Wednesday, March 25, 2020

First Reflections on an Eerie Time

It is as if somebody pulled the emergency lever on every train. Life was chugging along, and then suddenly it lurched to a scrunching halt. The halt was separated by a few days in different places, and the brakes worked more quickly in some aspects of life than others, but the end result is much the same, a pause in life as we know it.

New York City is at the bleeding edge of the virus within the US, and we have suffered all of the usual bleeding edge problems. There has been lots of denial and chaos and U-turns as well as lots of courage and creativity and leadership. Overall, Cuomo and De Blasio seem to me to have done a good job so far.

The bizarre inconsistencies have been striking, most notably at supermarkets. We have been told for a while now to practice social distancing and to manage personal hygiene, and most of us achieve some of this some of the time. But at other times a more primal urge has overwhelmed all of this; we see some scary news on the TV, and we panic and rush to the supermarket to buy yet more toilet rolls and Lysol.

Twelve days ago I went to Costco to get a normal shopping list – so far we haven’t seen the need to panic buy anything. I was a little bit later than usual because I had a chat with my daughter in Dubai that took a bit longer than normal. But it was still a weekday morning, and usually at Costco that means a half empty store, short lines and getting in and out within fifteen minutes.

Not this day. Once I had finally secured a trolley by stalking somebody loading up their car, I made my way in, but 10% into the store the checkout lines started, snaking all the way around the store into rarely used nooks. Navigating around the store to shop became near gridlock. After ten minutes I decided to abandon ship, judging the checkout time to be perhaps two hours, so I navigated the gridlock in reverse to return my goods and get back to the entrance. By now, the entrance itself had been closed by staff to try to limit the chaos inside, only to create now chaos outside of people lining up to enter the store.

If only a few of us had the virus when we set out for Costco, probably most of us had it by the way we got home. But, once the primal shopping urge had been sated, we duly went back to our new careful routines, perhaps achieving tiny marginal reductions to the risks we had just spent hours recklessly maximising.

This is how the train stopped, in fits and starts, with missteps and waves of panic. It was probably all too late anyway, and once the criminal absence of testing is fully dealt with, we’ll discover just how much too late and just how extensively we allowed this to infect us.

At least by now, two weeks in, people having started behaving intelligently and our providers have implemented new protocols. This morning at Trader Joe’s we all lined up in the street six feet apart before a few at a time were allowed into the store.

But it strikes me how limited even a so-called lockdown really is. It is not just supermarkets and pharmacies that are open, but also banks, hardware, laundromats, pet stores, car repair, medical facilities, fast food and convenience stores and so much more, as well as all their supply chains and mass transit. It is justifiable, but hardly feels like a lock down. The only things really shut are the indulgent stores of malls. Still, the people have responded and traffic at most of the open establishments is way down, and the roads are clear of cars. Take away commuters, schools runs and everyday hustlers and roads empty very quickly. 

Our apartment suddenly feels to have shrunk to half its size, with three of us at home nearly all the time, seeking out our own niches to work and avoid disturbing each other. I have even set up a little desk area on the terrace, and hopefully soon it will be warm enough on most days to use it.

I have plenty of time to reflect. Firstly, it is a chance to be thankful for what we normally have but take for granted. On the Sunday before the emergency brakes were applied, I spent six glorious hour singing beautiful music with three different groups. The memory still lingers sweetly. After this blessing returns, it will be a long time before I complain about early call times or long homilies.

I have also come to appreciate the small routines that used to punctuate my day, such as trips to the old-folks home or the gym, or breaks to watch live sport. I find that I really need these punctuation marks, and have had to work to spread things out and to find new habits.

This time also offers opportunities to rediscover joys we might have forgotten to utilise in normal times. It is good to have more quality time as a family, and also to connect more regularly to wider family and friends. These connections somehow seem more valuable now.

Then there is nature. I have rediscovered the joy of long walks, and have found four great new ones within an hour’s drive from home, all to beautiful places that have not been at all crowded. How lucky that the mild and dry winter has left the paths largely clear of mud and has accelerated the lovely tree blossoms.

It will be interesting to see how trade-offs are handled around the world. For now, avoiding the overwhelming of hospitals has to be the dominant consideration. But before too long there will be arguments to restart more activity to support economies and livelihoods, and also from limits to social tolerance.

