Wednesday, August 11, 2010
A Keyhole View of the Banking/Real Estate Crisis
The press has been discussing that banks are holding onto a great deal of real estate rather than completing the foreclosure process. I asked a prominent real estate figure in Chico about how large this phenomenon was. He replied that although no public data exists, he could show me houses that have ceased payments more than 18 months ago. He said that the banks are even paying the taxes on the properties rather than booking a write-down.
Here is the URL for my Second Talk
Here I move from investment and technical change to macroeconomic conditions and the run-up to the crisis.
http://www.ustream.tv/recorded/8850114
http://www.ustream.tv/recorded/8850114
Identity and Interests
I believe that the "economic way of thinking," as the textbooks have it, destroys the world we have in common, because that world is a world constructed in a normative, not a natural, space and rationality, as economists understand it, is inconsistent with, indeed makes nonsense of, the notion of normative authority. In effect, this point was made 30 years ago by Amartya Sen in "Rational Fools," where he argued that while the economic conception of rationality can make sense of "sympathy," - preference structures that made the utility of others part of the agent's objective function - it cannot make sense of what Sen called "commitment," which he defined as "counter-preferential choice." The idea that we sometimes sacrifice something - lower our utility - to do what is right is absolutely inconsistent with rational choice. I don't doubt that there are people who are well described as rational choosers - and more of them, unfortunately, than there would be had rational choice theory never been invented - but they are damaged humans, sociopaths.
The history of attempts to make sense of normative authority without giving up utility maximization is sad and pathetic and I will not rehearse it here. (The crudest is the attempt to make values a species of meta- or second-order preferences; the problem is that this approach cannot explain why their "second-orderness" gives them any more authority than the first-order preferences they are about.)
At one time, influenced by Mark Sagoff and early Bowles and Gintis, I thought that a reasonable way of "assimilating" the normative, taming it, in effect, was to distinguish between our concern with pursuing our interests and our concern with our identities, with the latter concern giving rise to commitment and making sense of normativity. So I refrain from doing something that would serve my interests because I am (we are) not the sort of person (people) who would do such a thing. This sort of thing is perfectly compatible with utility maximization, as the Akerlof/Krainton papers have shown, and therefore perfectly inconsistent with Senian commitment.
Here is the deeper problem with using "identity" to make sense of commitment: the criteria of identity are, if identity is to underpin the normative, themselves normative, not natural. My commitment to honest inquiry is tied to my identity as a "scientist," say- but scientists understood as honest inquirers, not scientists per se -many of whom are not honest. So appeal to identity to make sense of normative authority is, or can be, question-begging.
The normative, I submit, is irreducible. Hic rosa, hic salta!
e.
The history of attempts to make sense of normative authority without giving up utility maximization is sad and pathetic and I will not rehearse it here. (The crudest is the attempt to make values a species of meta- or second-order preferences; the problem is that this approach cannot explain why their "second-orderness" gives them any more authority than the first-order preferences they are about.)
At one time, influenced by Mark Sagoff and early Bowles and Gintis, I thought that a reasonable way of "assimilating" the normative, taming it, in effect, was to distinguish between our concern with pursuing our interests and our concern with our identities, with the latter concern giving rise to commitment and making sense of normativity. So I refrain from doing something that would serve my interests because I am (we are) not the sort of person (people) who would do such a thing. This sort of thing is perfectly compatible with utility maximization, as the Akerlof/Krainton papers have shown, and therefore perfectly inconsistent with Senian commitment.
Here is the deeper problem with using "identity" to make sense of commitment: the criteria of identity are, if identity is to underpin the normative, themselves normative, not natural. My commitment to honest inquiry is tied to my identity as a "scientist," say- but scientists understood as honest inquirers, not scientists per se -many of whom are not honest. So appeal to identity to make sense of normative authority is, or can be, question-begging.
The normative, I submit, is irreducible. Hic rosa, hic salta!
e.
Reframing Rebalancing
I have a couple of overdue reports to get out, so I have to be brief. Raghuram Rajan has played an important role in keeping attention focused on global imbalances, but his solutions are hardly solutions at all.
1. Differential savings rates, too low in the US and other deficit countries, too high in China and the other surplus countries, are primarily the consequence and not the cause of imbalances. I presented the evidence for this three years ago and see no reason to change my assessment. In any case, the surplus-deficit conundrum has been with us for more than a century, and historians have no trouble in identifying the problem. Deficit countries are uncompetitive; surplus countries have organized their economy to take maximum advantage of export opportunities.
2. China’s main problem in rebalancing is not simply the structural difficulty of converting an export-oriented capital stock to one that serves the domestic market. This will be hard, but my rough reading of history is that it is a mistake to assume that capital is all clay and no putty. (Vice versa too.) The real challenge is that successful surplus countries have managed to outcompete those who are less successful, and it is all but impossible to simply discard these victories. Can China adopt policies whose result is the conquest of markets by other developing countries that China used to dominate? This is an economic problem, because the shift of export production out of any one country in a competitive environment can be uncontrollable. It is a political problem, because Chinese firms will use all available influence to prevent it. (See this sensible overview by Jeffrey Frieden.)
