The Fourth Directive of economic policy

The 1987 Peter Verhoeven dystopian science-fiction film Robocop concerns the adventures of the title character--a prototype cyborg law enforcement officer, constructed from the remains of a dead Detroit policeman by a giant consumer-products conglomerate, which was seeking to win a contract to replace the Motor City's police force, which was involved in a labor dispute with the city.  Robocop's activities were bound by three directives which he would mechanically repeat at public function:  Serve the public trust!  Protect the innocent!  Uphold the law!   Unbeknownst to most, including the conscious mind of Robocop himself, there was a fourth directive as well, and while the first three were arguably platitudes more than anything, the fourth was not:  do not arrest or harm any senior executive of Omni Consumer Products, the aforementioned corporation which was his creator. 

The movie was critically acclaimed (and a big box-office hit) and is highly recommended (its lame sequels are another matter).  However, the purpose of this post is not film criticism, but analogy.

Economic policymakers around the world, both in the US and (more recently) in the Eurozone, have various policy directives which guide their activities.  The Fed explicitly has a dual mandate to fight both unemployment and inflation, policymakers elsewhere are similarly charged.  Yet in many cases, including the current handling of the European debt crisis, policymakers at institutions such as the Fed and the ECB act as though they are guided by a "fourth directive" as well; and that fourth directive seems to be something along the lines of the following:

Do not do anything which will significantly harm the interests of capital.  

The various policy arms of the US government went to heroic lengths to bail out the financial markets, but seems far less interested in bailing out distressed homeowners.  Whether or not this is because the banks are really "too big to fail" (meaning their demise would truly produce systemic collapse), or simply too politically powerful to be allowed to fail, is an open question--but after programs such as TARP were enacted, it seems offensive to hear politicians tut-tutting about moral hazard when the subject is people losing their homes to foreclosure.

A similar scenario is now playing out in Europe, where the ECB seems intent in ensuring that the financial markets in the wealthy northern countries get their pounds of flesh, via imposition of stark austerity programs on the poorer southern Eurozone countries, programs which will likely result in a severe recession (on top of the current one), and may lead to the breakup of the Euro itself.  Granted, some of the debtor countries arguably went beyond their means and over-leveraged themselves to the point that an economic downturn left them unable to pay off their debts (Spain, Italy), and at least one debtor country could be fairly described as a deadbeat republic (that would be you, Greece).  The sanest course of action for European policymakers--insisting that the (mainly German) banks which made the bad loans in the first place take a haircut, combined with an injection of capital into the markets to protect depositors and refloat the Mediterranean economies, however, is simply not under consideration. 

Interestingly enough, the Fed last week announced a program to lend dollars at low rates to the ECB, in an attempt to stabilize European financial markets, a maneuver which prompts three questions:  1) The ECB is a sovereign currency issuer; why does it need to borrow money to fund its market operations, particularly when the bulk of the debt in question is denominated in Euros and not dollars?  2) Why is the US government being so activist in bailing out foreign financial markets?  3) And, particularly, if the answer to question #2 is "to prevent/limit recession", which is itself not unreasonable, then why is there so much reluctance to similarly intervene in the domestic economy, particularly on behalf of beleaguered consumers and underwater homeowners?

A likely answer to these three questions can be found within the fourth directive.

On the ouster of UO president Richard Lariviere

This past week, the Oregon State Board of Higher Education announced that they would not be renewing the contract of University of Oregon president Richard Lariviere.  Tensions had long existed between Mr. Lariviere and the board, who had placed the head Duck on a short leash last summer, awarding him only a one-year contract, a move which was highly unusual.  But now the other shoe has dropped, and Mr. Lariviere is, as of next summer, out.


Mr. Lariviere is, of course, disappointed.  Many in the UO community are outraged.  Phil Knight called the Board's decision an example of "assisted suicide".  The Board is not talking, other than to note a "disagreement about the future of the university."

