Tag: economics

Are you Missing the Unintended Consequences?

Category : Political Science & Economics
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I attended a talk by Michael Pollan, the author of The Omnivore’s Dilemma and In Defense of Food, last night at the Kohl Center in Madison.  Pollan is one of my favorite writers and thinkers because he almost always has a new take on old problems that bring new and interesting points to the debate.  Pollan is most famous for In Defense of Food, an “eater’s manifesto” on how to eat well and forsake the “western diet” of processed foods and refined carbohydrates.  His book is interesting on many levels, but what struck me during the talk was how many of the problems that Americans have relating to their diet are unintended consequences of well-intentioned policies crafted by nutritionists, nutritional scientists, government bureaucrats and health-conscience consumers.

For example, Pollan talks about how throughout American history, there have been “blessed” and “evil” nutrients.  In the 1800s, protein was evil and John Harvey Kellogg led the charge against this scorage, leading many Americans to give up their traditional eggs, bacon, sausage and pancakes for boxed cereal, with the blessed carbohydrates.  Later, it was fat, leading to the creation of margarine and transfat to replace real butter and animal fat.  The Atkins phenomenon brought protein back because carbs were supposedly bad.  There have been many other examples of this throughout American history, but these are the easiest ones to see.  Each of these movements were started by people with good intentions who wanted to make Americans healthier.  At best, they did not work.  At worst, they made things worse.

The margarine and other plant fats that scientists created ended up being worse than the fats that they were replacing.  Pollan claimed that this switch led to hundreds of thousands of premature deaths from heart disease and other preventable diseases.  These deaths were an unintended consequence of food scientists and the government’s good intentions to help American live healthier lives.

Pollan’s talk led me to start thinking about other unintended consequences and how many people miss their impact in everyday life. I found some relating to our food, including some potential ones relating to Pollan’s “eater’s manifesto.”  Subsidizing the corn and soybean market after the USSR’s wheat crop failed in order to ensure that we never went hungry led to monocultures and a crash in farm prices, which led to fewer family farms.  It has led to America’s overproduction of cheap corn, which made high fructose corn syrup the cheapest and easiest sweetener to work with, leading to cheaper manufactured food and fatter, less healthy Americans.  Cheap subsidized corn and soybeans make it tough for farmers in Africa to compete and pull themselves out of poverty.  Now I don’t believe that each of these are straight cause and effect relationships, but its clear that these unintended consequences of trying to make sure that America’s food supply is secure have continued to ripple across the world since the 1970s.

Pollan’s manifesto advocates that we eat food, not too much, mostly plants and move away from packaged, processed “food like substances.”  This is a good goal, but he also advocates moving away from monoculture and large industrial farms.  The thinking is that we we have healthier plants, animals and humans if we diversify our food supply and stop growing huge amounts of corn and soybeans for use in just about everything.  Pollan believes that these types of changes could help solve global warming, the healthcare crisis and  potentially the current economic crisis.  It is clearly a noble goal, but what about the unintended consequences?

If farmers move away from high yielding monocultures, might we be at a larger risk of famine in the future as populations rise?  Could we lose jobs in the current food industry?  Could lower yields lead to higher food costs, much like how increased demand for corn based ethanol raised food prices worldwide, with most of the increased hurting the world’s poor?  Are there some other unintended consequences that Pollan’s way of thinking might bring about, much like the other big changes to our food supply brought to America’s dinner tables?

Personally, I think it is worth experimenting with Pollan’s ideas because I’m not sure we can do much worse than we are doing now, but it would be foolish to simply accept them and begin to implement them immediately.  I don’t believe that Pollan is calling for this, but I have not seen much research into the potential unintended consequences of his ideas. It reminds me a story I just came across the other day about tuna fishing.

In the early 1990s, groups like Greenpeace were outraged that tuna fishing companies were killing hundreds of dolphins with each catch.  Here’s how tuna fishing works

The main way that tuna is caught is through purse seines in the Eastern Tropical Pacific. Basically, after a large group of tuna is located, a miles-across purse seine net is closed around them via a group of small boats associated with a large factory ship.  It’s an effective way to catch large amounts of fish for not a lot of money.

This technique is pretty standard- the main variation lies in how the large group of tuna is located. There are basically three ways to do this.

1) Get lucky and happen to stumble across a large group of tuna visible from the surface in the middle of an enormous ocean. Obviously, this isn’t terribly practical.

2) Attract tuna using floating objects.  Stay tuned, we’ll come back to #2.

3) Follow dolphins, because dolphins in the Eastern Tropical Pacific are often associated with large schools of tuna. Dolphins are easy to follow because, unlike tuna, they have to come up for air.