3. The US problem is not that consumers spend too much, but that (1) given a trade deficit that is a substantial share of GDP, consumption can be maintained only by borrowing, and (2) US producers are uncompetitive in tradables. This will not be fixed overnight, and we won’t even begin repairs until we see what’s broken. Of course, the root cause of the US external deficit is not poor eyesight, but political economy: wealthy individuals and institutions changed the rules over several decades so they could maximize their global returns. They still run the show.
4. The conventional short run/long run dichotomy is associated with fiscal policy: we need deficits today to shore up demand and fiscal rectitude in the long run to achieve sustainability. In a sense, this is right, but it is drastically incomplete because it fails to take account of the relationship between public budgets, private budgets and the trade (or current) account. The real short run problem is that, given the lack of US competitiveness, a devastating austerity can be avoided only through high levels of borrowing, either by households, firms or the government. Since private borrowing is at a standstill, that leaves the US Treasury as the last line of defense. But this solution is not sustainable. The long run goal has to be approximate trade balance, especially since there is no reason why private investment prospects, and therefore global demand for US financial assets, should be counted on to be superior to foreign prospects over the long haul. Only by balancing trade can the US households, firms and government all achieve viable budget positions.
5. Can the US rebalance trade on its own? I doubt it. Will a coordinated dollar devaluation do the trick? Maybe, if you can get coordination (no easy feat), but it is also possible that US capacity in tradables has deteriorated too far for price adjustment alone to succeed. My view: we need a trading system that institutionalizes the collective interest in avoiding destabilizing imbalances. That will take a global political movement that I can’t even begin to visualize.
1. Differential savings rates, too low in the US and other deficit countries, too high in China and the other surplus countries, are primarily the consequence and not the cause of imbalances. I presented the evidence for this three years ago and see no reason to change my assessment. In any case, the surplus-deficit conundrum has been with us for more than a century, and historians have no trouble in identifying the problem. Deficit countries are uncompetitive; surplus countries have organized their economy to take maximum advantage of export opportunities.
2. China’s main problem in rebalancing is not simply the structural difficulty of converting an export-oriented capital stock to one that serves the domestic market. This will be hard, but my rough reading of history is that it is a mistake to assume that capital is all clay and no putty. (Vice versa too.) The real challenge is that successful surplus countries have managed to outcompete those who are less successful, and it is all but impossible to simply discard these victories. Can China adopt policies whose result is the conquest of markets by other developing countries that China used to dominate? This is an economic problem, because the shift of export production out of any one country in a competitive environment can be uncontrollable. It is a political problem, because Chinese firms will use all available influence to prevent it. (See this sensible overview by Jeffrey Frieden.)
3. The US problem is not that consumers spend too much, but that (1) given a trade deficit that is a substantial share of GDP, consumption can be maintained only by borrowing, and (2) US producers are uncompetitive in tradables. This will not be fixed overnight, and we won’t even begin repairs until we see what’s broken. Of course, the root cause of the US external deficit is not poor eyesight, but political economy: wealthy individuals and institutions changed the rules over several decades so they could maximize their global returns. They still run the show.
4. The conventional short run/long run dichotomy is associated with fiscal policy: we need deficits today to shore up demand and fiscal rectitude in the long run to achieve sustainability. In a sense, this is right, but it is drastically incomplete because it fails to take account of the relationship between public budgets, private budgets and the trade (or current) account. The real short run problem is that, given the lack of US competitiveness, a devastating austerity can be avoided only through high levels of borrowing, either by households, firms or the government. Since private borrowing is at a standstill, that leaves the US Treasury as the last line of defense. But this solution is not sustainable. The long run goal has to be approximate trade balance, especially since there is no reason why private investment prospects, and therefore global demand for US financial assets, should be counted on to be superior to foreign prospects over the long haul. Only by balancing trade can the US households, firms and government all achieve viable budget positions.
5. Can the US rebalance trade on its own? I doubt it. Will a coordinated dollar devaluation do the trick? Maybe, if you can get coordination (no easy feat), but it is also possible that US capacity in tradables has deteriorated too far for price adjustment alone to succeed. My view: we need a trading system that institutionalizes the collective interest in avoiding destabilizing imbalances. That will take a global political movement that I can’t even begin to visualize.
Has It Been Proven That P Does Not Equal NP?
In the last two days a firestorm has erupted over a claim by HP Labs computer scientist, Vinay Deolalikar, http://wwww.hpl.hp.com/personal/Vinay_Deolalikar/Papers that he has proven one of the six remaining Clay problems for which a million dollar prize is offered. In particular, he claims to have proven that polynomial time algorithms (P) cannot in general solve exponential time problems (NP), or are not equivalent in power to them. It has long been suspected that this is the case, but has not been proven so far. This has implications for computational complexity theory and computable and computational economics.