I'll say.

The disagreement was about far more than the future of the University of Oregon.  The dispute was about the very nature of higher education in Oregon.

(I should mention at this point that I'm an alumnus of Oregon State.  While I relish beating the Ducks on the athletic field, outside of sports and other extracurricular activities, I don't view UO or any other college in the state as "competition" to be defeated; particularly when it comes to academics.)

The proposal that got Mr. Lariviere in hot water was a 2010 proposal to give the University of Oregon more independence from the Board--one which would match $800 million in private donations with $800 million from the state to provide the university with an endowment which would reduce its need for future funding from (and thus political dependence on) the state Board.  He also suggested that UO have its own board of directors, separate from the state Board, a proposal which obviously did not go over well.  Mr. Lariviere also annoyed some when he used private donations to raise pay for professors.

It's easy to dismiss this as political infighting, and of the Board smacking down someone who didn't know his place.  That is, after all, probably part of it.  It's also easy to play the Randian card, as some at the UO are doing (ironically, given the student body's political leanings), claiming that this is a case of a band of mediocrities (the Board, and by extension, the other five state universities, particularly those on the Park Blocks and in Corvallis) beating down a peer who tries to excel, like the hypothetical crabs in a bucket preventing an ambitious fellow crab from escaping.  But buried in all the heated rhetoric, is a real difference of opinion on how higher education should be structured.

The current structure is of an essentially centralized system.  The six general-interest public universities in the state (UO, Oregon State, Portland State, Western Oregon, Eastern Oregon, and Southern Oregon) are all supervised by the state Board, and each given a role to play in providing education to the state's students (and to students from out-of-state), and are expected to play that role and stay within their boundaries.  The three regional universities focus on undergraduate education in specialized fields, with limited graduate programs; the three comprehensive universities offer a wide range of disciplines, and have extensive graduate and research programs, including doctoral studies in many fields.  Different schools focus on different majors, though there is significant overlap between them. 

In practice, there is quite a bit of turf war that is fought.  OSU, for example guards its engineering program jealously, and attempts to expand the scope and quality of engineering at PSU as frequently treated as a threat, despite Silicon Forests' frequent demands for a flagship engineering school that is closer than Corvallis. 

On the other hand, it's easy to see that administrators at other universities might view Mr. Lariviere's proposals as threatening in a way that proposals to expand Portland State's EE program might not be.  Right now, the state of Oregon doesn't have a "primate university".  No, that's not a term referring to monkeys, but a term meaning a dominant flagship school which is widely regarded as the premier public university in a political region.  To the south, California is big enough for two primate schools, with UCLA in Southern California and UC-Berkeley in the Bay Area.  To the north, the University of Washington stands head and shoulders about the other schools in the state in terms of academic and social prestige (and in resources); it's peer in the Pac-12, Washington State University, is frequently dismissed as a second-rate ag school that offers a lackluster education in anything other than agriculture and related disciplines, despite being a full-service university.  On the other hand, Oregon's land-grant school (OSU) enjoys much more parity with UO in academics, and has the best reputation among the state schools in quite a few non-agricultural disciplines.  However, neither UO nor OSU (nor PSU) enjoys the nationwide prestige that UW enjoys.

I suspect that a big reason that Lariviere is getting the hook, is that many in the state higher-ed establishment suspect that he wanted to erect a primate university in Eugene--that his proposed reforms were intended to go beyond simply improving the quality of the current degree programs offered at the UO, and instead try to expand the scope of UO's offerings in a manner that encroaches on the other major universities in the state.  Were any of the three major public universities to transition to primate-school status, the two most likely are UO and PSU--the latter because of its location in the state's largest city and economic capital (and close physical proximity to OHSU, with which a merger has been previously discussed), and the former because of the wealth of its donor base, which far outstrips those of Oregon State or Portland State.  (OSU, which is located in a college town rather than a major city, which has extensive agricultural programs, a discipline which tends to carry a stigma in the upper-class cultural circles where such decisions are often made, and which lacks billionaire alumni such as Mr. Knight, is probably the least likely candidate to become a primate school). 

