as new “supply” appears to meet the new demand. And so it was with American mortgage debt. When we ran out of borrowers with real credit buying homes with real value, we started pretending that the homes were worth more than they were, and that the borrowers’ credit - which never really mattered in itself but did signal to the attentive that there would be no bigger fools available to buy the homes should the need arise – was better than it was. That way, the nominal yields stayed high (i.e., the nominal price of the instruments stayed low), and everybody was happy. Until the music stopped.

So now what? The boomers aren’t getting any younger, and their appetite for paper has only increased as they try to recoup what they lost in blue-chip stocks, mortgage-backed securities, and other “prudent” investments. We’re still importing oil and toys, and we haven’t achieved any new comparative advantages to support a boom in exports. So. too much money will again be (or is still is?) chasing too few good pieces of paper. But the fraud option is no longer viable. How does that play out?

The stubbornly low yield on Treasury paper, and the bull market in stocks, both in the face of a stagnant economy and a soaring Federal deficit, are the first natural consequences. The prices of these instruments have gone up because the investments are, for the most part, what they claim to be. And people have to put their money somewhere.

On that score, the Americans have little choice. We will pretty much buy American, although a lot of people certainly are loading up on Asian stocks. My two largest holdings – largest because they have done so well and not because I invested heavily in them - are a Chinese travel agency and an Australian mining equipment maker. But still, our major averages are up nicely since March, and the need for Americans to rebuild their savings seems to be driving that.

What, then, will the Chinese and OPEC countries do with their dollars? Remember the wag’s description of the Soviet economy? “We pretend to work, and they pretend to pay us.” Although we can no longer pretend that a dollar will buy anything, our trading partners can pretend otherwise, converting export dollars into local currency for use by the local economy to stay employed and to continue to grow. It doesn’t really matter that the yuan or rial is backed by dollars and the dollars are backed by nothing. If our currency can be backed by nothing, why can’t theirs? (Actually, all currency is backed by the issuing country's ability to offer things for sale - manufactured goods for China, oil for OPEC.)

The only thing our trading partners cannot do is refuse to export to us, until, that is, they don’t need us as an export market. And that’s the game we need to follow now. The risk we run is that the US will outlive its usefulness as an export market. We may experience a functional embargo, a “shortage” induced by everyone else turning to serve the Chinese market because, in the case of Chinese sellers, the domestic growth is a good thing, and, in the case of OPEC, the Chinese have something to sell in exchange for the oil they import. Why should the world’s leading exporters continue to deal with us if they can deal with China? Wouldn’t you rather export to a country that has stuff to sell than to one that doesn’t? Wouldn’t you rather sell to your neighbors for your own currency than to foreigners who have nothing to sell you for theirs?

Eventually, the growth of demand in Asia and elsewhere could bring about a renaissance of manufacturing here, as cheap foreign goods are no longer available. But, just as we need a floor on the price of oil to promote alternative energy, we need a floor on the price (or ceiling on the quantity) of foreign goods to promote investment in production here. That may sound like a trade barrier, but it won’t be one if the barred products aren’t coming anyway. But still, the counterintuitive nature of trade restrictions, and the reluctance of capitalists to rely on them, may augur a period of significant shortages here until we get the political will to stimulate our own production.

This will be a slow process, taking shape as the domestic Chinese (and Indian and Brazilian) economies continue to grow, fed, ironically, by the myth that US dollars represent wealth. That’s because, at the end of the day, those dollars are just an excuse for deciding who among the Chinese, Brazilians, and Indians deserves to be wealthy. Exports to America become a way of keeping score in the game of “Who Makes the Best Stuff.” Because our consumers are good judges of stuff, the stuff we buy the most of is the best stuff (in terms of marketability, not necessarily quality), and that’s the stuff that should be made available to the domestic markets - and the producers thereof made rich for their efforts. We have, for the nonce, a comparative advantage in consumerism – an ability, unique in all the world, to advertise, distribute, test, and validate the products brought to us. That’s a useful thing, and we will benefit from acting as judges of foreign stuff until our trading partners’ own consumers are able to to the job for themselves. Until, again, the music stops.

The Presidential Race

Irwin says Joe Wilson wouldn’t have said what he did to a white President.  Pres. Carter echoed that belief, if not in so many words, last night on NBC.  Let’s suppose it’s true.  Then what?  Do we really want a President who cannot be criticized as aggressively as W. was by, say, Al Franken?  Is there any doubt that the angry and obnoxious things said about the last administration would have been attributed to bigotry had the President been in an historically oppressed class?

