US - economy of arrogance

The paper says that gas prices are headed for $3.50 a gallon by Christmas, and $4.00 a gallon by spring. It also says home heating prices are going to set records this year. And then, mystifyingly, amid stories of hardship, it says the consumer hasn't noticed this yet because the average family income has been rising faster than gas prices ... so far.

GM announces a loss of 39 Billion US dollars but says not to worry, everything's fine.

Meanwhile, a vicious spiral has begun of US banks announcing billions of dollars in losses is eroding confidence worldwide, which is hurting the dollar, which is hurting businesses and consumers that import anything including oil, which is leading to more corporate losses.

The Chinese spooked the US stock market yesterday with the announcement that they were going to start diversifying out of dollars into "stronger currencies." The Federal Reserve is now trapped - lower rates will accelerate the pressures of foreigners to get out of dollars and companies measured in dollars, but higher rates will hurt consumers who will stop buying things which will hurt companies measured in dollars.

The LA Times article quoted below notes that part of this problem is due to a loss of confidence of international investors in the competence of large US bankers to basically know what they're doing. This comes on the heels of US "hedge funds" with super-brilliant "quants" making disastrous mistakes, costing more tens of billions of dollars, possibly much more.

"Tim", as always, asks what's upstream of all this occupational incompetence.
The only way that huge numbers of experts in such corporations can be so effectively blind is that they are effectively blinding themselves by institutionalized arrogance, where people at the top are simply not listening to, or not hearing, and certainly not heeding, voices from below that surely raised the alarm months and years ago. This may be silent bias, expressed simply in it never occurring to people on the top that other opinions exist besides their own. Or it may be worsened by realizing other people differ or will be harmed, but deciding that "doesn't matter."

In any case, it's fairly certain that dissenting voices were quashed and dissenters that persisted removed for being pessimists or nay-sayers or being "contrary." Diversity of opinion was dealt with not by striving for overarching unity, but by simply bulldozing uniformity.

After the third executive was sacked, when the boss asked if anyone had any objections to his policy, surprisingly, no hands went up. Passed "without dissent." A short run gain, in exchange for long-term pain.

The lessons that need to be learned here have nothing to do with fiscal policy or corporate structure, and everything to do with how human beings respect and treat each other, especially across "class" lines. If that root-cause problem is not fixed, the exact same kind of headlong rush into disaster will simply continue until there's nothing left to continue it with.

We need to recognize that there is not enough visibility of complex systems from the corporate executive suite to manage affairs, regardless how brilliant or aggressive or stubborn the CEO can be. Changing CEO's won't help. The task is beyond one man, or one group of people that walk as the shadow of one man. Or woman.

Trying to deal with complexity while retaining "control of everything" leads to being overwhelmed with important detail, that is resolved with an axe, as it's simply too hard to follow all that and care about the problems of less powerful groups, and it's too hard to deal with hundreds of issues, so let's just focus on the two or three "most important" ones.

That may have worked when all the other people and problems moved very slowly and could and would wait. These days, the old assumptions are no longer true. Hundreds of problems may be equally important and tangle together so they cannot be addressed separately. The rest of the world is not waiting for us to get our act together.

"Prioritizing" in that context is not a virtue - it is an admission of failure, of inability to cope. The boat is leaking in 200 places, but we only have 10 fingers so we'll prioritize and that will have to do. Well, sometimes it doesn't do. Like now. In any case, it would only make sense if problems could be "ranked" and listed in order by a single variable, a single dimension, and that's not true either.

There is no "most important" problem many times -- like holes in the boat, they all have to be addressed or none of them matter.

If most people's problems keep on not making it to the agenda, then the whole approach is fatally flawed and needs to be re-thought and replaced. If Congress, for example, can't decide which issues are the most important to deal with, that has to be recognized as a much broader problem than politics or stubborn or dumb people -- it's a change in the whole scope and nature of what has to be managed simultaneously these days.

If replacing one President with another doesn't seem like it will address all the issues, this suggests the problem isn't with the person in that role, it's with the whole concept of trying to funnel so much onto the desk of any human being.

Maybe, we're past the point where one person can do that kind of job. There simply isn't enough "bandwidth". It doesn't matter what their politics or attitudes or beliefs are, what matters is that they are "one person".

