Monday, February 23, 2009

Thoughts on the bottom

I don't think we're at the bottom, but I think we can probably see it from here. Three data points, and some thoughts on this.

One, stocks are still expensive by historical standards. Maybe after today's selloff they'll be more in the ballpark, but despite all the hysteria we're still above historical P/Es:

"By this measure, the P-E ratio of the S.&P. 500 is now about 14.5. It’s below average [which is 16], but not enormously so. By comparison, this ratio fell to 6 during the 1930s and 7 during the early 1980s. In short, stocks are a little less expensive than their historical average. But they are far more expensive than they were at the worst points of the other two worst recessions of the past century."

Two, housing prices are way down, but somewhat incredibly, sales are brisk:

"An estimated 29,458 new and resale houses and condos were sold in the state last month, an increase of 53.9 percent from the year-ago period, DataQuick said."

Three, the stimulus is going to work very well, and the bank & housing plans are going to work well enough. Richard Norton's The American Dream vs. The Gospel of Wealth has a collection of very clear charts illustrating the benefits of demand side tax cuts. It is not the whole story since it mostly leaves out the advantages of investing in society, but it's a good start. Unfortunately none of the charts appear to be available online, although this page seems to have at least some of the data he collected. But basically, business investment goes up, unemployment goes down, real income & GDP growth goes up, and so on and so forth.

US stocks & housing were both overvalued because for decades, there was so much loose money in the top of the economy that it had nowhere to go but chase sketchy deals. But this week is budget week. Obama is going to propose - and pass, with or without Republican support - a modest tax increase on the wealthy. We are finally shaking off supply-side and taking money that was chasing its tail in the bubbles and investing it, in the old sense of investing (i.e. putting money to work). The next phase will be a wringing out of excesses, Volcker-style, which will involve pain but is the only path towards putting the economy back on a long-term path to growth.

Stocks coming back into line with historical averages is going to be part of that process. If anything they should be well below historic P/E averages, because there are still a lot of things that could go horribly wrong. Obama and the Democratic leadership successfully navigated the stimulus past the neo-Hooverites and the Santellis, but now for it to be effective we have to get it past the kleptomaniacs. It's not at all clear that our democracy is up to the task. And the Santelli types are disorganized and inchoate at the moment, with little to lose they have an opportunity to take bigger strategic risks. They're going to pitch a thousand hissyfits over the budget.

The irony here is that on some level (and apologies for this, Senator McCain), the fundamentals are strong. The question is how dig do you have to deep to find them (and the other question is how tone-deaf of a politician do you have to be to say that at the beginning of a mini-depression). A $50+ trillion "market" collapsed over the past few months. That's a lot of horseshit, but at the center of it, there is still a $15T pony under there. That pony is the greatest consumer market the world has ever known. This is why sales of California housing is brisk. Even with wave after wave of foreclosures, there are either enough people who saw this coming and waited patiently on the sidelines to drive demand, or the speculators are getting back in. Hopefully it's the former.

Yes, there will be rubble from the collapse. The best technical bookstore in San Francisco, Stacey's, is right across the street from my office. It's closing and this is a terrible loss. We may skip along the bottom for a while. But while we will get through it in some fashion, the big outstanding question is whether we can use the crisis to put our economy (and our lives) on a more sustainable course.

Monday, February 16, 2009

Preliminary thoughts on Beinhocker's Origins of Wealth

Someone - or perhaps many someones - could make a career out of turning the "very interesting research plus partially thought-through policy proscriptions" genre into ideas with real political impact. Maybe this is a recipe for a new think tank: scan for this stuff, develop the ideas the rest of the way, determine how to best get them across and then run advocacy based on that research. Eric Beinhocker's The Origin of Wealth and Dan Arielly's Predicatably Irrational both belong to this emerging category and would have tremendous potential for this approach.

Beinhocker's biggest win is the sheer size of the ideas. From the preface: "I...believe that just as biology became a true science in the twentieth century, so too will economics come into its own as a science in the twenty-first century...this book will argue that what we are witnessing in economics today is in fact the early stages of...a paradigm shift." He sets the controls of the heart of economics and goes far in making the case that the very core of the discipline is rotten.

What's at stake in this shift is decidedly not comparable to the turn of the century revolution in physics, where in moving from Newtonian to Einsteinian models, everything basically lined up except for the edge cases (i.e. for things moving near the speed of light or things that are very small, near the Planck length). The assumptions that traditional economics makes often don't match reality either close up or from a distance. The Complexity Economics Beinhocker describes basically rips out the Walrasian equilibrium models, and replaces them with complex adaptive systems. These systems and the models they generate both line up better with how economies work at the human, individual micro- level as well as at the historic macro- level.

