Month: February 2021

A Nation of Storytellers

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February 28, 2021

by Steve Stofka

In our national narrative, the sheriff comes to town and the virtuous town folk walk without fear. Four years ago, President Trump promised to be that sheriff, routing out the miscreants that lived in the Washington swamp. When he was the unlikely winner of the 2016 election, religious romantics attributed his victory to God, not the arcane rules of the Electoral College. When he lost the 2020 election, God was nowhere to be found. He had been chased off by cheaters who had stolen the election from their candidate. Hollywood could only have been invented in America. We are storytellers.

On January 6th, a group of self-dubbed patriots attacked the Capitol building in Washington. In their eyes, the lawmakers in that building were illegitimate, and the vigilantes assumed their Constitutional duty to unseat those lawmakers. They were the Tea Party attacking the British in Boston Harbor more than two hundred years ago. Through social media they had amplified their role in the American myth, taking center stage in a fight for freedom.

America is a game of Prisoner’s Dilemma, the game theory scenario where two prisoners, each in a separate interrogation room, must decide whether to confess to a crime. If neither confesses (they cooperate), they get off with a light sentence. If one confesses and the other doesn’t, one goes scot free and the other is given a harsh sentence. If they both confess, they are both given a medium-term sentence. The players have a choice to cooperate (neither confesses) or defect (confess). If the game is played once, it is better for each prisoner to defect. If the game is played multiple times and there is a memory between games, the prisoners should cooperate.

American politics is not a cooperative game. Within a decade after the ratification of the Constitution, the founders realized, to their dismay, that they had created a vicious party system. In 1800, the founders themselves were engaged in an electoral battle, ready to smear each other’s reputations and the honor of their families to gain the power of the Presidency.

In the halls of Congress, the prisoners meet in committee rooms. They confess to the crime of representing their constituents. They confess to the sin of defending their principles. They handcuff themselves together with rules of order, then come out fighting. They play this game every day, each party unable to cooperate with each other, but telling themselves a story that they are cooperating with the rules. Outside the halls of Congress, their constituents are fighting without rules. The breach of the Capitol building brought the fight inside.

We are storytellers. After World War 2, many Americans lost their jobs and careers on suspicion that they were Communist sympathizers. Today a common phrase is “if you see something, say something.” The campaign began as a response to the 9-11 attack but has been extended to mean any suspicious activity. The “see something, say something” campaign means to promote predator awareness – those who would victimize children and women. Trayvon Martin and Ahmaud Arbery were two men who looked suspicious and were gunned down by white vigilantes who interpreted the Constitution to give them the right to defend their community against suspicious people.

Hong Kong is an island off mainland China that was formerly under British rule and prized its independence from Communist rule on the mainland. They are telling a different kind of story – turning on each other. As part of a campaign by the mainland Communist Party to repress street protests in Hong Kong, the government set up a hotline to report suspected violators of new security laws aimed to restrict criticism of the government in the media. 40,000 virtuous and vigilant residents have squealed on their neighbors.

Myths connect people but our stories are tearing us apart. Our media is saturated with a mixtape of opinion, lies and carefully filtered facts to present some Americans as the “other.” The Chinese government encourages Hong Kong residents to turn on each other. In our country, the media does the same job. We are proud of those freedoms even if they destroy our civility and our cohesiveness as a society.

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Photo by Patrick Tomasso on Unsplash

A Policy Pivot?

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February 21, 2021

by Steve Stofka

Climate change induces more erratic weather patterns. More dry and wet; colder and hotter. California has been hit by persistent drought. Texas and other southern states got walloped this week. Several dozen Texans lost their lives when electricity generation failed for several days this week. For two decades, Texas has adopted a relaxed regulatory policy that does not incentivize or require power generators to prepare for unusual events like this week’s cold snap. Texas legislators argued that these policies reduced costs and lowered bills for Texans. Other states with more stringent regulations weathered the cold snap because power operators beef up their generation system to withstand extremes.

Natural gas supplies 46% of Texas’ electricity generation. The valves and regulators on those lines froze because of a lack of heating equipment. Wind turbines supply 23% of Texans electricity but had no heaters installed as they do in other states. Because Texas has its own electricity grid, it has no power balancing arrangements with other states. Texans pride themselves on their self-reliance to the point of arrogance. They are the Lone Star State, Texans first, Americans second.

Through district gerrymandering a minority of Republican voters in Texas control policy. The state has a constitutionally weak governor with little power. The legislature promotes someone to the post who will be agreeable. Politics is heavily influenced by the oil and gas industry whose rights are senior to property owners. If a gas company wants to run a pipeline through someone’s property, an owner has a difficult fight.