Should the state of Oregon have a primate school--a flagship institution which towers about the rest?  Or is it better-served by the current model?  I don't know the answer to that question.  The quality of an educational system is often judged by the (perceived) quality of its top institution, so perhaps its better to have an A-list school and a bunch of C-list schools and/or specialty schools, than several B-list schools.  On the other hand, no existing institution is going to surrender its prestige and resources voluntarily.  It should be noted that the state of Washington has a higher ed structure which is more similar to what Mr. Lariviere would like, with UW and WSU having far greater autonomy, and the state higher education apparatus instead focusing on the regional schools and community colleges within the Evergreen State.

Perhaps this is a conversation that the educational establishment, and the people of Oregon, ought to be having.  Perhaps the forced departure of Mr. Lariviere will encourage the conversation to take place.  But the current soundbites being bandied about don't serve to enlighten the discussion--instead, they simply reaffirm suspicions that athletic rivalries have become extended in the classroom as well.

When the chain of command fails

The sports world has been abuzz at the shocking story of former Penn State assistant coach Jerry Sandusky, who was recently indicted on multiple counts of sexual abuse.  Much attention has been focused on an incident nearly a decade ago when a graduate assistant with the PSU football program, investigating a noise in a locker room, discovered Sandusky (then no longer employed by the university, but running a football camp for kids on campus) in the showers sodomizing a young boy.  The assistant told coach Joe Paterno, who told campus higher ups--who responded by shutting down Sandusky's camp.

But nobody, apparently, bothered to call the cops.

In many institutions, one is taught to recognize--and respect--the chain-of-command.  You see something wrong, you tell your boss.  Or call one of those HR hotlines that promises anonymity.  But going outside the chain--outside the institution--is often seen as disloyalty, and discouraged.

But here's the problem.  We're not talking about a violation of team rules, or NCAA regulations, or university policy here.  (Or even a minor infraction of the law such as an underage football player in a bar sloshed out of his gourd).  A child was being raped.  This is not a matter for the head coach, or the athletic director, or the deans and provosts and regents to deal with.  This is a crime, and a matter for law enforcement.  I have a son who is the same age as the victim in the rape mentioned above, so this story has a somewhat personal angle, even though it's across the country.

I'm not going to pronounce judgment on Paterno in this post, even though I believe he probably has some coming his way.  Instead, it's important to make a broader point.  Institutions--whether its the Roman Catholic Church, the Penn State football program, the National Restaurant Association, or any number of corporations whose employees and officers have been caught engaging in wrongdoing--like to protect themselves.  People trust and believe in their friends.  And when given a choice between sweeping something under the rug, and doing the right thing; many will choose the former.  Institutions often create rules and policies which effectively encourage this.

For matters which are truly internal, this is fine.  But for things that are the business of society--and protecting children from molesters is certainly in this category, the chain of command often fails.

When a violent crime occurs, even within the confines of an institution's ivy-covered walls, the correct--and only--response is not to tell the boss. 

It's to call the police.

Thoughts on the "liberal media"

Think about it, folks:

If the media were really a "liberal media"--i.e. in the tank for liberal policies and politicians, would we really be hearing about in the media how liberal the media were?  After all, where do we hear that the media is liberal?  From the media! 

If the media were truly liberal, and trying to promote a liberal agenda--they'd be blathering instead about what a bunch of right wingers they are; and how reality is actually to the left of what the media says.  In other words, they would be trying to shift the Overton window to the left.

But instead, the media goes on and on about how liberal they are, which means that someone is trying to move the Overton window to the right.

So is the media really "liberal"?

The DHT reports.  You decide.

Random Facebook thought for the day...