You already see hospitals in some places deciding who to treat and who to let die, and we have that ugly reality ahead in many more parts of the world. But essentially politicians, guided by society, will have to make exactly that trade off at a macro level. How many extra deaths is a fair trade off for retaining jobs, enabling education, and relieving social tensions? All medicine comes to this really, despite nobody being willing to talk about it openly: we could keep some 90-year-olds alive for a few more weeks by giving yet another expensive operation or drug, but there has to be some limit on the cost benefit. Such calls will come starkly into focus in the coming weeks.

It is early to predict long-term effects of this crisis. Probably, it will accelerate existing trends. Workers and educators will come to realise that quite a lot can be achieved remotely. For education, we are blessed to have a 20-year-old doing a technical subject; for him I suspect remote working can achieve as much as 80% of a campus approach. If we were elementary school parents, we would probably see that home schooling will struggle to achieve more than 20%, with our own sanity compromised to boot. Then there is e-commerce. This might be the deathblow for many of those shuttered malls, while Amazon will probably emerge even stronger.

Then we can wonder how this might change general attitudes or political priorities or the global balance. Some are already suggesting that this could be the Suez moment for the US, signalling the start of decline and being overtaken by China. We can hope that those people who live in their bubble might come to realise how interconnected we are and how counter-productive it is to have so many living so poorly, but I somehow doubt that. Similarly, climate change action will probably be put back on hold as soon as we are free to consume again.

But one benefit could come from a wider appreciation of live performance art and other ways humans connect. Being deprived of something is a sure way to highlight its value. Once employment practices change permanently and we all finally have more leisure, art will emerge as a fine purpose for humanity, and this crisis might just accelerate that trend a little. Lots of people will be at home at getting out their old guitar or their piano scores or paintbrushes. The potential blossoming of all that creativity is one vision to help us through these tough times. 

Wednesday, March 11, 2020

Bubble Delusions and Coronavirus

It can often be tempting to retreat to a bubble. Life would be so much simpler if we didn’t have to deal with all the complexities of family or life administration or career. Many teenagers do this as they start to work out that life is more difficult than animated movies might suggest; especially boys end up in their rooms with video games and minimal contact with the world outside.

One symptom of a bubble mentality is to over-simplify things. People are either good or evil, opinions are either right or wrong, parents are either good or bad, immigrants are either a blessing or a curse. Such assumptions can be necessary to move us away from the paralysis of confusion. The problem comes when we believe them too rigidly and forget to challenge, modify or see nuance in them.

One way I learned this was early in my business career, working for Shell’s UK retail unit and trying to agree a pricing policy for fuel. We were always the most expensive, because our costs were high and we had a snobbish belief in our superior quality. One day, somebody produced a simple pie chart, in primary colours with solid lines, showing the market divided into price conscious buyers and those not influenced by price.

It was all we needed. We could continue to price high and not worry about it. We were not interested in all those bright red people on one side of the pie, but could count on those more refined folk on the blue side. We had found an assumption, it reaffirmed our bias, it simplified our choices, and we proceeded to plan policy around it, and then fail to adapt when things went wrong.

Of course things did go wrong. Those solid dividing lines between blue and red turned out to be very blurry, and within each colour there were many shades. Worse, the lines moved, partly even as a reaction to our own policy, and could even move suddenly in response to some unforeseen event like a new market entrant or national shortage or the like. It took us a long time to accept the error of our ways, and arguably our business never recovered.

I realise that I sound very stupid in telling this story. I have probably described it worse than it was, but we were indeed pretty dumb. Yet we were not normally dumb people, and I believe most of us make this sort of mistake all the time. We were trapped in our bubble.

Move from business into the wider world and especially politics, and bubbles are everywhere. A very common type of bubble is origin of prejudice, the division of humanity into them and us.

Biological differences between genders in terms of reproductive roles and physical strength turned into a rigid segmentation, with assumptions about emotions and societal roles tagged along. Now we learn that there were always all sorts of sub-segments, blurred lines and associated wrong-headed assumptions that held back society for millennia.

The same dangerous over-simplification has led to religious persecutions and beliefs of superiority and even being chosen races. The damages of colonisation and slavery started the same way. In each case a bias and a search for simplicity led to sweeping policy prescriptions of unconscionable damage. And, in each case, it eventually ends badly as the hidden complexities emerge, resentments are fed while believers dig in, and external events lead to sudden shifts. South Africa of 1994 will one day be Israel.

The feeding of resentments is a key point. In Shell, we pushed up prices to the point that we were insulting people. It worked until it didn’t. Any individual who worked out they were being abused was lost to the brand forever and made sure they told lots of others about it too.