For a long time, #3 was the most common way of catching tuna. The problem with this method was that by definition, dolphins are right there- and they get caught in the net as well. Despite the honest effort of many sailors to free dolphins (there is a long maritime tradition of respecting dolphins), by some estimates, around 500,000 dolphins a year were killed as a result of bycatch.

Sounds terrible, right?  500,000 dolphins EACH YEAR were killed as a result of this tuna fishing.  Groups like Greenpeace and others marshaled public support and got the rules changed, making dolphin following illegal.  People could not fish for tuna by following dolphins to big groups of tuna.  So what happened?

Tuna fishing fleets rapidly switched over to method #2, attracting tuna using floating objects.  If you put a log in the middle of the ocean, within hours it will be surrounded by fish. It may have something to do with the fact that many open ocean fish can go their entire lives without encountering a hard surface.

The floating objects now used by tuna fishing fleets are quite high tech- they have sonar and video cameras that allow the flagship to detect how many fish are near that object. Once there are enough, the purse seine comes and scoops them all up- and the floating object is redeployed.

The big problem with this method is that floating objects don’t only attract tuna. EVERYTHING is attracted to floating objects, including sea turtles, sharks, seabirds, billfish, and, yes, dolphins!

Well-intentioned groups like Greenpeace and others tried to help the dolphins by making fishing for tuna by using dolphins illegal, but the unintended consequences of their actions have created “The Ecological Disaster that is Dolphin Safe Tuna.” Here are some stats comparing the bycatch of both methods of fishing.  First, the floating log method, then the old, dolphin method:

Ten thousand sets of purse seine nets around immature tuna swimming under logs and other debris will cause the deaths of 25 dolphins; 130 million small tunas; 513,870 mahi mahi; 139,580 sharks; 118,660 wahoo; 30,050 rainbow runners; 12,680 other small fish; 6540 billfish; 2980 yellowtail; 200 other large fish; 1020 sea turtles; and 50 triggerfish.

By trying to help dolphins, groups like Greenpeace caused one of the worst marine ecological disasters of all time. Few other fisheries are as bad for groups like sharks and sea turtles as the purse seine fishery, and none are as large in scale.

“Ten thousand sets of purse seine nets around mature yellowfin swimming in association with dolphins, will cause the deaths of 4000 dolphins (0.04 percent of a population that replenishes itself at the rate of two to six percent per year); 70,000 small tunas; 100 mahi mahi; 3 other small fish; 520 billfish; 30 other large fish; and 100 sea turtles. No sharks, no wahoo, no rainbow runners, no yellowtail, and no triggerfish and dramatic reductions in all other species but dolphins.”

In other words… the only species that “dolphin safe” tuna is good for is dolphins!  The bycatch rate for EVERY OTHER species is lower when fishing dolphin-associated tuna vs. floating object associated tuna! The reason for this is obvious- floating objects attract everything nearby, while dolphins following tuna doesn’t attract any other species.

If you work out the math on this, you find that 1 dolphin saved costs 382 mahi-mahi, 188 wahoo, 82 yellowtail and other large fish, 27 sharks, and almost 1,200 small fish.

“Dolphin Safe Tuna” is one of the most egregious examples of unintended consequences that I have heard about in a long time.  I wonder if we may repeat similar mistakes with global warming (now called climate change), health care, taxes, the bank bailouts and our monsterous national debt.  We should at least try to look at the potential downsides and unintended consequences of our larger decision in all aspects of our lives – political, business and personal – so that we do not make another mistake like margarine or dolphin safe tuna.

It’s the Leverage, Stupid!

Category : Political Science & Economics
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With the stock market looking toppy and the unemployment rate still on the rise, the “green shoots” are starting to look rather brown (or more like a mirage) and some are calling for a second stimulus.  For now, leave the ridiculous fact that only a tiny percentage of first stimulus has been spent so far and let’s look at the facts.  The economic crisis was caused by excess leverage, first by consumers, then by companies, now by the government.  Is a second stimulus with more leverage what we really need?  If it is, will the Obama administration make a case for it that doesn’t use phony statistics like “jobs saved or created?”

To borrow from Bill Clinton’s first presidential campaign, Its the Leverage, Stupid!  Consumers borrowed huge amounts of money to live lavish lifestyles or to just keep up with the monthly bills.  The consumer savings rate peaked in the 1970s around 15%, but declined consistantly during the 80s and 90s.  It even went negative in 2007, right before the financial crisis.  This meant that consumers were, on average, spending more than they made.  Consumers resorted to using their homes as ATMs, borrowing vast amounts of money to keep the party going.  Clearly it was not sustainable.