The problems caused by 6 billion people interacting with each other do not fit in the mind of any one person, without being oversimplified and "prioritized" to the point where the answer cannot be correct, regardless who the person is.

This is new. In the history of the Earth, we've never been at the point where a decision made in Beijing, say, affects what's going on in New York 5 seconds later. Suddenly it's a very small world, and things that didn't used to interact are interacting a lot.

So, we need to learn how to address conflicts, and how to listen to people who are different from ourselves. We need to figure out how to engage many more people in better decisions, instead of fewer and fewer people in faster (but wrong) decisions.

In an increasing number of cases, they know and see important things that we are blind to. Diversity is not something "nice" if there is time -- it is the key to getting out of the mess we are in. Failing to understand the role that arrogance and racism, class-ism, sexism, and not-me-ism have on outcomes will be the single biggest error we can make. Trying to have control of everything results ultimately in more and more control of less and less.

We don't need to look abroad for magic answers - we only need to start listening better to our own people. Making everyone "like us" only ensures that everyone shares our blind spots and is a sure-fire recipe for the kind of self-imposed disaster we see going on now.

The "authority" of wisdom has to be disentangled from the "authority" of command. We need a command and control structure we authorize to lead , but it has to be informed from below or leadership is irrelevant.


My prior post "Houston, we have another problem" looks at this "bandwidth" issue more. It's an important issue. The entire US National Incident Management Plan, under which FEMA should be operating, seems on my reading to be similarly based on a "star" architecture - that is, everything flows the the top where issues will be "prioritized" and the few important ones decided based on what the top knows and believes at that time. The shining example of a government agency that worked out well in Hurricane Katrina was the Coast Guard, with the opposite model, where powers had been pre-delegated to each ship's captain to do what made sense locally -- particularly if communications with the top were down or slow.

As the planet gets more like a single living body, it gets harder and harder to imagine a world in which one cell of a body could be given authority to make decisions for and give orders to the rest of the 10 trillion cells. There is no such super-cell. That's not the model our body uses to manage itself. Maybe we need to pay more attention to our own bodies.

Of course, integrity and honest also matter. This mortgage and credit fiasco was also brought on by the arrogant belief that millions of poor people could be exploited and tricked out of their homes, and no one would ever know or care. People in the middle thought they could put "AAA" ratings on junk and sell it for prices of gold, and they did. Now, any "AAA" rating by these people for anything is suspect in the world's eyes. God may work in mysterious ways, but we ultimately end up reaping what we sow, with interest.

One can hardly guess what impact the probable coming shutdown of the US Government in December will have on world opinion of our ability to work with ourselves to get important decisions made in hard times. It can't be good.

Anyway, here's the news.

Today's New York Times says this:

HOUSTON, Nov. 7 —

The national average for regular gas surpassed $3 a gallon this week, and drivers could be paying record prices this holiday season, experts said. The timing of such an unusual jump could crimp consumer spending at a vital time for retailers.

Barring some unexpected development like a big drop in the price of oil, Mr. Kloza and other experts said, gas could be headed toward $4 a gallon by spring.

Average gasoline prices in November had never exceeded $3 a gallon before this year. A year ago, the average price at the pump was $2.20, meaning it costs roughly $12.50 more today to fill a car with a 15-gallon tank.

But recently they have been rising by 2 cents a gallon every day. Motorists are feeling the pain across the nation.

If gasoline prices are causing motorists to drive less over all, it is not evident in the national statistics.

But there are signs that many Americans are feeling the pinch, and business economists are worried that rising gasoline prices will cut consumer spending this holiday season.

Michael P. Niemira, chief economist for the International Council of Shopping Centers, said that average weekly earnings of American households over the last year have outpaced increased expenditures for gasoline. But he added, “With the expectations of higher gasoline prices and home heating expenses this winter, the potential exists that consumers will have less discretionary purchasing power.”

Meanwhile, lower-income drivers are especially unhappy with prices at the pump.

... drivers said the cost was crimping their lives.

Energy experts see few signs that gasoline prices will ease soon.

... be at least $3.20 by Christmas.... a price as high as $3.50 by Christmas

Meanwhile, the LA times notes this (excerpts)

Stocks plunged Wednesday as the dollar sank to new lows against other major currencies, in a one-two punch that deepened concerns about the outlook for the U.S. economy.