The paper is over 100 pages long and involves ideas drawn from model theory in logic as well as statistical physics, an approach not used for anything previously, and so far in the enormous debate that has erupted, there is not yet a definite answer if Deolalikar is right or not, although some minor errors have definitely been found. An aggregator site for this debate is at http://michaelnielson.org/polymath1/indep.php?title=Deolalikar%27s_P!%3DNP_paper. This site provides links to others where more detailed debates have been occurring, with the ones starting with http://rjlipton.wordpress.com being especially insightful and providing most of the mathematical meat picked up on the aggregator site.
The paper is over 100 pages long and involves ideas drawn from model theory in logic as well as statistical physics, an approach not used for anything previously, and so far in the enormous debate that has erupted, there is not yet a definite answer if Deolalikar is right or not, although some minor errors have definitely been found. An aggregator site for this debate is at http://michaelnielson.org/polymath1/indep.php?title=Deolalikar%27s_P!%3DNP_paper. This site provides links to others where more detailed debates have been occurring, with the ones starting with http://rjlipton.wordpress.com being especially insightful and providing most of the mathematical meat picked up on the aggregator site.
Tuesday, August 10, 2010
Reminder About My 2d Streaming Video Tonight
Tonight's talk will answer some questions about the first talk, then discuss new technology and replacement investment – all leading up to crisis theory, but that is a way off.
http://www.ustream.tv/broadcaster/5149208
http://www.ustream.tv/broadcaster/5149208
Monday, August 9, 2010
Is US Contemplating War With Iran?
Juan Cole (http://www.juancole.com) has a guest editorial today by Mahan Abedin who reports that US Joint Chiefs Chairman, Mike Mullen, has made statements that the US is contemplating a "limited war" to block Iran from getting nuclear weapons. Abedin reports that this appears to be a shift of policy, at least in the open, and warns it would not work, with Iran likely to fight back very hard with great impact.
It should also be kept in mind that there continues to be no evidence of Iran actually pursuing nuclear weapons, although arguably it has been pursuing a possible capability to build them. However, the fatwa of the Commander-in-Chief, Ali Khamenei, against nuclear weapons remains in place, as does the official US NIE supported by all US intel agencies declaring that they are not actively pursuing nuclear weapons, despite all the shouting in the media claiming that they are. This may be the result of rumblings arising from the new anti-Iran UN sanctions reportedly biting, with who knows what going on in the background, although there are clearly parties who would just love to have the US go after Iran militarily. Very. Bad. Idea.
It should also be kept in mind that there continues to be no evidence of Iran actually pursuing nuclear weapons, although arguably it has been pursuing a possible capability to build them. However, the fatwa of the Commander-in-Chief, Ali Khamenei, against nuclear weapons remains in place, as does the official US NIE supported by all US intel agencies declaring that they are not actively pursuing nuclear weapons, despite all the shouting in the media claiming that they are. This may be the result of rumblings arising from the new anti-Iran UN sanctions reportedly biting, with who knows what going on in the background, although there are clearly parties who would just love to have the US go after Iran militarily. Very. Bad. Idea.
Murders In Afghanistan Hit Home
Where I live, Harrisonburg, Virginia, has only 45,000 people in it. Yet, somehow two of the ten people killed in Afghanistan on a medical mission of mercy have connections to here. One was Glenn Lapp, a 40 year old nurse who has been involved with administration at the International Assistance Mission (IAM), but went on this trip. He was a 1991 graduate of Eastern Mennonite University here in Harrisonburg, and has been involved with Mennonite missions abroad. I note that the Mennonites are a pacifist church and do not actively proselytize abroad, in contrast with the claims made by the supposed Taliban defenders of this killing.
The other was Brian Carderelli, age 25, a graduate of James Madison University here in 2009, whose parents apparently teach in Kabul. His identity has only just been confirmed within the last few hours. The claims that these people were spying or handing out Bibles in Dari are just ridiculous. The group's leader, Tom Little, has been there since 1983 doing these activities, the period when there was a Soviet-dominated government. He survived through the years of outright Taliban rule. Some are suggesting that the real reason for the killings was robbery, being covered up by these ridiculous claims of spying and Bible handing out.
On the broader issue this is all very depressing. I supported going into Afghanistan, in contrast to Iraq, and I agree with Obama that invading Iraq really messed up the situation in Afghanistan. But that is a very complicated and difficult place, and it is unclear it would have been all that great if we had not invaded Iraq. It looks like it is time to get out, although this will have to be done with some care. In the meantime, we get tragedies such as these murders.
The other was Brian Carderelli, age 25, a graduate of James Madison University here in 2009, whose parents apparently teach in Kabul. His identity has only just been confirmed within the last few hours. The claims that these people were spying or handing out Bibles in Dari are just ridiculous. The group's leader, Tom Little, has been there since 1983 doing these activities, the period when there was a Soviet-dominated government. He survived through the years of outright Taliban rule. Some are suggesting that the real reason for the killings was robbery, being covered up by these ridiculous claims of spying and Bible handing out.