I've got a great idea for a cheesy sci-fi TV show.  In said show, a group of futuristic astro-archeologists, led by a Really Nerdy Guy played by William Peterson, zooms 'round the galaxy from dead planet to dead planet, trying to figure out what natural phenomenon or act of collective stupidity offed the sentient life-forms that used to live there. 

I'm not sure if Earth gets visited in the premiere, or the finale.


Bonus points if it involves apes and the Statue of Liberty.

I invite suggestions for the name of this show in the comments.

Social Security and "funny money"

Social Security has been in the news lately, with the decision of current Texas governor and GOP presidential hopeful Rick "W²" Perry to refer to the program as a Ponzi scheme.  While his rhetoric has been roundly disputed, and while the decision of W² to firmly grasp the third rail of US politics with both hands so far appears unwise; such rhetoric plays well into the hands of those who believe that the program is on unstable financial footing.

From an actuarial point of view, the Social Security Trust Fund is reported to have sufficient funding to pay all its expected obligations until 2036, at which point the trust fund itself (currently about $4 trillion) will be depleted--an event would sharply reduce benefits were it to occur, but which would not end the program completely.  With various tweaks, such as no longer capping payroll taxes or further means-testing of benefits, the life of the trust fund can be extended many decades beyond that.  (Medicare and disability insurance have more pressing funding problems; this article focuses entirely on the non-medical social insurance).

However, many critics of the program instead argue it is in perilous trouble, with apocalyptic terms such as "bankruptcy" or "fraud" or "Ponzi scheme" thrown around; accusations which are routinely given credence in the press.

What's in the trust fund

A major issue of contention is just what is in the Social Security trust fund.  Conservative columnist Charles Krauthammer referred to the trust fund as "a fiction", which contains nothing but IOUs which are, in his words, "worthless".   Other commentators have stated that the trust fund contains "funny money", as though there's a bank vault somewhere in the DC suburbs full of Monopoly scrip or Burger Bucks. 

What the trust fund actually does contain is various types of US government treasury securities--debt which is the US is legally obligated to pay, and is backed by the full faith and credit of the US government.  As such, monies owed to the Social Security trust fund is counted as part of the national debt (Social Security obligations are about 30% of the total public debt of about $14 trillion). 

Mr. Krauthammer is an intelligent fellows, and both know full well how the SS trust fund is structured and what it contains.  Assuming that both are being forthright in their assessments of the situation, it stands to reason that they believe either one of the following things are true:

• The US government will indeed, in the near future, default on its public debt.  I'm sure that Wall Street and the world of international finance (particularly the Chinese), not to mention the many patriotic Americans who directly hold Treasuries in their investment portfolios, will not be happy to hear that the securities widely considered the safest investments in the world, are in fact "funny money" and/or "worthless".  The financial markets, needless to say, don't believe either to be the case, and are happily continuing to by US Treasuries despite a ridiculously low rate of return (and despite Standard and Poor's ridiculous decision to downgrade US debt).
• OR---there won't be a general default on the public debt of the United States, but that the Social Security trust fund--at some point in the future--will be stiffed, either by a targeted default or by act of law.

Smart money bets that they are assuming the latter.

How independent is social security?

In discussing Social Security, it is important to consider its structure, and its independence from, the rest of the US Government.  Under current law, Social Security is structured as a program with separate books from the US Treasury.  It is run by a Board of Trustees (who enjoy wide immunity from political interference), and its operations are prescribed by law:  Payroll taxes come in, social security checks go out.  Excess funds are required, again by law, to be invested in US Government debt, and the Treasury is required to redeem these bonds when they expire.  For a long time, while the Baby Boomers were in the work force, the value of the trust fund grew as receipts exceeded benefits; with the Boomers starting to retire, now the opposite is happening and the trust fund is starting to decline in value.  Presently, the value of the trust fund--which represents the amount of taxes collected over the program's life, minus the benefits dispersed--is around $4 trillion, invested in US securities.   This view of Social Security, as an independent actor separate from the US government, and a creditor thereto, is held by many people.