The latest rout on Wall Street was led by already-battered bank shares. ,.....

But the central bank now risks being caught in a bind, some analysts say: If it continues to lower interest rates, it could further undermine the sagging dollar and drive away foreign investors, sending markets reeling.

"The soft landing we were anticipating quickly transitioned to a severe downturn," Kerry Killinger, the Seattle-based company's chief executive, told investors in New York.

The tumbling dollar is compounding investors' fears. Each decline in the greenback devalues the substantial U.S. investments of foreigners, who have been a crucial source of funding for the nation's huge budget and trade deficits.

The dollar's continuing slide raises the risk that foreign investors could balk at buying more American securities, such as Treasury bonds. That, in turn, could worsen the already severe credit crunch rooted in the housing market's woes.

The dollar crumbled Wednesday after Chinese officials implied that the country might sell off dollar-denominated securities to diversify its $1.4 trillion in foreign-currency reserves.

"We will favor stronger currencies over weaker ones, and will readjust accordingly," Cheng Siwei, vice chairman of China's National People's Congress, said at a conference in Beijing, Bloomberg News reported.

Some analysts said the dollar's steep slide in recent months in part reflects foreign investors' ebbing confidence in the U.S. economy, as the housing market bust has worsened and some of the nation's most important financial institutions have been battered by huge losses on home loans.

"Any currency is a kind of a report card on the country," said Brian Gendreau, strategist at ING Investment Management in New York.

"The foundation of the U.S. is its capital markets, and we have the biggest players in the capital markets making terrible mistakes in their assessments of risks," said Peter Morici, an economist and business professor at the University of Maryland.

The confidence of U.S. consumers and executives has slumped in recent months, national surveys show. Waning faith in the economy can make a downturn a self-fulfilling prophecy if people and businesses begin to cut back their spending because they aren't sure what's ahead.

Record oil prices also threaten the economic outlook.

Some economists say the surge in oil prices partly stems from the dollar's ongoing plunge. Because oil is priced in dollars worldwide, oil exporters in effect get less for their crude as the U.S. currency weakens -- unless the price rises.

A dollar panic also could make it impossible for the Federal Reserve to further reduce interest rates to help the domestic economy, because lower rates make returns on U.S. fixed-income securities even less attractive to foreigners compared with what they can get abroad.

For the U.S. economy, "that is checkmate -- when the Fed can't come to the rescue," Kasriel said.

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Side-note

Household Income in the United States is described in what looks like a pretty solid article in Wikipedia, with dozens of links to the source data at the Census Bureau, etc. Houshold income by race in the US, in 2005, from that article looks like thins:

Over time, things seem worse.

"From 1969 to 1996, median household income rose a very modest 6.3 percent in constant dollars... ."- John McNeil, US Census Bureau

So, if this rose 6.3 percent over 27 years, TOTAL, was there household income in the last decade? How can income be rising faster than gas prices? And, if you left out the influx of wealthy Asians, what would these figures look like for just everyone who was here at the start of the period?

Again, what was the average change, not the change in the average?

Household income growth (above) is shown in a chart that you shoujldgo to the original to view in full-screen size here. This is based on census data and looks credible. What's clear is that almost all the growth in real household income from 1965 to 2003 occurred in the top 50% of households, while the bottom 50% remained flat.

(photo credits - thinker behind bars by by Mike_fj40 on flickr.)

What is ailing black America?

Blacks in America face a complex system problem where causes and effects have merged into self-reinforcing barriers, but sometimes we can see through the fog. Here's a letter to the New York times in regard to Bill Cosby's recent initiatives on what is ailing black American family.

To the Editor:

It is surprising to me that in the discussion of black fathers and children, there is no reference to the disappearance of decent working-class jobs in America.

As a teenager in the early 70s, I would often visit friends in Compton, Calif. At that time, the black fathers in Compton worked in factory jobs — Bethlehem Steel or Goodrich Tires. Compton was a black suburban town with two-parent families, nice lawns and fathers fixing their cars on the weekend.

Now, the factory jobs are gone, and Compton is drug-infested. It may be useful to say “get a good education and there’s an engineering job waiting for you in Silicon Valley,” but that socio-intellectual distance is enormous. To address the problems of the inner city, some kind of viable economic structure needs to exist to help fathers act like fathers.