Banks and non-bank banks stoked the flames and let the party rage on.  Banks offered mortgages to people who shouldn’t have had them, manufactured huge bets on CDOs and made billions moving money around.  After the government removed many of the leverage regulations, banks continued to go wild.  Other companies and hedge funds joined the fray, borrowing billions of dollars  for leveraged buyouts that left balance sheets riddled with debt.

When the economy started to slow down and the stock market fell out of bed, companies and consumers who were strapped with debt and little savings faced the brunt of the downturn.  Companies began to deleverage, cuting costs and jobs to be able to stay in business.  US consumers, scared by huge declines in net worth stemming from the stock market collapse and the real estate downturn, started to save, bringing the savings rate up to around 7%.  

The US government, which had started to run larger deficits during the Bush years, stepped in to fill the void.  The Bush administration pushed the first bailouts through and the Obama administration passed even more bailouts and a huge stimulus package.  The $740bn+ stimulus package pushed much of the spending two to three years down the road, funding tons of pork-laden projects that are probably unnecessary and have nothing to do with stimulus.  These programs saddle the government with even more debt at a time when the rest of the world is concerned about the value of the dollar.  The government should have advocated for $200-300b of immediate spending, or better yet, returned money to the people so that they could pay down their own debts.  Instead, we have record amounts of debt and even more leverage, not even taking into consideration the unfunded liabilities of Medicare and Social Security that will require even more leverage.

Now, as the stock market and the economy as a whole are showing signs of getting worse, there are calls for a second stimulus.  I fear that Congress will pass another massive bill, but most of the money won’t be spent fast enough and there will be even more waste.  I’m worried that many of the projects will be useless and ineffective at turning the economy around.

The only way to fix the problem and get through the bear market is to deleverage.  We need to squeeze the leverage out of the system, stop the insanity and go back to more rational debt levels.  With another round of mortgage resets set to take place late this summer, we are likely to have many more foreclosures in the next year.  Instead of spending money on projects in the future, the government should have made it easy for mortgage holders to renegotiate their mortgages in exchange for the bank having the rights to some of the upside of the house when the market turns.  This type of solution removes debt (leverage) from the consumers and bad debt (leverage) from the financial institution and saves consumers money right away, with a lower mortgage payment.  The government will have to spend a little more money, but it would be rational, compared to the huge stimulus package and bail outs that we have seen so far.

The government should be helping (forcing) companies to convert debt to equity in institutions that have bad balance sheets.  Instead of bailing out investors and companies who made bad decisions, the government should be converting debt to equity to shore up balance sheets and make the companies deleverage.

I think we are on the verge of another downturn in the stock market and rising unemployment.  The press seems to think (or hope) that the worst is behind us.  Most people are turing bullish and many Americans have come back into the market.  I fear that we face a repeat of the stock market’s performance during the Great Depression, where there was a prolonged bear market rally and then a second crash that wiped out more market value than the initial crash.

China and the rest of the world are already starting to pick at the reserve status of the dollar.  If the US keeps leveraging and then decides to inflate away the problem, the US dollar may lose its reserve status.  The government must make sure they do not make the crisis worse than it is.  Its not a Republican or Democrat issue. Its an American issue.  I am not confident that the government will make the right decisions.  With GoldmanSachs alums holding many key government jobs, I fear that they will do what they know best: continue to leverage and try to pick up the pieces later.  If you want to go farther, read Matt Taibi’s blog and latest piece in Rolling Stone.

I hope I am wrong, but I don’t see the US coming out of this without lots more pain.  What do you think?

Is GM’s Failure a Forerunner of America’s Problems?

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“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.”  –   Bill Gross, PIMCO

Bill Gross is the manager of PIMCO, the world’s largest bond fund, and made a bunch of money predicting the collapse of US housing.  This means that when he speaks, lots of people pay attention.  In a recent interview with Bloomberg, he predicts, among other things, that the dollar is in trouble and that Americans’ standard of living is probably going to fall, much like I did in a previous post, but the quote above really caught my attention.

Gross’ comparison of GM’s problems to the problem’s facing the US is spot on.  GM’s business plan called for new workers to pay for the retirement and health care of old workers.  This plan worked while GM was producing quality cars and growing, but once GM began to lose market share, it became impossible for the company to sustain itself without major changes.  GM did not change fast enough, leading to its bankruptcy.

Social Security and Medicare work the exact same way, but on a much larger scale.  Current workers pay in to support workers who have retired.  It worked when both the population and economy were growing, but it will stop working sometime in our lifetime.

If this comparison is correct, can we learn from GM’s unwillingness to change, which ultimately led to its bankruptcy?  I think we can.  There is still time to fix Social Security and Medicare, but our government has not done much to solve these problems lately.  It seems to me that the US is burying its head in the sand, just like GM did.  We cannot afford to continue down this path.  It will take huge change to fix these problems, but we must act now before its too late and the US government goes bankrupt, just like GM did, because nobody will step up to bail out the USA.