A wise young man said to me last summer that all Presidential candidates should be WASP males.  Not because WASP men make the best Presidents, but because they make the best targets when they are not the best Presidents (or candidates).  Look at all the ink spilled on the race or sex of Senators Clinton and Obama and Gov. Palin.  Not a dime’s worth of it had anything to do with health care or Iraq or Afghanistan.  It was all a lot of self-congratulatory feel-goodism: “Look how cool we are letting these ‘others’ take a shot.”  Three cheers for US. 

Of course, there’s some irony in the claim that BHO would not be receiving the abuse he is receiving if he were not black.  After all, he wouldn’t be President if he weren’t black.  He might have got there some day, after he had actually shown some skill as a legislator or character in crisis, but in 2008, he had no such credentials.  The nomination was Hillary’s to lose, and she lost it, but her inevitability strategy would have worked just fine, I think, if she could have counted on her due share of the black vote.  And only a black man could have snatched that from her.  (After that, all BHO needed to get elected was to not be a Republican.)

So the election was distorted, first by Hillary’s sex, then by BHO’s race.  And as the twig is bent, so grows the tree.  The political hurly-burly, the part of our process that ain’t beanbag, must now be fought with kid gloves lest someone be accused of bad thinking.  What do we think of these pics?  Over the line?  No? So can we put BHO in them?  Nope.  New rules apply. 

Liberals make a big mistake, I think, by demanding special consideration for their man.  It’s hot in the kitchen, and if the American people get the sense that we have to turn down the heat for a black President lest we be accused of turning it up on him, we will be reluctant to go down this road again, especially since we have already assuaged our collective consciences for all that slavery by sacrificing Hillary to the gods of political correctness.  (Irony there, too: so much of feminist politics is a coat-tail play on the mistreatment of African slaves; it’s time we were reminded of the relative magnitude of the atrocities to be rectified, and BHO’s victory over HRC did that very well.)

Joe Wilson’s War - continued

This post responds to Irwin’s last comment. It turns out that comments are limited to 4096 characters.

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Irwin -

You say my dislike of BHO is showing. Am I obliged to like the President? Or are you saying that once I decide that I don't like him, I am somehow disqualified from commenting on the things about him that I don't like? Who are we to expect to criticize the President if not the people who don't like him? His acolytes? I am not saying "trust me, the President is lying"; I am saying "LOOK - Here are the President's lies." I don’t see whether the status of those statements as lies turns on my like or dislike of the man making them.

Your reference to Jefferson is ironically apt. You have read Founding Brothers. Ask John Adams if Thomas Jefferson was a liar. But otherwise, the analogy doesn't hold. The Declaration of Independence was not intended to mislead anyone regarding the issue of equality. BHO's pronouncements are intended to mislead real Americans about things they really care about. That's lying.

Your reference to finding "lies" in the Gettysburg Address suggests that my standard has something to with naked accuracy. I'm not complaining that BHO's statements are inaccurate like Jefferson's claim about all men being created equal. BHO's statements are all accurate. But they are nevertheless intended to mislead. Bill Clinton said that he did not "have sex" with that woman. That was accurate, too, but it was hardly true. That's why I call BHO's statements on Healthcare Clintonesque.

I doubt that I used the word "liar" to describe the President. I said he is lying and that he lies to advance his political agenda. But I am not uncomfortable with political lies, and if you'll notice, I have not really condemned BHO for telling his. I have simply said that he is behaving like other politicians: that he does not represent a "new" politics, that when he speaks, he should be taken no more seriously than his less articulate predecessor. And that we can learn something about the possible effects of his proposed legislation by looking at the things he chooses to lie about.

This may sound like parsing, but I draw a very sharp distinction between "he is lying" (or even "he lies") and "he's a liar." Liars lie to pretty much anyone whenever it suits them. But everyone lies sometimes ("No, you don't look fat in that dress, dear"), and politicians lie because politics is the art of the possible, and sometimes lying is the only way to get things done. It’s no big deal ethically, but it’s a datum not to be ignored.

The sensitivity you feel about the term "liar" is well-founded. But if you search this page for the word, you will find it only in your comments (until right now). I do think Bill Clinton is a liar. But not BHO. He's only a politician whose lies happen to follow Clinton's model. Which leads me to say that my first paragraph was offered arguendo. In fact, I don't dislike BHO. I just don't think he's as special as you and he say he is.