Eric Lindemann
Boulder, Colo., Oct. 16, 2007

How does that help me? - Average American

"They complained in the East,
They are paying too high.
They say that your ore ain't worth digging.
That it's much cheaper down
In the South American towns
Where the miners work almost for nothing...

"The summer is gone,
The ground's turning cold,
The stores one by one they're a-foldin'.
My children will go
As soon as they grow.
Well, there ain't nothing here now to hold them."

North Country Blues (1963)
Bob Dylan

( photo credit: spoon )

So, The New York Times had a story "Couple learn the high price of credit" by John Leland about a typical family in Ypsilanti, Michigan, and a graph of the personal savings rate of the average American. Like most of the other economic indicators, the back broke in about 1982 and it's just been plummeting ever since. The big news is that 2 years ago the rate crossed zero, and now we have a graph where the "average savings rate" of Americans is negative. I asked in economics once what that meant, and the professor said it was "dissavings." I asked again, what if the family has no savings left? Then what does it represent? He stared at me blankly, as if this concept was absurd, and went on.

The last time the personal savings rate was negative was in 1933. (Source EBRI Databook, US Department of Commerce.) The blue line on the chart is the personal savings rate, as a percentage of disposable income. The chart goes from 1930 to 2007. It is clear that whatever is going on is structural, a consistent pattern over 75 years, not just some blip that will turn around next year.



The dismal point this graph makes is that the economic pain, and the mental, medical, and social problems that this pain brings, is not going to go away anytime soon and, in fact, will probably get worse over the forseeable future.

For a serious structural trend, we'd expect to see this not just in personal data, but in national level data. What's that look like?

A similar story is in "Measuring the Moment - Innovation, National Security, and Economic Competitiveness" (Nov 2006).

US Trade Deficit (From BEA, quoted at invisibleheart. "Does the Trade Deficit Destroy American Jobs, Russell Roberts, George Mason University, Nov 2006.)



The left scale goes from +100 million per year to -900 million per year and the time from 1960 to 2005. Again, the whole picture changed about 1982, and the overall trend is accelerating downward into debt as a whole nation.

As a whole nation, we're buying way more than we can afford to pay for, and it's not getting better - in fact, it seems to be getting worse.


This raises an hypothesis that doesn't seem to be discussed much in public health - that the reason the US health care bill is skyrocketing is not only because the charges per unit of care are going up, but because we are, frankly, as a nation, getting sicker.

That is a crucial distinction, because it means that the major problem we have is not really getting more insurance to pay for damage repair, or lowering the cost per repair job.

The real problem facing public health, as we trek upstream to see where this problem is coming from, is "Why are the American people getting sicker and how can we prevent that and reverse that trend, on a personal, local, state, regional, and national level, simultaneously?" Blaming doctors or hospitals or drug companies won't fix this. Pitting individuals against corporations won't fix this. Blaming China or Japan won't fix this. It's deeper.

Part of the problem, in my model, is that so many people in corporations think that the problem is one of dividing the pie between "consumers" and "corporations", or between managment and labor, or between the rich and the poor. I don't think that's the problem at all, although it certainly is a source of conflict.

The problem is that the pie is shrinking, in any real measure. The wind has gone out of the sails of the American dream. We've lost a positive direction and now are on the decline curve instead. Squabbling over who gets the remaining food in the cupboard won't address the larger question, which I want to look at.

The key question is where does the pie come from in the first place. What creates wealth, and why isn't it working any more?

I'd say the universe (or Universe) clearly supports a wonderful overall design, whether accidental or intentional, for the hierarchy of life to evolve in ever more ways, at least on large scales and long timeframes -- but something seems to be interfering with out ability to ride that tide right now, on every level.

Surrounded by opportunity, we are failing to thrive. Surrounded by water, we are dying of thirst. With more computing power on our desktop than the entire planet had 50 years ago, we are unable to solve even basic problems of getting along and making things work. So, maybe, more technology is not the answer. We don't use 1% of what we have now.

I'm not sure where "the tracks" are, but I am pretty sure that our train has left them.