Nationalism is the latest form of bubble mentality. It started long before Trump. Once again, I find roots in the 1980’s. One of the most famous quotes of Margaret Thatcher was that there is no such thing as society. I expect she was making a point that people should not expect the state and others to simply give them a living or allow them to do whatever they liked. But it is still a revealing quote. Society does exist. It is what blurs the lines and segments and moves them over time and responds to surprises. It is society that has shifted in waves in things like reactions to immigrants, religious belief, homophobia and so much more.

Thatcher’s policies reflected this bubble thinking. The individual was king and the nation stood alone. Losers should just get ”on yer bike” or accept pitiful trickle down. It had its merits; at the time a rebalancing away from welfare dependency and union power was needed. But over time the approach did a lot of damage, which persists today anywhere where the right holds sway. Electorally it can work so long as the base stays strong enough. If you can be convinced GDP and corporate health and the markets are true and sufficient indicators of success, then it does well for a time. But resentments grow and external surprises can reveal the flaws very quickly.

Trump’s nationalism takes all this to another level. Trade partners are seen as rivals from another fixed segment. The Sunni people are lumped together as terrorists and left to suffer under tyrants and US bombs, all the while building resentments. The Southern border is a dividing line as stark as on a pie chart, even though the nations are interdependent and Hispanics are already prevalent as US citizens. 

This all builds on the perception that we can live in our gated communities while those outside are prepared to serve us, or at least that we continue to go about our business without thinking too much about the homeless all around us or the incarcerated, in an economy that has most living pay check to pay check, without health insurance and probably hustling on the edge of the law.

This works by some metrics, and is even some sort of electable coalition, though in the long run the very actions of one segment will move the lines to make that segment smaller. Trump's base has proved unusually resilient so far, helped by the bifurcation of media.

But then come surprises. Coronavirus is such a surprise. Just like climate change, it dispels the myth that segments can live independently of each other. We all inhabit the same planet and have overlapping vulnerabilities.

How would you envisage a nation least well equipped to handle Coronavirus despite being rich? There would be lots of big, dirty cities where rich and poor lived side by side. Healthcare would be expensive and unaffordable to many, and healthcare support providers disrespected. Many would need to work even when sick, for lack of decent tenure, wages, or sick pay. There would be a general culture of not respecting authority or following rules, and lots of ambiguity and distrust between federal and state levels. Federal expertise would have been gutted, but what remained would be so insular and arrogant as to ignore established international good practice, meanwhile screwing up the development of its own alternative tests. The most senior leader would have no credibility among one half and could happily lie to the other, and would be so obsessed by markets and retaining power as to ignore the health needs of his own people.

This is today’s US bubble. Bubbles are never sustainable and are vulnerable to surprise shocks. Sometimes those shocks even burst them completely. Dare I hope, or will this dream fade and die like all the others?  

Friday, March 6, 2020

Turning down the Heat on Capitalism

Imagine an oven that only had two settings. It is either at 500 degrees or off. The oven is still useful, even essential, especially if it is the only means available to heat anything. But it is a blunt instrument, liable to burn things and destroy tastes. I think this is a passable metaphor for global capitalism today. It is great, we need it, it does good things, but wow, it would be so much better if we could regulate the heat.

Before getting to ways of regulating, here is a recap on how we ended up with such a powerful but blunt oven over the past forty years or so.

We have to remember that capitalism has transformed the world for the better. Markets and rewards spur innovation, allocate capital and labour where they can be productive, and drive human progress, especially in combination with social changes such as female emancipation.

Just look at China, transformed within two generations and taking a billion people out of poverty, with another billion or so on the way thanks to Belt and Road. That is the power of capitalism, and it illustrates that capitalism is not the same as democracy, and also that capitalism is not an antonym of communism.

It is also clear that capitalism always requires regulation, in the same way that civilised societies require police. Regulation is especially important where markets are necessarily impure such as healthcare, banks or utilities – practical constraints limit competition and consumer knowledge. But in general a key to good capitalism is to maximise competition – something the US has forgotten and China has yet to fully grasp. What a shame Elizabeth Warren has had to withdraw - this is one of her big messages.

Capitalism always drives inequality of outcomes. Markets create winners and losers, and there has to be some incentive to take risk. But inequality of outcome has some justice, while inequality of opportunity does not. The injustice is that winners work to skew the playing field in favour of their own offspring and rich states do the same, via trade rules and the like.