On the broader issue this is all very depressing. I supported going into Afghanistan, in contrast to Iraq, and I agree with Obama that invading Iraq really messed up the situation in Afghanistan. But that is a very complicated and difficult place, and it is unclear it would have been all that great if we had not invaded Iraq. It looks like it is time to get out, although this will have to be done with some care. In the meantime, we get tragedies such as these murders.
Sunday, August 8, 2010
The Corporate Scandal of Higher Education
I have been meaning for some time to offer a series of posts about the plague that is devastating education, even though education is supposed to fuel economic growth. I was stirred to stop procrastinating by a note in yesterday's Wall Street Journal, which reported that the Washington Post's Kaplan "education division, which accounts for more than 60% of total revenue, increased 15% to $747.3 million. The bulk of Kaplan's revenue comes from the higher-education unit, consisting of a group of for-profit colleges that primarily offer certificate, associate's and bachelor's degrees."
I am going to start out with a shocking piece from the New York Times, which describes the enormous salaries given to presidents of elite universities to serve on corporate boards. Administrative salaries alone should be enough to create an outrage now that money for teaching is drying up. These presidents might be expected to offer a patina of respectability for the corporations. Even more, presidents, who want to keep their lucrative board positions, will be careful not to offend corporate America. Others who want to have comparable money thrown at them will be equally careful. Here is the article:
Bowley, Graham. 2010. "The Academic-Industrial Complex." New York Times (1 August): p. BU 1.
http://www.nytimes.com/2010/08/01/business/01prez.html?_r=1&hpw=&pagewanted=all
"What does Shirley Ann Jackson know about shipping parcels? For that matter, what does Steven B. Sample understand about mutual funds? Dr. Jackson, who is a theoretical physicist and the president of Rensselaer Polytechnic Institute in Troy, N.Y., has served as an outside director on the board of FedEx since 1999."
"Dr. Sample, an electrical engineer and the retiring president of the University of Southern California, sits on the boards of directors of the American Mutual and Amcap mutual funds. He is also a director of another company, and stepped down two years ago from the board of the Wm. Wrigley Jr. Company, the candy maker."
"Dr. Jackson and Dr. Sample are part of a cozy and lucrative club: presidents and other senior university officials who cross from academia into the business world to serve on corporate boards. While academics can often bring fresh perspectives, managerial experience and the imprimatur of a respected institution to a board, they are also serving in an era when corporations wrestling with fallout from the financial crisis (think Bank of America, Citigroup and Goldman Sachs) or very public mishaps (think BP, Johnson & Johnson and Toyota) have raised the stakes for board members expected to guide corporations."
"Some analysts worry that academics are possibly imperiling or compromising the independence of their universities when they venture onto boards. Others question whether scholars have the time -- and financial sophistication -- needed to police the country’s biggest corporations while simultaneously juggling the demands of running a large university. "It is prestigious for a company to have a major university president on their board,"says Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute. "But few college and university C.E.O.’s are even qualified to understand the workings of a major public company"."
"According to a 2008 survey by The Chronicle of Higher Education, presidents from 19 of the top 40 research universities with the largest operating budgets sat on at least one company board. The trend is more widespread among public universities, but the private ones are catching up: the American Council on Education says that from 2001 to 2006, the proportion of presidents from all doctorate-granting institutions sitting on corporate boards rose to 52.1 percent from 47.8 percent at public institutions, and to 50.9 percent from 40.6 percent at private ones."
"Some of the more high-profile and ubiquitous academics include the president of Stanford, John L. Hennessy, who sits on three boards, including that of Google. (Google also has the president of Princeton, Shirley M. Tilghman, on its board.) The chancellor of the University of California, San Diego, Marye Anne Fox, is on three boards. And then there is Dr. Jackson of Rensselaer, the highest-paid private college president and one of the most prominent black university leaders. In addition to FedEx, she sits on the boards of four other companies, including I.B.M. and Marathon Oil, and she recently stepped down from the board of NYSE Euronext."
"The attractions are clear for the president: lucrative extra pay and useful networking, among other reasons. For a dozen hours or so each month for each board served, in addition to preparation time, and their wise advice, they can receive hundreds of thousands of dollars a year. Ruth J. Simmons, the president of Brown University and the first African-American woman to lead an Ivy League university, sat on the Goldman Sachs board until she stepped down this year. In 2009, she earned $323,539 from her Goldman directorship, including stock grants and options, as calculated by Goldman, and left the board with stock worth at the time around $4.3 million. This is in addition to her salary from Brown, $576,000 this year."