Many Washington insiders hold a different view of Social Security--namely, that it's just another government agency among many, and that the trust fund and the Treasuries contained within are little more than an accounting fiction.  In this point of view, Social Security has no more claim on the Treasury than the US Forest Service or the U.S. Board on Geographic Names; and current and future recipients ought to have no expectation of future benefits.  (Indeed, former Wyoming Senator Alan Simpson often refers to "greedy geezers", and infamously called the program a "cow with 310 million tits", implying that the claims of retirees are somehow illegitimate).

Which view is right?  In a way, both.  The key phrase above is "under current law".

If no act of Congress changes the law, Social Security will continue to operate as prescribed until the trust fund runs out (at which point benefits will be reduced to match payroll tax receipts).  But that's a big if--the program is a creation of law, and if Congress wishes to alter or abolish the program, nothing prevents it from doing so.  Nothing prevents a future Congress (and a like-minded, or veto-overridden President) from abolishing the program, ending benefits immediately, and redirecting payroll tax revenues into the pockets of the most job-creating billionaires the government can find.  Likewise, nothing prevents a future Congress from deciding to bolster the trust fund with general fund revenues funded by a new soak-the-rich tax.  And nothing prevents the government from reducing the overall public debt by essentially reducing the trust find size (cancelling or forgiving some of the Treasuries in the process), and reducing benefits accordingly.

Of course, all of these things would take an act of Congress to pull off.  And there is not, at the present time, sufficient political support in Congress or among the electorate to defund the program--it isn't called the third rail of US politics without a good reason, as the governor of Texas is starting to discover.  Social Security is immensely popular, and no generation has a desire to be the generation that pays into the program but gets nothing out of it.

So why do so many conservative politicians speak of Social Security as though its demise is imminent, and as though the post-Baby Boom generations are going to find an empty cupboard when it is their (our) turn to retire and collect benefits?  And why, when the program was running demographic surpluses, were they happy to go spend the money on other things (like tax cuts), but now seem to regard the upcoming pig-through-the-python as an insoluble problem?

The questions are rhetorical.  The answers--are left as an exercise for the reader.

The unanswered austerity question: What level of debt is ideal?

Right now, a big chunk of the political class in the US, including the President, is in the mood for a little austerity.  The public debt is just too high, so sayeth the punditocracy. Some go far as to propose various flavors of "balanced budget amendment", though many such proposals contain other terms (such as requiring supermajorities to raise taxes) that many consider objectionable.  Ignoring salient issues such as the seriousness of deficit hawks (do they really want to lower the public debt, or simply oppose the spending desires of the other party, but don't mind at all spending public funds on their own priorities) and how do we get there, there's a significant question that hasn't really been discussed with regard to the deficit:

Where should it be, anyway?

Should it be zero, forever? 

Should it be zero over a long-term time window (several decades), but permit fluctuations as necessary to deal with short-term economic cycles?

Should a long-term deficit be maintained, albeit at a lower fraction of GDP than we currently have?

Should the permitted deficit be dependent on inflation-adjusted interest rates--in other words, if the bond market thinks the debt is too high, then its too high?  (And given that despite Friday's S&P downgrade, interest rates on Treasuries remain absurdly low--does the market really conclude that the US poses an unacceptable credit risk)?

Should the US government actually attempt to have a surplus?  (And if one assumes that the dollar remains a fiat currency which the US can create or destroy at will; what would the point be of the US having a surplus in its own currency?)

Should Congress be required to use PAYGO accounting--appropriations and taxes need to be balanced, albeit not in the same fiscal year? 

In other words, what is the endgame of austerity?  And what is the justification--economic, political, moral, whatever--for that position?

Simply assuming that it's good for you, without discussing why or in what dose, strikes me as a major opportunity for mischief.