In today's New York Sun Robert Samuelson argues that middle class anxiety results from an economy that generates greater returns at the expense of greater risk. He claims that we are better off because many of us have purchased technologically advanced consumer products like flat screen televisions and high speed internet access but at the same time the fluidity that a market economy requires has made us less secure. Mr. Samuelson's argument is half right. Americans are less secure, but they have bought less security at the price of stagnant real wages. In the past 36 years wages have increased at lower rates than in any prior period of American history.
According to the Census Bureau, in the 23 years from 1947 to 1971, American males' real incomes in 2006 dollars increased from $17,967 to $31,915, an increase of 77.6%. In 1971 Richard M. Nixon abolished the international gold standard. In the 35 years from 1971 to 2006 American males' real wages increased from $31,915 to $36,011, an increase of 12.8%. The reduction of increase from 77.6% to 12.8% is 83.5%. This is unquestionably the slowest wage growth in any 36-year period of American history.
In contrast, a 1971 dollar was worth $.55 in 1947, an inflation rate of 1/.55= 181.8%, while a 2006 dollar was worth $.20 in 1971, an increase of 1/.20 = 500%. Moreover, the consumer price index was doctored in the early 1980s to omit house prices, price increases of which have been the primary source of economic anxiety among the middle class until this past year. Thus, while real incomes increased at the slowest rate in American history between 1971 and 2006, 12.8% over 35 years, prices increased at the fastest rate in American history over the past 35 years, 500%, and their increase was understated.
Wednesday, May 21, 2008
Tuesday, May 20, 2008
Socially Constructed Belief Is Indistinguishable From Insanity
One philsophical claim is that definitions of social phenomena such as mental illness, justice and morality are socially constructed and reflective of power rather than truth. But more fundamentally, social construction has been insane as well as sane, false as well as true, and therefore it is difficult to discern whether a social construction is true or false. Since social construction has questionable validity and deliberation depends on social construction, political systems that depend on deliberation are as likely to result in false as well as true conclusions.
Every age is rife with delusion. Charles MacKay wrote Extraordinary Popular Delusions and the Madness of Crowds in the early 19th century and he details mass delusions such as the south sea bubble, tulipmania, witchcraft and superstitions. Because of the financial importance of such delusions in the stock market, the financial delusions have been studied more often and more carefully than others as in Charles Kindleberger's Panics, Manias and Crashes but mass delusions are not limited to market phenomena like tulipmania. Political scientists such as Irving Janis have been fascinated by delusions of small groups in making decisions, which Janis termed groupthink, but delusions are as characteristic of large as well as small groups. Nazi Germany, 19th century imperialism, racism and slavery were widespread delusions that had the support of entire societies.
Academics have been especially prone to systematic delusion, such as the belief that Stalin and Pol Pot were social reformers and not mass murderers, that Mao was a kind man who was successful in developing the Chinese economy (a belief stated by the leading economists of the mid-20th century in a 1972 New York Times article penned by John Kenneth Galbraith). As well, delusional academic belief such as in centralized economic planning, Keynesian economics, Freudian psychiatry, the use of econometric models to predict gross domestic product, belief in welfare as a cure for poverty, and belief in urban planning as a way to improve cities look quaint to us today, but these were beliefs actually held by twentieth century academics.
What does this say about deliberation and democracy as ways to govern society? Democracy is an information sharing device. People know best what they want. They are prone to mass delusions that they later regret, but democracy is the best way available to permit the state to reflect their intent. But given the likelihood that the public deliberates irrationally and with limited foresight, democracy ought to be limited. Not by autocratic or totalitarian rule, but by anarchy, or more accurately, markets. Markets perform better and are less prone to perceptual error than are state institutions becuase investments are easier to withdraw than laws are to change. Markets are more flexible than government. Thus, democracy ought to be limited where possible and replaced by markets.
Second, democratic decision making processes ought to be as easily reversible as possible. Since deliberative decisions are often erroneous, it must be possible to reverse them once errors are detected. State institutions must be made flexible. But in large units flexibility is absent because it is most difficult to change laws.
Third, the outcomes of deliberative processes should be voluntaristic when possible. The principle of voluntarism is consistent with basic precepts of fairness. Just because a majority prefers one way of doing things it may not be so for all. If it is not necessary to force a minority who thinks differently, then to be fair and to best incorporate information about the intention of the majority, force should not be used. To the extent force is used, democracy's ability to integrate information from all citizens is curtailed and democracy's value is limited. De Tocqueville wrote of the danger of a tyranny of the majority in America. The danger of majority tyranny can be limited if democratic decision making utilizes cafeteria criteria. Choice among democratic rules results in more information about the public's preferences than a unitary rule. Why one social security plan when there can be several or many? Why one set of federal rules when there can be a multiplicity? In the last century the ability to express diverse rules was limited by the economic need for a unitary market, but today computers can integrate diverse regulatory systems. Corporations choose to do business in 100 countries. Why should 50 states pose a problem?