Because Texas was part of Mexico until the 1840s, its laws and culture are influenced by the hacienda system set up by Spain in Latin and South America during the 17th century. In that colonial period, the Spanish monarchy took control away from parliament, imposed a uniform religion and a rigid centralized bureaucracy. Land in the Americas was parceled out in large tracts called haciendas to those who were loyal to the crown. This promoted a system of personal relations among landowners, people over principle, and a lack of growth and technological improvement. Like cuttings on a plant, the culture of white settlers in Texas were grafted onto this system. Texans adopted the “good old boy club” that has plagued politics in Latin America for centuries and made it their own.

Northern states were initially settled by colonists from England. In the 17th century, the English Parliament took power from the monarchy, a power shift opposite that in Spain. Religious and political diversity carried over from the motherland to the colonies and became institutionalized. Property rights, and the products of property could be conveyed to others. This encouraged a system of principle over person, a more impersonal exchange that fostered technological development.

Texas culture relies on tradition more than innovation, but the state provides a fertile and friendly atmosphere for innovative businesses from other states. Business growth relies on a flourishing human capital. Texas’ K-12 schools rank in the middle of the 50 states and above California, both with large immigrant populations and low English fluency (McCann, 2020). However, a state that cannot manage its power grid is not an attractive environment for business.

Will this crisis spark a shift in policy? Texas has long been captured by special interests, who are antagonistic to change. The past few years Texas politicians have stood proud, calling to California businesses, “Come here and get away from those regulations.” That cheery welcome has been tarnished this week. Business executives might wonder if Texas has other infrastructure problems. Texans hope that the fast-moving news cycle will turn its attention elsewhere.

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Photo by Alexander Schimmeck on Unsplash

McCann, A. (2020, July 27). States with the best & worst school systems. Retrieved February 20, 2021, from https://wallethub.com/edu/e/states-with-the-best-schools/5335

Finding the Right Wires

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February 14, 2021

by Steve Stofka

Since WW2, households have traditionally held more debt than the federal government as a percent of GDP. I’ll call it %Debt. The biggest component of household debt is mortgages, and includes car loans, student loans, credit card debt, etc. A decade ago, Federal %Debt surpassed households, effectively allowing households to reduce their debt level and put it on the federal balance sheet.

Federal debt spiked during the pandemic while household debt levels have risen only 1.5%. For decades, deficit hawks have long warned that rising federal debt levels could cause an economic implosion that would make the Great Depression look tame by comparison. They may be right – finally.

There are two ways that the federal %Debt can go down. The first is to grow the economy; that’s the GDP in the denominator of Debt / GDP. The second way is to reduce the level of Debt, the numerator. It is unlikely that Congress is going to raise taxes enough to reduce the debt, so that leaves only one way to reduce %Debt – grow the economy faster than the growth in federal debt.

To do that, consumers need to spend money because their spending makes up 70% of GDP. There are three ways to increase spending. The first is to increase incomes faster than economic growth but that has not been happening for several decades. The real growth in middle class incomes over the past 30 years is only 15%, or 1/2% per year average.

The non-partisan Congressional Budget Office projects that total incomes will increase by an average of $33B per year over the next decade if the minimum wage is raised to $15 over the next five years (CBO, 2021). That increase of 1.5% in GDP will not change the federal %Debt by much.

The second way to increase GDP is for consumers to take on more debt. A rise in housing prices has lifted the net worth of many households, who can tap into that equity to increase their spending. However, households are already choked with debt. The two largest generations, the Millennials and the Boomers are offsetting each other’s spending. Older Boomers are reducing spending as Millennials increase their purchases. The Millennials have been crushed by the financial crisis a decade ago and again with the Covid crisis. Many feel like they came along at the wrong time in history and are cautious. When consumers pay down debt, they spend less and that lowers GDP growth.

The third way is probably the trend of the future. The federal government will continue to pile debt on its balance sheet and shift income onto households in the hopes that consumers will spend money and grow the economy faster than the rise in federal debt. There is a concept called the multiplier and economists argue over its value. It is the total effect of spending in an economy when the government spends $1. That depends on consumer and business confidence, which depends on the amount of debt each sector holds. The IMF estimates that the multiplier is about 1.5, so that $1 of spending equals $1.50. If so, deficit spending might grow the economy faster than the federal debt grows.

I’ll return to a proposal I discarded earlier – increasing taxes, particularly on the top 10% who don’t spend as much of their incomes on consumer goods as the bottom 90%. Under the Budget Reconciliation rule in the Senate, the Democrats could pass tax legislation that undoes the 2017 tax cuts that the Republicans passed using that reconciliation process. In his campaign proposals, President Biden limited any tax increases to those making $400,000 or more, a small sliver of the population.

Income distribution is skewed toward the upper 5%, who will fight vigorously to keep what they have. They will complain – and they have a point – that they are already paying higher taxes in the form of lost income because interest rates are so low. Those with savings are being paid a paltry amount in interest but the low rates reduce the interest on the debt that the federal government pays each year. Boomers on fixed incomes are having to reduce their savings faster  to meet monthly expenses.