You say "only the most tortured interpretations of what is (in fact) in the House bill would find concern in whether or not illegal aliens could 'sneak' into the health care system." But then you say "I trust that you are not suggesting that it would be wise and cost efficient to set up an elaborate verification system for people who come into use hospital or MD services to make sure that they are illegal. That is simply not a workable solution." So, why are we to eschew an elaborate verification system? Because the House bill "covers the issue," or because the verification system would be unworkable?

Why do you doubt that people would lie to get health insurance? As I have said, I don't care if they get it; I just don't want the President to pretend that they won't get it just because the law says they can't. The law says they can't be here, and yet here they are. Why would a legal provision denying them health insurance be any more effective than the ones denying them entry?

With regard to the public option:

1. Did you try pasting the link into your browser? It isn't a real link. You can't click on it. You have to copy it to the browser's address window. But here it is as a link (I hope).

2. I don't see the inconsistency in my position. The public option is still up for debate, and its form will be relevant to its implications. More important, its implications will probably be too hard for me to fathom even when I know what the law is. I have no idea how the actual carrots and sticks will play out - the system is too complex. But if you tell me that a bill denies a thing to illegal aliens, but does not require that those who seek that thing prove they are not illegal aliens, I'm pretty comfortable with the expectation that illegal aliens will get that thing. One question is hard, the other is easy. I can't answer the hard one. I can answer the easy one. What's the problem?

3. I don't know or care whether the public option issue is "dead." I care about whether the President is lying about it. That's the subject of my posts - the President's credibility. If he were lying about the price of tea in China, in which I have no interest at all, I would still find it noteworthy that he was doing so.

4. I have not said that the pending bills will "force" anyone to do anything. I have said that whether the language "forces" anyone to do anything is irrelevant, because only the effects of the law matter. Thus, for the President to say that the law will not "force" anyone to change their plans, as if that meant that they would not, in fact, end up with changed plans - which is, after all, what they care about - is disingenuous. That's why taunts about finding language that will do X or Y are misdirected. It is precisely the irrelevance of the President's accurate claims that I find telling about his political methods.

5. Of course, BHO knows the difference between overhead and profit, but he saw fit to cite profit as part of the "overhead" that a public option will obviate. If he knows profit isn't overhead, and he lists profit as part of the overhead that makes private insurance bad, what word are we to use for his doing so? "Spin"? "Puffery"? "Sizzle?" I think "lie" is the word we'd be looking for. Don't you?

How can I engage in debate about "Obama's Health Plan." First, he has not spelled it out, so how can I debate it? Second, it provides universal coverage, will not reduce anyone's benefits, and won't raise the deficit. Except for the higher taxes I will pay, which I'd be OK with if he can put a unicorn in every stable, what's not to like? It's a great plan.

I'm dead serious when I say that I don't know what effect the plan actually adopted will have. It's too hard. Like the guys in Plato's cave, I can only look at the shadows on the wall. In this case, those shadows take the form of the President's rhetoric, and I know enough about political rhetoric to know that he is promising things that don't matter. He says I won't be "forced" to change my plan and that illegal aliens "won't" be covered, which means to me that I may find my plan changed as a result of the law, and illegal aliens may very well get coverage by deceitful means (making the deficit claim unreliable). That's precisely why I have been posting about the rhetoric. The substance is too complex for us mere mortals to get. But the lies are pretty easy to spot.

As for your inference that Joe Wilson would not have said what he said to a white man, what would agreeing to that claim change? Would BHO's statements be rendered no longer misleading? Would the public option become more or less a dead issue? Would more or fewer illegals lie to get coverage? Your post started with an ad hominem argument (that my alleged dislike for BHO somehow taints the facts or deductions I have offered), and it ends with one (that alleged racial bias in Joe Wilson's effrontery makes his claim less true). But ad hominem arguments are just a form of genetic fallacy; they have no persuasive force on the merits of the issue. Why would I comment on an irrelevance in discussing a post that protests irrelevance?

Joe Wilson’s War

Rep. Joe Wilson (R-SC) shouted “You lie” at the President during the latter’s speech to the Congress on Wednesday night. (The President had just said that his healthcare plan would not cover illegal aliens.) Of course, Wilson was right – I’d be hard-pressed to deny that the President lies, having taken that very position on this blog more than once, and I think he was lying in this particular case – but Wilson was also surely out of line to say so then and there.