Wealth is created from the interplay of what Beinhocker dubs Physical Technologies, Social Technologies and Business Plans, which function as a sort of wealth-creating DNA. Wealth is "fit order," created through jointly meeting 3 conditions: irreversibility, locally decreasing entropy and fitness. This is far too brief of a summary but it is a gorgeous idea: supple, flexible and with a grand historical scope. It's the math behind the history of human cooperation in Robert Wright's Nonzero, a book Beinhocker references frequently.

In terms of the math and the science, there are clear gaps that need filling, which Beinhocker clearly indicates. Equilibrium-based models work for a great many purposes and will continue to do so even as Complexity-based models become more useful. But despite the out-of-control nature of evolution and complex adaptive systems, the key to his analysis of the implications of Complexity Economics is this:

We may not be able to predict or direct economic evolution, but we can design our institutions and societies to be better or worse evolvers.

Policy Implications

The policy side of the book has two big problems. One is structural and likely nothing more than a function of the current state of the research. The other, based on a total misunderstanding of the progressive position on markets, is less understandable.

First, his telling of Complexity Economics seems to gloss quickly over the clear role democracy plays in economic evolution. He divides the processes that sort business plans according to effectiveness into two categories: Big Men and markets. Yet over the course of a few pages devoted to the role of democracy, he points out that "in 1700, America's GDP was 5 percent of Britain's and, by 1775, was 40 percent.."one of the highest growth-rates the world has ever witnessed." (297) - and that this was due in large part to the politics and culture of the colonies.

For another example, consider the growth and broadly shared prosperity of the post-war US economy. The fitness functions of a functioning democracy in a mixed economy seem to have the ability to shape the economy far more effectively than a dictator. But the interplay between functional democratic institutions and economic growth merits only three pages. There is a clear but unexplored connection to Sen's concept of substantial freedom, for another example: in fact it may be that substantial freedom could be defined as the degree to which one can deflect the fitness order with one's preferences. Arguably this is all outside the scope of Origins, but it's certainly an area for more study.

The more incomprehensible problem is that the one chapter specifically devoted to policy implications is built around a somewhat jarring end to left-right/end of history artifice. Maybe this only reads so strangely in the decidedly post-Fukuyama world where Obama is president: Origins was published in 2007. But it relies on a particularly flimsy anti-market strawman of the left that was no more accurate in 2007 than it is today, as if he mistakes the anti-globalization WTO protesters as the left's entire argument. If this isn't an indication that the left needs more aggressive idea marketing, I don't know what is.

Incidentally, as they say on Battlestar Galactica, this has all happened before. Bob Kuttner's April 2003, "Beyond Left and Right: a Guide for the Unwary" picks up the same pattern in discussing the lefty approaches offered up by the New America Foundation as centrist:

"...Lind doesn't deign to address the political obstacles. The very phrase, "Imagine a federal program ..." is a nonstarter in the current Bush era, let alone a program of national economic planning. (If you want to imagine something, imagine the Republican catcalls at the presumption of large-scale social engineering.)

We're in a different moment now, to be sure. An $800B stimulus was unthinkable six months ago and will be signed into law on Tuesday. But in Origins as then, the Rawlsian-compliant opportunity and social-capital expanding proscriptions he offers - such as "efforts to encourage voting and political involvement" or "[r]eforms to make workplaces more family friendly" or "better public transport" and more urban-friendly land-use laws - are all utter nonstarters with what's left of the conservative movement in the US.

Ultimately these two issues may be a quibble. The point is that we can design our institutions across the business, government and nonprofit sectors to evolve more quickly and vigorously

Movement Implications

There are powerful implications for the movement here, both at the movement strategy and the organizational development levels. His conception of strategy as a portfolio of experiments, while brutally difficult to implement, manage and execute, sounds like a key success factor as well as exactly the kind of strategy that a revamped conservative movement (with less to lose) could adopt.

At the organizational level, the key to this is creating organizational cultures that allow for increased evolution. Beinhocker covers so much ground so quickly that he doesn't have a chance to get into this in too much detail, but he does provide 10 commandments of evolutionary culture as a starting point (371):

Performing Norms
1. Performance orientation
2. Honesty
3. Meritocracy

Cooperating Norms
4. Mutual Trust
5. Reciprocity
6. Shared Trust

Innovating Norms
7. Nonhierarchical
8. Openness
9. Fact-based
10. Challenge

There's a clear connection to the Learning Organization school of organizational development: evolutionary optimization and strategy as a portfolio of experiments both sound like tools for executing and evaluating the learning organization. Again there's a lot of room for further analysis here. And this points towards an organization focused on horizontal movement communication, organizational development and spreading best practices around evolving strategy as another serious movement-level gap. (although one that a group like the Democracy Alliance could perhaps step into relatively easily)

Thursday, February 12, 2009

Thinking Big, Thinking Forward

Yesterday, I was privileged to attend Thinking Big, Thinking Forward, put on by four of the groups doing the best work on the economy in the movement: the Economic Policy Institute, the Institute for America's Future, Demos and the American Prospect.