"Dr. Jackson earned $1.38 million from her directorships, comprising both cash and stock. That’s in addition to $1.6 million from her day job, including bonuses and other benefits. Beyond personal financial benefits, the interchange of ideas between campus and corporation can allow for a fruitful cross-fertilization. For example, Dr. Hennessy sits on the boards of Cisco Systems and Atheros Communications as well as Google. As an electrical engineer and a pioneer in computer architecture, he is well placed to bring industry expertise to the boards he serves."
"William G. Bowen was president of Princeton University for 16 years and served on two boards, including Merck’s. It was an experience, he says, that was invaluable in helping him build up Princeton’s then-fledgling life sciences activities. "It influenced my understanding of how the field was evolving, where new ideas were most likely to appear, where to look for talent,"he recalls. "It was one long seminar in the sciences and molecular biology"."
"Indeed, the path from academia to corporate boards began broadening in the late 1990s when companies sought to break up the traditionally white, male composition of their boards. Academia, and in particular university presidents, were a good source of prominent minority leaders and women who were established in their fields and had experience running big organizations."
"Phyllis M. Wise, the provost of the University of Washington, is on Nike’s board. Nike said it hired Dr. Wise, an Asian-American, "because of her impressive accomplishments and her record of independent thought, and we believe that through the exchange of ideas, both Nike and the University of Washington will benefit"."
"But according to James H. Finkelstein, a professor in the George Mason School of Public Policy, probably the biggest reason companies have sought out academics is the prestige they bring. Universities are among the few institutions trusted by the public, he says, and companies believe they can associate themselves with this quality by installing an academic on the board."
"Corporations think this is a way of enhancing their prestige and legitimacy, especially in the case of Ivy League presidents,"he says. "I suspect that’s the principal motivation. It’s probably not for their business sense."
"John Gillespie, who has written a book on corporate boards, "Money for Nothing,"says academics are often selected for another reason -- because they are less likely to rock the boat than directors from the business world. Academics may be trained to ask tough questions in their own fields, but when confronted with tricky business issues far above their level of expertise they "often become as meek as church mice,"he says."
"Most corporate governance experts think that a president serving on one board brings benefits to both the company and the university, but the situation becomes problematic as these academics serve on more boards. There may be diminishing returns to the university and less time to be an effective board member."
"Nell Minow, editor of the Corporate Library, an independent research firm focusing on corporate governance, says Goldman Sachs was hurt having Dr. Simmons as a director because she lacks financial expertise and was focused more than she should have been on other things like the firm’s philanthropy. She was chairwoman of the advisory board for a Goldman initiative, 10,000 Women, that provides women outside the firm with business and management education."
"That seat could have been held by someone who understood derivatives,"says Ms. Minow. "What we have learned from the financial crisis is that boards of directors have failed miserably in their No. 1 task of risk management. You don’t go on a board for networking, seeking contributions or working for minorities. You go on a board for one purpose -- to manage risk for the long-term benefit of the shareholder."
"Dr. Simmons declined to comment for this article. In an interview early this year after she announced she was retiring from the Goldman board, she said filling boards with specialists was "exactly the wrong direction." "You need people close to the industry to provide depth of experience, but you also need people with perspective,"she says."
"In the case of Dr. Jackson and her five board appointments, Ms. Minow says, "it is just physically impossible to do the work necessary to be a good director"on so many boards. The Corporate Library estimates that board members must invest 240 hours a year, including meetings and preparation, to do the work properly. But it can become a full-time job if the company runs into trouble."
"At the time, Goldman was being battered by questions about its involvement in the financial crisis and the lucrative pay it doled out to executives and employees even after the firm had received a huge taxpayer bailout. As a director, Dr. Simmons was partly responsible for approving Goldman’s bonuses during the boom years — including the $68 million pay package awarded to its chairman, Lloyd C. Blankfein, in 2007, the largest ever on Wall Street. Early this year Dr. Simmons said the criticism directed at Goldman was not the reason she gave up her position. She would not comment on whether the salaries the board had approved over the past decade were appropriate, except to say, "The environment for salaries on Wall Street has evolved over a period of time, and the environment today is different"."
"As a further sign of how complicated the issue can become, some academics at the University of Washington protested that Dr. Wise’s presence on the board meant they would not be able to criticize Nike over its labor policy, in particular the treatment of workers at factories in the developing world. "She is the chief academic officer of the university, to whom all faculty report, and her affiliation with Nike creates incentives for faculty to be less vocal about Nike’s human rights record," said Angelina S. Godoy, director of the university’s Center for Human Rights. However, Ms. Godoy said a recent landmark agreement between Nike and unions in Honduras made her less concerned about the university’s relationship with Nike."