Gail Collins writes this morning that “just to make sure nobody else ever goes off the rails like this again, the Senate Finance Committee is changing its version of the health care bill from one that does not provide benefits to illegal immigrants to one that absolutely, positively, for sure does not provide benefits to illegal immigrants.” I think that Ms. Collins, funny as ever, has sacrificed truth to accuracy. What really happened is that the Senate Finance Committee is changing its version of the health care bill from one that says it does not provide benefits to illegal immigrants to one that actually does not provide benefits to illegal immigrants.

This little distinction sadly captures the essence of the President’s method. His plan, recall, will not “force” anyone to change their health plans – it will merely result in their having no practical choice but to do so. Likewise, to say that the bill prohibits illegal aliens from getting free healthcare is like saying that our immigration laws prohibit them from being here in the first place. As, of course, they do.

On the merits of the issue, I don’t care. Indeed, I actually prefer illegal aliens’ being covered to my having to prove that I am a citizen. I mean, if healthcare is a universal human right, if we provide it to convicted felons, why on earth should we not provide it to anyone who can figure out how to get to the doctor? If the only effect of the bill is to make illegal aliens the only ones who still use the ER as a primary care center, what’s the point of the exclusion? And if I think that way, can we believe BHO does not think similarly? Which means he’s lying about what the bill does not because he thinks it lacks a flaw that it has, but because that flaw is entirely consistent with his program.

And, as Forest Gump might say, that’s all I have to say about that.

Obama on Healthcare II - More of the same

First, if you are among the hundreds of millions of Americans who already have health insurance through your job, Medicare, Medicaid, or the VA, nothing in this plan will require you or your employer to change the coverage or the doctor you have. Let me repeat this: nothing in our plan requires you to change what you have.

Now, I don’t know how much BHO’s plan will look like Hillary Clinton’s plan, but his speeches are certainly channeling Bill Clinton’s style of dissimulation. No, the President’s plan won't force anyone to lose anything; it will simply make it impossible for a business to remain competitive and continue to provide the plan it is is providing. No coercion there, nosiree.

But by avoiding some of the overhead that gets eaten up at private companies by profits and excessive administrative costs and executive salaries, it could provide a good deal for consumers and would also keep pressure on private insurers to keep their policies affordable and treat their customers better

Are you paying attention? “overhead that gets eaten up at private companies by profits … and executive salaries.” So we are going to have a level playing field after all. The private companies can compete successfully simply by paying their senior executives on the Civil Service scale and paying their shareholders, well, nothing.

Let’s leave aside the fact that the President is lying about the equal playing field. Obviously, an insurer that does not have to pay for its capital or compete for managers – it’s not clear why the public option companies won’t have to pay a lot for competent management, but I guess it’ll be a good place to get your ticket punched on the way to a big salary at a for-real insurance company, if there are any left when the smoke clears – such an insurer can do what it does more cheaply than can a company that actually has to raise capital in the private market and recruit real executives who know something about running an insurance company.

No, let’s leave the nonsense about competition aside. Let’s ignore Mr. Obama’s specious analogy to co-existing public and private educational systems. Let’s focus on the President’s claim that profits are somehow the problem – that the private sector could deliver better health insurance to more people if private companies weren’t saddled with the need to make money. How can the President of the United States of America denounce profits per se – not “windfall profits,” or “gouging” or “profiteering,” but the very essence of free enterprise itself as something Congress should pass a bill to obviate?

When conservatives claim that the President is a leftist – not a liberal, but a leftist – they sound shrill. But what are we to call a man who thinks profit is overhead, or that executive talent grows on trees? These are precisely the things that socialists and communists believe. They believe not only that the profit motive is corrupt – it certainly can be corrupting -but that ipso facto an economy can operate without it, and it is government’s job to see to it that it does.

The President’s speech was downright Orwellian. Not only does his plan do what he says it won’t do – compel businesses (by the gravity of competition rather than the force of law) to drop their private plans in favor of a one-size fits all public plan – but it reveals his complete and frightening alienation from the entrepreneurial model that drives our economy and, by extension, the economies of all of the less entrepreneurial states (read, Canada and Europe) that live off our innovation and hide behind the military shield our wealth supports.

Confessions of an Existential Socialist

A libertarian premise that seems to go too often unchallenged is that we “own” stuff in more than a legal sense. Ownership is strictly a legal invention. Society gets together and says that it will authorize and direct certain of its number to enforce members’ control of certain resources. I get to say who lives in “my” house only because I can call the cops on anyone who contests my right to do so. Absent that ability, I can claim to “have” my house for as long as I can defend it, but not to “own” it.