There are many instances where government programs need not be forced upon all Americans. For example, the draft was mandatory until the 1970s. Its compulsory nature caused upheaval. After military service was made voluntary in the mid 1970s, the controversy subsided. Why not apply the voluntaristic principle to social security, regulated cable television service and regulation of financial disclosure?
Fourth, democratic institutions ought to be as local as possible. Representation of public insanity is best accomplished when those who represent the public understand their insane idiosyncracies. Experts are generally wrong, as per the twentieth century fields of economics, sociology and psychology, so experts are of little use to public deliberation. Moreover, public insanity is likely to vary regionally and in other ways. A Congressman who represents 37,000 citizens is better able to understand their oddities than a Congressman who represents 600,000 citizens. Although the American population has nearly doubled in my lifetime, the number of Congressmen remains at 435. The population of the City of Los Angeles today is about the same as the entire population of the United States in 1790. In 1790, there were 106 Congressmen representing all of America, today there are the equivalent of six or seven representing Los Angeles (it is difficult to tell the exact number because of gerrymandering). Bruce Bartlett has suggested increasing the number of Congressmen. How about increasing the number of states so that state governments can be more responsive to public needs? Why must upstate New York be conjoined to New York City, or Los Angeles and San Diego conjoined to San Francisco?
The social construction of reality is frequently wrong and therefore ought not to be cast in stone. But the principle of twentieth century deliberation resulted in outcomes of deliberative processes being cast in stone and then aggressively defended by "progressives" and "radicals" from being changed. A 21st century paradigm would require greater flexibility, greater localism, greater suscepitibility to change.
Every age is rife with delusion. Charles MacKay wrote Extraordinary Popular Delusions and the Madness of Crowds in the early 19th century and he details mass delusions such as the south sea bubble, tulipmania, witchcraft and superstitions. Because of the financial importance of such delusions in the stock market, the financial delusions have been studied more often and more carefully than others as in Charles Kindleberger's Panics, Manias and Crashes but mass delusions are not limited to market phenomena like tulipmania. Political scientists such as Irving Janis have been fascinated by delusions of small groups in making decisions, which Janis termed groupthink, but delusions are as characteristic of large as well as small groups. Nazi Germany, 19th century imperialism, racism and slavery were widespread delusions that had the support of entire societies.
Academics have been especially prone to systematic delusion, such as the belief that Stalin and Pol Pot were social reformers and not mass murderers, that Mao was a kind man who was successful in developing the Chinese economy (a belief stated by the leading economists of the mid-20th century in a 1972 New York Times article penned by John Kenneth Galbraith). As well, delusional academic belief such as in centralized economic planning, Keynesian economics, Freudian psychiatry, the use of econometric models to predict gross domestic product, belief in welfare as a cure for poverty, and belief in urban planning as a way to improve cities look quaint to us today, but these were beliefs actually held by twentieth century academics.
What does this say about deliberation and democracy as ways to govern society? Democracy is an information sharing device. People know best what they want. They are prone to mass delusions that they later regret, but democracy is the best way available to permit the state to reflect their intent. But given the likelihood that the public deliberates irrationally and with limited foresight, democracy ought to be limited. Not by autocratic or totalitarian rule, but by anarchy, or more accurately, markets. Markets perform better and are less prone to perceptual error than are state institutions becuase investments are easier to withdraw than laws are to change. Markets are more flexible than government. Thus, democracy ought to be limited where possible and replaced by markets.
Second, democratic decision making processes ought to be as easily reversible as possible. Since deliberative decisions are often erroneous, it must be possible to reverse them once errors are detected. State institutions must be made flexible. But in large units flexibility is absent because it is most difficult to change laws.
Third, the outcomes of deliberative processes should be voluntaristic when possible. The principle of voluntarism is consistent with basic precepts of fairness. Just because a majority prefers one way of doing things it may not be so for all. If it is not necessary to force a minority who thinks differently, then to be fair and to best incorporate information about the intention of the majority, force should not be used. To the extent force is used, democracy's ability to integrate information from all citizens is curtailed and democracy's value is limited. De Tocqueville wrote of the danger of a tyranny of the majority in America. The danger of majority tyranny can be limited if democratic decision making utilizes cafeteria criteria. Choice among democratic rules results in more information about the public's preferences than a unitary rule. Why one social security plan when there can be several or many? Why one set of federal rules when there can be a multiplicity? In the last century the ability to express diverse rules was limited by the economic need for a unitary market, but today computers can integrate diverse regulatory systems. Corporations choose to do business in 100 countries. Why should 50 states pose a problem?