I am going to start out with a shocking piece from the New York Times, which describes the enormous salaries given to presidents of elite universities to serve on corporate boards. Administrative salaries alone should be enough to create an outrage now that money for teaching is drying up. These presidents might be expected to offer a patina of respectability for the corporations. Even more, presidents, who want to keep their lucrative board positions, will be careful not to offend corporate America. Others who want to have comparable money thrown at them will be equally careful. Here is the article:
Bowley, Graham. 2010. "The Academic-Industrial Complex." New York Times (1 August): p. BU 1.
http://www.nytimes.com/2010/08/01/business/01prez.html?_r=1&hpw=&pagewanted=all
"What does Shirley Ann Jackson know about shipping parcels? For that matter, what does Steven B. Sample understand about mutual funds? Dr. Jackson, who is a theoretical physicist and the president of Rensselaer Polytechnic Institute in Troy, N.Y., has served as an outside director on the board of FedEx since 1999."
"Dr. Sample, an electrical engineer and the retiring president of the University of Southern California, sits on the boards of directors of the American Mutual and Amcap mutual funds. He is also a director of another company, and stepped down two years ago from the board of the Wm. Wrigley Jr. Company, the candy maker."
"Dr. Jackson and Dr. Sample are part of a cozy and lucrative club: presidents and other senior university officials who cross from academia into the business world to serve on corporate boards. While academics can often bring fresh perspectives, managerial experience and the imprimatur of a respected institution to a board, they are also serving in an era when corporations wrestling with fallout from the financial crisis (think Bank of America, Citigroup and Goldman Sachs) or very public mishaps (think BP, Johnson & Johnson and Toyota) have raised the stakes for board members expected to guide corporations."
"Some analysts worry that academics are possibly imperiling or compromising the independence of their universities when they venture onto boards. Others question whether scholars have the time -- and financial sophistication -- needed to police the country’s biggest corporations while simultaneously juggling the demands of running a large university. "It is prestigious for a company to have a major university president on their board,"says Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute. "But few college and university C.E.O.’s are even qualified to understand the workings of a major public company"."
"According to a 2008 survey by The Chronicle of Higher Education, presidents from 19 of the top 40 research universities with the largest operating budgets sat on at least one company board. The trend is more widespread among public universities, but the private ones are catching up: the American Council on Education says that from 2001 to 2006, the proportion of presidents from all doctorate-granting institutions sitting on corporate boards rose to 52.1 percent from 47.8 percent at public institutions, and to 50.9 percent from 40.6 percent at private ones."
"Some of the more high-profile and ubiquitous academics include the president of Stanford, John L. Hennessy, who sits on three boards, including that of Google. (Google also has the president of Princeton, Shirley M. Tilghman, on its board.) The chancellor of the University of California, San Diego, Marye Anne Fox, is on three boards. And then there is Dr. Jackson of Rensselaer, the highest-paid private college president and one of the most prominent black university leaders. In addition to FedEx, she sits on the boards of four other companies, including I.B.M. and Marathon Oil, and she recently stepped down from the board of NYSE Euronext."
"The attractions are clear for the president: lucrative extra pay and useful networking, among other reasons. For a dozen hours or so each month for each board served, in addition to preparation time, and their wise advice, they can receive hundreds of thousands of dollars a year. Ruth J. Simmons, the president of Brown University and the first African-American woman to lead an Ivy League university, sat on the Goldman Sachs board until she stepped down this year. In 2009, she earned $323,539 from her Goldman directorship, including stock grants and options, as calculated by Goldman, and left the board with stock worth at the time around $4.3 million. This is in addition to her salary from Brown, $576,000 this year."
"Dr. Jackson earned $1.38 million from her directorships, comprising both cash and stock. That’s in addition to $1.6 million from her day job, including bonuses and other benefits. Beyond personal financial benefits, the interchange of ideas between campus and corporation can allow for a fruitful cross-fertilization. For example, Dr. Hennessy sits on the boards of Cisco Systems and Atheros Communications as well as Google. As an electrical engineer and a pioneer in computer architecture, he is well placed to bring industry expertise to the boards he serves."
"William G. Bowen was president of Princeton University for 16 years and served on two boards, including Merck’s. It was an experience, he says, that was invaluable in helping him build up Princeton’s then-fledgling life sciences activities. "It influenced my understanding of how the field was evolving, where new ideas were most likely to appear, where to look for talent,"he recalls. "It was one long seminar in the sciences and molecular biology"."
"Indeed, the path from academia to corporate boards began broadening in the late 1990s when companies sought to break up the traditionally white, male composition of their boards. Academia, and in particular university presidents, were a good source of prominent minority leaders and women who were established in their fields and had experience running big organizations."
"Phyllis M. Wise, the provost of the University of Washington, is on Nike’s board. Nike said it hired Dr. Wise, an Asian-American, "because of her impressive accomplishments and her record of independent thought, and we believe that through the exchange of ideas, both Nike and the University of Washington will benefit"."
"But according to James H. Finkelstein, a professor in the George Mason School of Public Policy, probably the biggest reason companies have sought out academics is the prestige they bring. Universities are among the few institutions trusted by the public, he says, and companies believe they can associate themselves with this quality by installing an academic on the board."
"Corporations think this is a way of enhancing their prestige and legitimacy, especially in the case of Ivy League presidents,"he says. "I suspect that’s the principal motivation. It’s probably not for their business sense."