The main change since 1980 is the globalisation of capital and the maturation of finance. Money flows much more easily and transparently these days, which is in part a good thing. But, like water in the absence of barriers, it will flow where the returns are highest, and eventually all returns will have to be that high to avoid a drought. There are still a few exceptions, such as some sovereign wealth funds and private companies, but nowadays most money rapidly flows to investments able to claim a minimum benchmark.

That benchmark is essentially set by the largest pension funds and other funds taking in and investing cash now in return for liabilities long into the future. If you run a pension fund, you need to make a base assumption about average real investment returns to run your business. By some unknown process, that assumption has converged at around 6% real annual return. The funds have grown to be a significant share of global capital, so most of the rest has come to accept that same assumption.

That 6% real assumption is the 500 degree setting on the oven, and has huge consequences. Firstly, it entrenches a rapid widening of inequality, because natural economic growth per person can only get close to that level in exceptional circumstances. As Piketty concluded, r > g.

Worse, the fact that 6% real is such a stretch forces anybody managing capital to strive harder and harder to achieve it. The next myth is that banks and business leaders are just driven by greed. In reality they are driven to keep their jobs, and that requires a series of credible business plans returning 6% real. Fail that test just once and the vultures will swoop. Collectively fail the test and we have a national or international financial crisis.

Most businesses cannot continue to grow organically at such a rate, especially as populations get older and Amazon swallows more and more of the cookies. So what do they do? They merge with each other, take in more debt and risk, and push profit flows to the short term. They squeeze all their costs, throwing out good human relations and offshoring. They lobby like heck to create regulatory tailwinds. And sometimes they just cheat. Don’t blame them or their greed, blame 6%.

So, how can we fix this oven? Smart politicians of the left, sometimes supported by thoughtful publications such as The Economist, have policies to attack the symptoms. Starting with more equality of opportunity, there need to be higher estate and property taxes and maybe even a wealth tax, with proceeds mainly going to improve the chances of disadvantaged kids.

My top policy prescription tries to put a speed bump in the frantic flow of capital, especially the most speculative sort. This is the so-called Tobin tax on financial transactions. We might be getting close to a place where a global form of such a tax could be used to fight global heating.

Then there are a raft of actions to stop businesses finding ways to skew the playing field in their favour. Start by removing the crazy advantages for debt over equity, including the carried interest loophole (and US tax reform has to do this to be credible). Then restore more corporate taxation, trying to make it progressive like income tax, crack down on devices, havens and loopholes, and restore regulation to favour citizens over corporations, especially in those areas where markets cannot work at full efficiency. If politics can be reformed to favor citizens too, so much the better.

From the other direction, there is a growing consensus that living minimum wages, long demonised by business, are proving effective in making sure workers accrue a share of economic gains. These must be subtle, reflecting cost of living differences (so not $15 per hour everywhere), but set aggressively and without loopholes. We can also make progress in defining things like decent housing and healthcare as human rights, enabled by sufficient central funding.

The resistance to this package would be huge, not just in the US, and the reason is clear. The corporate and financial edifice would collapse – they simply can’t afford it and retain 6%. Once financiers had run out of ways to cheat (which would take a long time), profit expectations would reduce back to long-run levels and markets would plunge, and pension funds would have to revise their actuarial assumptions and declare massive under-funding, creating huge liabilities for future pensioners. This rightly scares politicians – it is hardly a recipe for re-election, so even the centre-left continues with the charade and perches uncomfortably in the oven.

So we have to address the cause at the same time as the symptoms, and somehow replace 6% with a more sustainable figure such as 4%. The only time this would be feasible would be during a financial crisis. Obama might have been able to get through such a package in 2009, should there have been full diagnosis and sufficient time to plan. So this is what the great and the good of the economic world should be doing now – planning not to waste another good crisis. A crisis is surely coming, and maybe coronavirus might trigger it. In the US, history might repeat with a crisis timed just when the White House shifts red to blue – not a coincidence in any way, of course.

The uncomfortable part of the required package is the necessary compensation. Last time bailouts went to banks. Hopefully, reforms will mean less of that will be needed this time, and the focus can be on funds linked to pensions. Shortfalls in the funds could be met in part by federal money, sufficient to restore confidence and avoid condemning millions to poverty in old age. For the rest of the financial industry, I would not be so generous.

It does feel very optimistic to suggest that politicians and economists can define and implement this sort of transformation, given their history and their immediate interests. But the alternative is just frying in the oven, while humanity is also frying in the other oven of climate change. Eventually, both scourges must be faced, and the time it usually happens is during a crisis. I hope some smart people are thinking this way – now Ms Warren has more time on her hands maybe she can start a coalition?