The structure of income distribution is weak. No, it’s not a problem with capitalism, as some like to claim. This is a problem with political policy which pre-dates capitalism. A small group of people in a nation take command of the distribution levers and direct more of the nation’s income to themselves. In the 1700s, the problem was thought to originate with monarchy and aristocracy. Democracy was going to cure the problem, but it didn’t. Communism was going to cure the problem and it didn’t. Socialism – the middle way between capitalism and communism – was going to solve the problem, but the EU demonstrates that socialism simply slows growth, increases structural unemployment, and does little to solve the persistent problem of distributional inequalities.

Governments worry about exogenous factors like Covid, war, or a dramatic shift in commodity prices. While those do produce crises, they do so because of endogenous factors – weaknesses in a nation’s political and economic system that award property rights in such a way as to exacerbate social tensions. The Great Depression and Financial Crisis were examples.

Since the Financial Crisis a decade ago, people in nations around the world have been raising their fists and their voices. The productivity gains that capitalism promoted had ameliorated the centuries old problem of political oligarchies, but no economic system can solve what is fundamentally a political problem.

Those who voted for former President Trump in 2016 did so thinking that he was a political outsider who could “drain the swamp,” i.e., bust up the political oligarchy that controls Washington. He became part of that oligarchy, feeding the monster, because it relied on his lack of political expertise.

Those who voted for President Biden hope that his decency and moderation will help craft legislation that unlooses the grip that the oligarchy has on our political process. Which wires do we pull to disconnect the oligarchy?

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Photo by Victor Barrios on Unsplash

Congressional Budget Office (CBO). (2021, February 08). The budgetary effects of the raise the Wage act of 2021. Retrieved February 13, 2021, from https://www.cbo.gov/publication/56975

Tax Policy Center. (2020, May). What is reconciliation? Retrieved February 13, 2021, from https://www.taxpolicycenter.org/briefing-book/what-reconciliation

Social Brain

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February 7, 2021

by Steve Stofka

On C-Span’s Washington Journal call-in show, I  heard a caller say that they were glad to see the government back at work. The show allows callers to briefly say their peace. Roughly half of the people in this country don’t want the government in Washington to work, half do. Because of  the show’s early morning airtime, callers in the eastern time zone are overrepresented and most are mature. Regardless of one’s political affiliation, most appreciate the show’s unfiltered approach.

The Greek philosopher Plato observed that we are social creatures by nature. Each of us has the capability of reasoning – it is the distinguishing feature of human beings – but an individual walks around in a cloud of misperception. Only through dialog with our neighbors do we arrive at some universal truths.

Indoctrinated since childhood in an egalitarian, individualistic society, we reject this “group think,” but the founders of Facebook and Twitter have made billions creating a social platform for us to interact. Whether we unfriend a family member on Facebook or engage in a spirited debate with a stranger on Twitter, we are demonstrating the Platonic notion that we try to arrive at truths in our dialog with others. The Social Dilemma documentary explores the techniques of manipulation by those who wrote the code.

Some people hate capitalism. “It turns people into numbers!” We don’t think of money as a dialog. Bitcoin is worth $40,000 or it is worthless. The marketplace is a dialog. There is a group of “investors” on Reddit who are one-share owners of the volatile stock GameStop. One share. When one investor sold his shares – he had much more than one – he missed the sense of community with others. Yes, he had made several hundred thousand dollars, but he felt as though he had betrayed the community by selling.

We are human beings with big brains, but our fundamental character is that of individuals in a monkey troop. We assess danger by looking at our neighbors. Are others afraid or is it me? This berry tastes good. Has anyone else gotten sick eating it? We may choose to isolate ourselves from the group, but we don’t like to be isolated by the group.

In Star Trek: TNG, a race of cybernetic beings act as a hive of bees, a collective coordinated in thought and action. They convert U.S.S. Enterprise Captain Picard into a Borg member to communicate with other humans. Picard must endure the withdrawal of the Borg implants and never fully recovers from the psychological wounds of being part of that collective.

Plato’s take on this process is different. We communicate with and understand the world through the group. We are like the Borg in that sense, a collective of creatures, whose distinctive feature is their reasoning. We are intrigued by the social life of bees and ants, who use chemical clues and dancing to inform their fellows about the world.

Bees dance. Ants share chemicals. We dance by talking and writing, by tapping on our phones. We aren’t sensitive to pheromones, so we wear clothes and adopt lifestyles that signal our position in the group. In the new world of tech and social media, the chemicals we share are our data: what we ate, what we bought, what our moods are.

What do Plato and social programming engineers at Facebook have in common? We are Borg. We form a social contract not because it is convenient but because it is in our nature.

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Photo by Boba Jaglicic on Unsplash