"John Gillespie, who has written a book on corporate boards, "Money for Nothing,"says academics are often selected for another reason -- because they are less likely to rock the boat than directors from the business world. Academics may be trained to ask tough questions in their own fields, but when confronted with tricky business issues far above their level of expertise they "often become as meek as church mice,"he says."
"Most corporate governance experts think that a president serving on one board brings benefits to both the company and the university, but the situation becomes problematic as these academics serve on more boards. There may be diminishing returns to the university and less time to be an effective board member."
"Nell Minow, editor of the Corporate Library, an independent research firm focusing on corporate governance, says Goldman Sachs was hurt having Dr. Simmons as a director because she lacks financial expertise and was focused more than she should have been on other things like the firm’s philanthropy. She was chairwoman of the advisory board for a Goldman initiative, 10,000 Women, that provides women outside the firm with business and management education."
"That seat could have been held by someone who understood derivatives,"says Ms. Minow. "What we have learned from the financial crisis is that boards of directors have failed miserably in their No. 1 task of risk management. You don’t go on a board for networking, seeking contributions or working for minorities. You go on a board for one purpose -- to manage risk for the long-term benefit of the shareholder."
"Dr. Simmons declined to comment for this article. In an interview early this year after she announced she was retiring from the Goldman board, she said filling boards with specialists was "exactly the wrong direction." "You need people close to the industry to provide depth of experience, but you also need people with perspective,"she says."
"In the case of Dr. Jackson and her five board appointments, Ms. Minow says, "it is just physically impossible to do the work necessary to be a good director"on so many boards. The Corporate Library estimates that board members must invest 240 hours a year, including meetings and preparation, to do the work properly. But it can become a full-time job if the company runs into trouble."
"At the time, Goldman was being battered by questions about its involvement in the financial crisis and the lucrative pay it doled out to executives and employees even after the firm had received a huge taxpayer bailout. As a director, Dr. Simmons was partly responsible for approving Goldman’s bonuses during the boom years — including the $68 million pay package awarded to its chairman, Lloyd C. Blankfein, in 2007, the largest ever on Wall Street. Early this year Dr. Simmons said the criticism directed at Goldman was not the reason she gave up her position. She would not comment on whether the salaries the board had approved over the past decade were appropriate, except to say, "The environment for salaries on Wall Street has evolved over a period of time, and the environment today is different"."
"As a further sign of how complicated the issue can become, some academics at the University of Washington protested that Dr. Wise’s presence on the board meant they would not be able to criticize Nike over its labor policy, in particular the treatment of workers at factories in the developing world. "She is the chief academic officer of the university, to whom all faculty report, and her affiliation with Nike creates incentives for faculty to be less vocal about Nike’s human rights record," said Angelina S. Godoy, director of the university’s Center for Human Rights. However, Ms. Godoy said a recent landmark agreement between Nike and unions in Honduras made her less concerned about the university’s relationship with Nike."
The Defamation League
This report in today’s New York Times makes it clear why the opposition of the Anti-Defamation League to a Manhattan mosque was so squalid. It is not just about one building downtown; it’s an episode in a nationwide assault on the rights of a minority—exactly the kind of group the ADL of old could be relied on to protect.
The old guard Jewish organizations are radically out of step with the values of most Jews in America, who continue to support equality and inclusion as core social principles. Bigotry may rule in Israel, but it remains anathema here, at least among the liberal half of the population, where most Jews are to be found. Either the misguided leadership of the mainstream Jewish organizations must be retired, or the organizations themselves have to be replaced.
The old guard Jewish organizations are radically out of step with the values of most Jews in America, who continue to support equality and inclusion as core social principles. Bigotry may rule in Israel, but it remains anathema here, at least among the liberal half of the population, where most Jews are to be found. Either the misguided leadership of the mainstream Jewish organizations must be retired, or the organizations themselves have to be replaced.
A Conjecture on Equilibrium Selection
An interesting question is posed in the latest post by Rajiv Sethi on growth prospects for Sub-Saharan Africa. The core issue is whether, in a world characterized by multiple equilibria, it is historical inertia (transmitting local equilibria from one period to the next) or expectations (converging airlessly on new, possibly distant equilibria) that perform the selection. Sethi pulls out an old paper by Paul Krugman that zeroes in on the question.
The Krugman paper, as described by Sethi (I haven’t read the original) uses increasing returns in a two-good model to construct a two-equilibrium result, and the history-expectations dichotomy is resolved by the assumption that expectations will be decisive if the initial conditions are consistent with the attainment of either equilibrium.
My conjecture: this result, which is to say the assumption that convergent expectations can generate a leap from one local equilibrium to another provided either is feasible, depends on the number of potential equilibria and the complexity of the processes that generate them. Of course, if an economy’s structure is perfectly known to agents, complexity is not a problem, but it is safe to say that this knowledge is unattainable. (I’ve been trying, and it’s unattainable to me.) What we have, then, is a constraint on the role of expectations derived from the likelihood that they can converge on a multi-dimensional outcome complexly different from that inherited from the past.