There are many instances where government programs need not be forced upon all Americans. For example, the draft was mandatory until the 1970s. Its compulsory nature caused upheaval. After military service was made voluntary in the mid 1970s, the controversy subsided. Why not apply the voluntaristic principle to social security, regulated cable television service and regulation of financial disclosure?
Fourth, democratic institutions ought to be as local as possible. Representation of public insanity is best accomplished when those who represent the public understand their insane idiosyncracies. Experts are generally wrong, as per the twentieth century fields of economics, sociology and psychology, so experts are of little use to public deliberation. Moreover, public insanity is likely to vary regionally and in other ways. A Congressman who represents 37,000 citizens is better able to understand their oddities than a Congressman who represents 600,000 citizens. Although the American population has nearly doubled in my lifetime, the number of Congressmen remains at 435. The population of the City of Los Angeles today is about the same as the entire population of the United States in 1790. In 1790, there were 106 Congressmen representing all of America, today there are the equivalent of six or seven representing Los Angeles (it is difficult to tell the exact number because of gerrymandering). Bruce Bartlett has suggested increasing the number of Congressmen. How about increasing the number of states so that state governments can be more responsive to public needs? Why must upstate New York be conjoined to New York City, or Los Angeles and San Diego conjoined to San Francisco?
The social construction of reality is frequently wrong and therefore ought not to be cast in stone. But the principle of twentieth century deliberation resulted in outcomes of deliberative processes being cast in stone and then aggressively defended by "progressives" and "radicals" from being changed. A 21st century paradigm would require greater flexibility, greater localism, greater suscepitibility to change.
Monday, May 19, 2008
Open Letter to Herbert M. Allison, Jr., Chairman of TIAA-CREF, Re Threat of Future Stagflation to Account Holders' Funds
PO Box 130
West Shokan, NY 12494
May 19, 2008
Herbert M. Allison, Jr.
TIAA-CREF
730 Third Avenue
New York, NY 10017-3206
Dear Mr. Allison:
I hold a TIAA-CREF account through my employment at the City University of New York and have done so since 1991
TIAA-CREF should implement a commodity index fund and a foreign-currency denominated interest bearing fund. Doing so would fulfill your responsibility to be prudent to your account holders. I say this despite current short-term overheating in the commodities markets.
The 1970s were a period of significant challenge to TIAA-CREF because the stock market declined while inflation accelerated. This caused pensioners to receive reduced payments at the very time that inflation posed high costs. TIAA-CREF has a fiduciary duty to take action to anticipate the realistic risk that Federal Reserve Bank policy will again cause stagflation. Conversely, it is imprudent to pretend that stock and interest bearing investments provide all of the diversification that investors need when the Federal Reserve Bank has expanded the money supply by eight percent annually for the past two and one half decades.
To be prudent, you ought to diligently consider the risk of stagflation and take action. Both the stock market and interest bearing dollar denominated accounts are ultra-risky in a stagflationary period, yet those are the only alternatives TIAA-CREF currently has on offer. By failing to diversify into alternative currencies you are shooting craps with shareholders’ accounts. Inflation-indexed bonds are a crap shoot as well because interest rates may skyrocket at the very time that inflation goes up.
Sincerely,
Mitchell Langbert, Ph.D.
Cc: Chronicle of Higher Education
West Shokan, NY 12494
May 19, 2008
Herbert M. Allison, Jr.
TIAA-CREF
730 Third Avenue
New York, NY 10017-3206
Dear Mr. Allison:
I hold a TIAA-CREF account through my employment at the City University of New York and have done so since 1991
TIAA-CREF should implement a commodity index fund and a foreign-currency denominated interest bearing fund. Doing so would fulfill your responsibility to be prudent to your account holders. I say this despite current short-term overheating in the commodities markets.
The 1970s were a period of significant challenge to TIAA-CREF because the stock market declined while inflation accelerated. This caused pensioners to receive reduced payments at the very time that inflation posed high costs. TIAA-CREF has a fiduciary duty to take action to anticipate the realistic risk that Federal Reserve Bank policy will again cause stagflation. Conversely, it is imprudent to pretend that stock and interest bearing investments provide all of the diversification that investors need when the Federal Reserve Bank has expanded the money supply by eight percent annually for the past two and one half decades.
To be prudent, you ought to diligently consider the risk of stagflation and take action. Both the stock market and interest bearing dollar denominated accounts are ultra-risky in a stagflationary period, yet those are the only alternatives TIAA-CREF currently has on offer. By failing to diversify into alternative currencies you are shooting craps with shareholders’ accounts. Inflation-indexed bonds are a crap shoot as well because interest rates may skyrocket at the very time that inflation goes up.
Sincerely,
Mitchell Langbert, Ph.D.
Cc: Chronicle of Higher Education
Sunday, May 18, 2008
Correction in Gold and Oil Prices?
Is there going to be a correction in gold, oil and other commodity prices in the coming weeks? It seems like a distinct possibility.
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