America Doesn’t Plan for the Future

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The other disturbing trend has been building slowly since the 1980s.  It is a “dumb as we wanna be” mood that has overtaken our political elite, a mood that says we can indulge in petty red state-blue state cat fights for as long as we want and can postpone shoring up our health care system and our crumbling infrastructure, postpone addressing immigration reform, postpone fixing Social Security and Medicare, and postpone dealing comprehensively with our energy excesses and insecurity indefenitely.  The prevailing attitude on so many key issues in Washington today is “we’ll get to it when we feel like getting to it and it will never catch up to us, because we’re America.”    

–    Thomas Friedman, Hot, Flat and Crowded

I was rereading the beginning of Hot, Flat and Crowded today when this passage caught my attention.  It summed up my feelings about our government for awhile now, but even more so now since the financial crisis.  Our government is simply not planning for the future and I’m not sure what we can really do about it.

Government has done little, or nothing, to address energy independence, social security, a sprawling, complex tax code, healthcare, infrastructure, over crowded prisons, underachieving school and job creation.  Instead, government has focused on abortion, illegal drugs, same sex marriage, online sports gambling, online poker, steroids in baseball and short term fixes to America’s major problems.

Both parties, and the system as a whole, are to blame.  First, gerrymandering has robbed America of many competitive election fights, leading to more partisan politicians getting into office, at the expense of moderates who would be more willing to compromise.  Second, the political class has to raise money to continue to be elected.  With the rise of lobbyists, our elected officials face an ever increasing temptation to accept contributions in exchange for influence.  The constant election cycle hurts our political process.  Third, it seems fewer smart people are going into politics.  When the founding fathers were writing the constitution, they were some of the smartest people in the world.  The founding fathers would be ashamed to be compared to today’s political class.  Fourth, the constant campaigning and fundraising pushes elected officials to work on “flavor of the month” and divisive projects, rather than working toward large, long term goals.  Lawmakers who work toward big goals may be thrown out of office by their constituents for not being liberal or conservative enough (ie, working across the aisle on a big issue). 

Its gotten so bad that I wouldn’t trust 95% of politicians, Republican or Democrat, to run a gas station for two years, much less our entire government.  The “dumb as we wanna be attitude” is a symptom of the disease I outlined above.  American politicians think in 2-6 year time frames.  The major problems facing America today cannot be dealt with that quickly.  They require multi-decade approaches that combine government, private business and ordinary citizens.

An example of the dumb as we wanna be attitude is the government’s response to the financial crisis.  The financial crisis was caused by excess leverage by banks, homeowners and consumers.  People were living beyond their means.  The government’s response (both Bush and Obama)?  Start the printing presses and borrow more money.  We are simply exchanging one form of leverage for another.  As I wrote a month ago, I am worried about the US dollar and America’s standard of living.  I believe that our short term approach to avoid any further pain will only worsen the pain in the future.  It does not make logical sense for our government to do what it is doing, expect to make sure that it gets elected again.  We are being as dumb as we wanna be.

An item becomes less valuable as it becomes available in greater quantities, no matter what the item is.  This statement holds true for dollars, just as it does for doughnuts.  It is not logical to think that the US can simply print its way out of massive debts, yet that is the path that the US in on.  I believe we are on that path because its the easy road and the politicians want to make sure they continue to be elected. 

Contrast America’s approach over the last two decades to that of China.  The Chinese government, unlike their American counterpart, thinks in terms of decades, not single years.  For example, in the 1990s, Deng Xiopeng set a goal to make China the leading producer of rare earth metals, the valuable metals used in most high tech products including solar panels, microchips, high capacity batteries and many more.  In 2009, China succeeded.  It now controls 95% of the world’s supply of these valuable metals and have imposed strict export quotas so that industry is forced to move to China.  This is not to say that we should follow the Chinese model, as the ends do not always justify the means, but I believe we can learn a lot of China.  They have lived within their means, saved money and invested it wisely.  China is being rewarded for it now, while the US is being punished.

I’m not really sure what we can do to get our politicians to focus on the big, multi-decade projects that are important to our country’s future.  The only thing I can think of is to educate the voters and demand action on big projects, rather than quick fixes.  Reward congressmen for spending 2 years on fixing social security, not sending pork barrel projects home to the districts.  We are America, but the world is catching up.  I fear they will have caught up because we are falling at the same time they are rising, not because they are rising faster than we are.  I wish there was an easy button, but sadly, there isn’t.  What do you think?