It follows, I think, from this notion, that society can say to what extent “ownership” confers privileges. Nuisance laws exemplify this point. If there are certain things you just cannot do on “your” property, then there must be strings on its “your-ness.” Society may allow you to do more things with “your” stuff than with other stuff, but that’s society’s decision, not yours. Everything belongs to everyone because everyone can decide at any moment that nothing belongs to anyone.

Viewed in this light, the arguments between capitalists and socialists become less philosophical than the participants make them out to be. The question that matters is not whether “ownership” confers privileges by natural magic but, rather, what privileges ownership will confer by common consent. Within this argument, there is a lot of room for the laissez-faire view that ownership should confer a very wide degree of control. But those arguments should not take as their premise the circular claim that “it’s my money.” If we’re trying to figure out what consequences should flow from it’s being “your” money, how can we say that some particular consequence arises necessarily from its being “your” money?

The idea that private property is a social construct is like the idea that morality is socially developed. Both leave the absolutist with no place to stand. Nothing “has to be” a particular way. All rules are arrived at by active or passive consent to their promulgation or unplanned emergence. And this broad idea feeds back into the choice of evolutionary questions generally, specifically, “Why did x arise?” vs. “Why does x persist?” “Why does a bee sting?” is not as useful a question as “Why do stinging bees out-reproduce non-stinging bees?”

Economic systems, morality, and evolved traits all depend on their consequences. Whatever has what it takes to persist, persists; everything else goes away. Not because some authority says so, but because nature is inherently competitive, the more survivable supplanting the less so in every realm. It is this essential competitiveness that drives my reductionist view of things: if everything is competitive, analysis of all things should begin with the question of how competition brought it about and kept it in place.

Everybody Hates Game Theory

I wrote in April about the Prisoners Dilemma as the template for situations in which Government regulation is appropriate. I have been putting that idea forward for some time in various fora, and it has almost always been greeted with hostility. Not disagreement – although, of course, that, too – but outright hostility. Something there is that does not love game theory.

I’m engaged in another round here. Note how testy some people get. I get accusations of intentional obtuseness, claims that I’m arguing red herrings, and, in general, a flurry of desperate evasions from some very intelligent people who would would see through the same level of logic if it were aimed at them. People just don’t like the thing. And that’s interesting.

I think the problem is that game theory has no agenda. You cannot trust it to support you, and it takes the fun out of being right when it does support you. Where game analysis of a situation suggests that coordination of action would benefit all involved, the result is a prescription for government intervention. But the prescription comes without the feel-good element of sacrifice. To raise the minimum wage because “no one should have to live like that” makes liberals feel all warm and fuzzy, but the emotional pay-off is diminished if, as game theory teaches, the businesses paying the inadequate wages had no rational alternative, and so weren’t villains after all. Even worse, the change will actually increase everybody’s wealth, including the idea’s supporters. Where’s the fun in that? Consequently, liberals tend not to like what game theory has to say.

Conservatives, especially libertarians, don’t like game theory because, where it supports intervention, it impinges on their autonomy. I like autonomy. I like to decide for myself what risks to take, where to shop, how much to pay, etc. So I’m suspicious of nostrums that restrict my action, and when you tell me that it’s in my interest because John Whackjob Nash says it is, well, that’s not likely to change my mind. The whole thing reeks of ivory tower mad science. So what amounts essentially to an immune response to the unknown includes not just resistance, but ad hominem attack. Conservatives do not so much refute game theory arguments as reject them as inconvenient. I think the response is perfectly natural, but it is unhelpful. And fascinating.

I’m not sure why I’m so comfortable with game theory as a tool of policy analysis. Maybe I like the idea that it ignores my prejudices rather than feeds them. Also, I’m not wedded to the outcome of the exercise as determinative of my policy position. Almost all “good” things are only contingently good. Thrift is good unless it destroys consumption. Efficiency if good unless it puts people out of work or shortcuts full exploration of options. That’s a big one: the fastest way to find a qualified person to do something is to limit the pool arbitrarily to the smallest number likely to contain a qualified applicant. You don’t get the "best" person, but you get an adequate person, where, as is often the case, the marginal cost of getting the best person is far greater than the maginal value of the improvement. Nevertheless, that sort of efficiency is unfair, and that matters, no matter what game theory says. Not being overly committed to what game theory suggests, I’m not worried that it will unthinkingly take me where I don’t want to go.