We have a "failure to thrive" problem here, a global depression that has gripped us on multiple levels simultaneously, causing despair and self-destructive behaviors on all scales.
By all our models and insights, what we're doing "should" work, but it clearly doesn't. That suggests that one of our basic, cherished assumptions is wrong.

And, it's not only wrong, but it's blinded us to a reality that is all around us, but we're incapable of perceiving it -- the myth is so strong that it squelches out all contrary evidence. The myth, after all, in my model, is itself alive and seeking to survive, and doing a good job of it.

Which myth? Which assumption?

Well, my model suggests that our concept of "individuality" is seriously wrong. We do not exist independently of the world around us, but are actually dependent on the world around us to survive and, in fact, we are an inseparable part of the world around us.

This is one of those ideas that varies by what size the observer is.

Darwin and others observed that individuals battled and the fittest survived, and perceived that as a global truth and a model for how humans, corporations, and nations should treat each other, basically saying "It's us or them, Jake, and there ain't room on this planet for both of us!"

However, that's poor observing, because the competition is really only local. On a larger scale, the wolf species and the deer species get along just fine. The wolves kill off the weakest deer, which, net, strengthens the deer herd. On the scale of many years and the size of species, deer and wolves cooperate and get along and help form a stable ecosystem.

That's the part of the model that seems to have gotten lost, as we try to make both corporate America and international America a one-horse show, take no prisoners. I think most CEO"s spend more time building alliances than they do attacking enemies, and many of them would rather get along and play golf than compete fiercely in a winner-take-all contest.

It may be hard to grasp at the corporate level, but the survival of corporations depends on the survival of the people who make them up. And, judging from the charts and graphs above, the people are getting very near running out of steam here.

It's not Al Qaida that's destroying us, it's our concept that the only way to structure life is as a competition, between nations, between cultures, between corporations, and between corporations and the people who make them up, unaffectionately known as "labor."

Because of the interlocking feedback loops and distant effects, there are indeed two choices - there's "win-win" and "lose-lose." Corporations, individuals, and public health can figure out how to co-exist and thrive together, which is a thought starting to emerge at the Ross School of Management, or they can go on fighting with the results shown above., and the population dying of obesity, diabetes, asthma, stress, and rampant infections.

Competition is not an "invariant". A single counter example can prove that, and here it is: The cells in our body do not spend all day with each one trying to be the "king cell" that rules all the others. They manage to cooperate, and thrive.

It's a good model. We should consider it. It's a model that does scale up, and then no one has to lose -- except the purveyors of the old myth that someone has to lose.

"Economic competitiveness" is the wrong term touse. "Ability to thrive while allowing others to thrive as well" or "jointly thriving" are better terms. Failure to thrive is a problem of the spirit, of our interest in and willingness to work together to ride the available tide of innovation, growth, and life that is all around us.

I'm unabashedly a Baha'i, and the Baha'i's believe in "spiritual solutions to economic problems"
which that link can explain better. This means, in my mind, more that the answer is in greater willingness to stop fighting and cooperate than in simply praying that things should get better while continuing our daily habits that make them worse.

A strong dose of humility can get thrown in as well, which doesn't mean walking around glum, but does mean not thinking we know it all without at least checking around first for contrary evidence, for any sign that maybe our model is wrong. As Karl Weick has pointed out in secular high-reliability organization literature, that kind of "mindfulness" doesn't come easy, but brings great rewards when it can be achieved.

Here's a tiny look at how drenched we are in this concept. People laugh at guys who would drive around for hours rather than stop and ask for directions -- although if it's a pilot and not asking directions results in using the wrong runway, this is no longer funny. Today, many families, like the one described by the Times article, are in deep debt and at risk of losing their house. Yet, if I were to suggest to them that maybe two familes could live in one house and share the mortgage costs, they'd think I was crazy.

Why is that, exactly? People would rather get lost than ask for directions? People would rather lose their home than share it with others, who, apparently, they think they would surely hate?
I'm glad I don't like ice cream because, if I liked it, I might eat it, and I hate it?

This idea that each family should have their own home and car has co-evolved with the idea that the purpose of money is so we don't have to learn how to get along with each other.

Now that the money has gone away, maybe we should revisit the idea of getting along with each other, instead of losing our homes. THAT's what I mean a "spiritual" solution - one that simply requires a change in heart, and suddenly, a new door opens where there was just disaster before.