I'm not going to try and get into the content, because there was just too much of it for me to cover remotely adequately here. I posted a few real time reactions to twitter with the #thinkingbig tag (which no one else took up - more on this later). Overall, it was an outstanding event. There was certainly evidence of the somewhat chaotic pile-of-silos approach progressives ordinarily employ in endeavors such as this, but it seemed like there was a strong effort to move beyond that. The great preponderance of the presentations were well crafted and interesting. I agree with presenter Mark Schmitt's observation that thinking big, to him, means putting the whole thing together somehow, and it may not have quite gotten there, but more on this later too.

So here are a few points of unsolicited but hopefully constructive feedback:

1) Racial and gender diversity. I know this is a big challenge, and I'm sure Larry, Miles, Bob & Roger and Bob Kuttner have known each other for years. Every last one them are progressive champions and on the whole, they did better than most events of this nature. One of the more interesting panels had Jerome Ringo of the Apollo Alliance and Michelle Collins of ShoreBank, and Dr. Manuel Pastor Jr. of UCSC and Deepak Bhargava of the Center for Community Change presented in the afternoon. So while there was relatively good panel diversity, the concern here is top-line leadership diversity. Why not elevate CCC or the Apollo Alliance (who were represented on panels), or for that matter, Green for All, Opportunity Agenda or PolicyLink? (who weren't) I know these things get geometrically harder to plan with more groups, but it is incumbent on movement leadership to keep the fact that if we're not connecting with women and racially diverse communities, we're not just doing it wrong, we're not going to get where we want to go. The only way to do that is to bring diverse leaders and groups in at the foundational, leadership and strategic levels.

2) Presentation Quality. You would think at a meeting where people are putting out lots of complex information that there would be a better mix of visual communication. We can't all be Al Gore or Steve Jobs, but we can all learn from how they communicate. For the few folks who did have slides, many of them could have used an overhaul. (hint: if you have to apologize for how much text there is on a slide... revise the slide!) Presentation Zen is a good starting point. Also, a switch to a more TED/EG style model of 15 minute presentations rather than a panel might encourage more concise storytelling.

3) Social Media Exposure. While it's unlikely that this kind of event would generate much earned corporate media coverage even if the Vice President had been able to make it, it does seem like there's a lot of room for better social media exposure. Of the 900 some-odd folks there, from the searches I ran there were only a half-dozen people using twitter, and not even a critical mass of people to pick up the hashtag I proposed. There were no facebook pages or invites as far as I could tell. This is a movement wide problem, and it does seem that the right is outflanking us already in social media usage on the movement/organization side (if not on the campaign side). While yesterday's content was likely too technical for a broad audience, we should be doing a better job of reaching people like the person who practically begged the presenters for better communications tools at one point in the Q&A.

It seems like ideas marketing (broadly conceived) is still a gap that no organization is yet quite filling, even while many orgs have it as part of their missions. More effective use of social media could be a low-cost way of making this happen. We have to do a better job narrowcasting to the group of people who are already interested this, meet their needs, and then start figuring out how to grow the size of the audience we can reach effectively.

One other general thought: for a long time, I have chalked up the left's lack of a forceful, clear argument for a progressive economics to... I'm not sure what, but something internal to the movement. A short list might include ossified and/or thick-headed leadership, structural issues around what does and doesn't get funded and why, some variant of beltway fever (maybe a "not invented here" strain) that repels solutions-oriented thinking from outside, historical divisions and structures, and even (everyone's favorite excuse), the good old fashioned lack of resources.

All those are certainly very real issues (although I think the thick-headedness is less of a problem, and the lack of resources moreso), but I'm also thinking that there's simply a natural, historic progression to these things. Maybe reading Beinhocker has me thinking that every big, complicated process is an evolutionary one, but it seems like this probably really is. Arguments evolve. While there are numerous factors that can increase & decrease the rate of evolution (and what those factors are would be an awfully interesting analysis), evolution takes time. The right's arguments are so clear, powerful and resonant - even now, amongst the obvious economic devastation that governing under their argument has led to - simply because they've been at it for so long and have been able to boil their arguments down to their most simple and persuasive cores.

I suppose I'm being a little more zen about this, which might be helpful to the process of reading, synthesis, execution of research and writing that we need so much more of. Maybe we need Top Thinker, the progressive economics version of Top Chef. Or how about an unconference of some kind, perhaps FooCamp (closed, elite invite list) or even one BarCamp (open invite list) style? I found myself awfully curious about where people in the audience were coming from and why and how they were there. An unconference could help figure that out.

So while arguably no one was really able to pull it together in a satisfying way yesterday, maybe the big takeaway is that we're headed in more or less the right direction, and how helpful it is to get folks in a room and talking.