Krugman’s model, if it is described properly, obscures this by proposing an extremely simple and transparent equilibrium selection choice. No doubt there are cases where such an assumption is warranted. But, as I argued long ago, the problem of multiple equilibria becomes far more general and complex when one incorporates interaction effects compared to increasing returns. (In technical terms, if you are looking at a matrix of send-order partial derivatives, increasing returns show up on the principle diagonal, while interaction effects are non-zero terms off the diagonal.) The factors that cause multiple equilibria entailing good x may be lodged in non-x sectors, interacting with x only through derived demands. Indeed, the processes may be so ramified that they resist any realistic strategy to disentangle them, such as would be required for a selection process based on expectations.
This is why, in the end, I think history plays by far the largest role in equilibrium selection. (It is also why I think that equilibrium methods are ill-suited to economic analysis.)
The Krugman paper, as described by Sethi (I haven’t read the original) uses increasing returns in a two-good model to construct a two-equilibrium result, and the history-expectations dichotomy is resolved by the assumption that expectations will be decisive if the initial conditions are consistent with the attainment of either equilibrium.
My conjecture: this result, which is to say the assumption that convergent expectations can generate a leap from one local equilibrium to another provided either is feasible, depends on the number of potential equilibria and the complexity of the processes that generate them. Of course, if an economy’s structure is perfectly known to agents, complexity is not a problem, but it is safe to say that this knowledge is unattainable. (I’ve been trying, and it’s unattainable to me.) What we have, then, is a constraint on the role of expectations derived from the likelihood that they can converge on a multi-dimensional outcome complexly different from that inherited from the past.
Krugman’s model, if it is described properly, obscures this by proposing an extremely simple and transparent equilibrium selection choice. No doubt there are cases where such an assumption is warranted. But, as I argued long ago, the problem of multiple equilibria becomes far more general and complex when one incorporates interaction effects compared to increasing returns. (In technical terms, if you are looking at a matrix of send-order partial derivatives, increasing returns show up on the principle diagonal, while interaction effects are non-zero terms off the diagonal.) The factors that cause multiple equilibria entailing good x may be lodged in non-x sectors, interacting with x only through derived demands. Indeed, the processes may be so ramified that they resist any realistic strategy to disentangle them, such as would be required for a selection process based on expectations.
This is why, in the end, I think history plays by far the largest role in equilibrium selection. (It is also why I think that equilibrium methods are ill-suited to economic analysis.)
Saturday, August 7, 2010
My Second Streaming Video, Tuesday, 6 PM Pacific Standard Time
I am planning on doing a second streaming video. I want to briefly answer a few questions raised about the first talk. Then I will take up where I left off and discuss the question of capital replacement, which I believe to be a key element of the current crisis.
go to:
http://www.ustream.tv/channel/unsettling-economics
go to:
http://www.ustream.tv/channel/unsettling-economics
Friday, August 6, 2010
Peter Diamond for the Fed
I would assume that he would be fairly uncontroversial. Why is he being held up?
Social Security Doing Just Fine
After several months delay, the Social Security Trustees have finally issued their report, which has received little MSM attention, with some outfits like the Washington Times putting out canned reports that do not reflect the contents of the report at all. For all the moaning and wailing and gnashing of teeth and shrieks of hysteria over the state of social security coming out of the deficit commission, the new report shows almost no change in any of the projected dates of any matters of interest. There is no immediate crisis, and the supposed dates of various shortfalls are barely changed. On top of which, the future of medicare actually looks much improved.
Although others have the story, the best coverage as usual of both the details of the report as well as the surrounding (lack of) media coverage is due to Bruce Webb over at angry bear (thanks again, Bruce, for your excellent efforts!). http://www.angrybearblog.com/search/label/social%20security.
Although others have the story, the best coverage as usual of both the details of the report as well as the surrounding (lack of) media coverage is due to Bruce Webb over at angry bear (thanks again, Bruce, for your excellent efforts!). http://www.angrybearblog.com/search/label/social%20security.
Thursday, August 5, 2010
Did President Reagan Increase Government Spending or Reduce It?
Daniel Mitchell who only pretends to be an economist writes more spin on the wonders of Reaganomics:
I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.
As far as the business cycle, Ezra Klein and Paul Krugman have already debunked Mitchell’s spin.
Both Ronald Reagan and Barack Obama entered office during periods of economic misery. But they adopted dramatically different solutions. Reagan reduced the burden of government and Obama increased the burden of government. So which approach worked best? In his Washington Times column, Richard Rahn compares the economy’s “recovery” performance under both Presidents. As you can see, Reaganomics is much better than Obamanomics.
I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.
As far as the business cycle, Ezra Klein and Paul Krugman have already debunked Mitchell’s spin.
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