On the other hand, as a philosopher friend once remarked, self-descriptions are not privileged, i.e. I may have no clue as to why I find game theory so hospitable and others don’t. But I do know that I do, and that they don’t, and that it shows.

Limiting Pay

There are a lot of reasons why people want to limit the pay of CEO’s, investment bankers, and money managers. Most of those reasons are bad. Yes, there is an unseemly disparity in income levels between the top and the bottom, and yes, no one needs to make $1,000,000,000 or more per year managing other people’s money. But limiting income disparity artificially and paying people “according to their needs” are bad ideas; they either remove incentives for achievement that create the wealth of the nation, or they delegate to fallible and corruptible bureaucrats decisions that the market can make in a dynamic and self-correcting manner.

But there is a second-order consequence of limiting pay. The current pay regime allegedly creates incentives to risky behavior – behavior of a sort that could bring down the financial system and the economy. If the claim is true – it is just a claim – then one needs to consider effectively limiting those incentives, and if limiting those incentives involves limiting pay, then that’s just how that cookie crumbles. One need not have a socialist bone in one’s body to want to protect our economy from collapse.

So, two questions arise. First, is economy-threatening risk-taking a product of the opportunity to make a ton of money risking other people’s money? And, second, if so, what should we do about it.

I can’t answer the first question. I can only say that I would entertain the possibility, and until I know the answer, I wouldn’t oppose efforts to limit compensation on principle.

As for the second question, how to limit pay, I think the income tax is the only viable approach. The progressive tax structure should add brackets at $1,000,000, $5,000,000, $25,000,000, and $125,000,000 of ordinary (not capital gain) income. And partnership income (e.g., hedge fund contingent management fees) should be treated as ordinary income to the extent the partner does not have a proportional amount at risk.

But that’s only if the case can be made that risk-taking was a but-for cause of the late unpleasantness. And I’m not sure that case can be made.

Bob Herbert is a racist.

His Op-ed today contains the following:

Mr. Gates is a friend, and I was selected some months ago to receive an award from an institute that he runs at Harvard. I made no attempt to speak to him while researching this column.

Nosirree, Bobby, don’t you get yourself all confused by the facts. Just join the list of liberals who are most proud of not having had to be there to know what went down there. Only an idiot would actually have had to see what happened at Gates’s house to know that the man was a victim of racist cops run amok. He was doing nothing wrong (disorderly conduct being a civil right, not a misdemeanor), and he was black. Res ipse loquitur.

There is a metamessage in every complaint about race. Every such complaint reveals that people are still complaining about race under the circumstances being complained about. My guess is that most white Americans see what happened at Gates’s house as unexceptional and unexceptionable. All Gates had to do to avoid this mess was behave the way any white man would have behaved in the same situation. Maybe, a white man would have been cut more slack for behaving badly, but then, charges or implications of anti-black racism are, one hopes, uniquely obnoxious, so maybe the reaction it allegedly provoked is the best evidence of its untruth. (Do you think a black man could have pissed off a white cop fifty years ago by accusing him of racism?) But even if Gates were allowed a bit less slack than a white counterpart might have been, that’s the sort of thing one should want to know more about before assuming to be the case. Is Bob Herbert really spilling all that inky bile to say “Crowley should have cut my hotheaded friend some more slack”?

Herbert calls Gates’s offense “being angry while black.” Compare that to “being unjustifiably angry and verbally, race-baitingly abusive while black to a man who is risking his life to protect your home from reported burglars while white.” Do I know that’s what happened? Nope. I wasn’t there!!! Does Herbert know it didn’t? Yes, because he. like Gates, is black for a living and so didn’t have to be there.

DWB stops are unacceptable because the victims are not doing anything that a white person wouldn’t ordinarily do under similar circumstances. Driving is not some misdeed a white man might get away with, and stopping a black man for doing it (and not also exhibiting other antisocial indicia – pimped-out ride, darkened glass, etc.) is racially motivated police action. But in the Gates situation, race may have at most been an unconscious element in a loss of patience. Or maybe not; maybe the accusation of racism, terrible thing that the accuser routinely tells us that it is, more than the race of the accuser, was the accelerant to this particular conflagration.

Such distinctions – the difference between having a short fuse for black citizens and being called a racist by a black man whose house you have come to protect – are lost on racists like Herbert, for whom not inquiring further is a badge of honor. After all, how could an event be symptomatic if it is idiosyncratic? The details can only detract from the outrage. Sometimes, the devil wants no part of the details.