Sunday, May 24, 2015

Fooling some of the people some of the time, No surprises, Krugman on the pending Trade Agreement

I have a fondness for old underwear.  The give and take between its shape and mine has reached a tacit understanding.  With something new you're never sure what you're getting.  I trust the tried and true.  It's not that I'm averse to taking risks of any sort.  I experiment - fairly often - with my teaching and sometimes with my writing too.  Some prior thinking, wishful though it may be, suggests a likelihood of success.  The thinking can be wrong and sometimes the thinking is okay but the execution is poor.  Either way, the experiment fails.  I can handle the failure, at least most of the time. I understand the principle, nothing ventured nothing gained.  And I believe that over the long haul an experimental approach produces much better results on average.

What I dislike, detest really is a better word to describe my feelings, is to be scammed.  I recall being scammed in the 1980s, when I was still single.  I was trying to buy a dining room table, custom made by the Amish with my own design on the top.  I went through the middle man in Champaign, which proved to be a big mistake.  I should have gone to Arthur and negotiated directly with the people who would build the table.  As it played out, the middle man took my money for a down-payment, then nothing.  Eventually I heard that the store went bankrupt.  It was probably already on the verge of that when I gave him my check.  My paying was throwing money down the drain. 

Some years later my parents were scammed by their then financial adviser, who worked at Prudential-Bache.  It was part of a larger scam; it wasn't just this one guy who was the one rotten apple.  Nonetheless, this guy was really slimy.  He took language lessons from my mom at our house, which in retrospect amounted to a way to get my parents to drop their guard and take this guy at his word.  My parents were retired and this was their life savings we're talking about.  The whole thing was vile.

I tell these stories to note that in both cases the person being scammed was highly educated.  In my case, indeed, my degree is in economics, which at a minimum should make make me wary of the moral hazard that is present in any such transaction.  And nowadays I teach about this very thing in my economics of organizations course.  Market transactions come at a cost, as Coase noted.  Sometimes those costs manifest as scamming.  Even in my parents' case, while my mom was pretty clueless about financial transactions, which is why I paid her bills and managed her portfolio after my dad passed away, my dad was a lawyer and knew which way is up.  Yet it wasn't enough to get him to walk away from the con before it had a chance to play out.  There is a lot of talk about predatory behavior on the poor and uneducated.  I have no doubt that this happens, in great volume.  But I want to note that being upper middle class and well educated doesn't itself make you immune from these threats, even if it does lessen the risk.

I don't know how you'd measure this in a meaningful way, but I have a sense that the scamming is on the rise.  Consequently, I've begun to see it everywhere, including in quite ordinary settings.  Consider for example the checkout at the grocery store.  Did they always have tabloids and candy at the checkout or is that a comparatively recent phenomenon?  I don't know.  I can remember as a kid going shopping with my mom at Bohack's or Waldbaum's and that the store was so crowded, unlike the wide aisles there are now where I shop.  But I have no recollection of what the checkout was like then.  Since in some sense "the market works," the placement of those items in the store is a tribute to human weakness as a driver of some (much) of our behavior.  I don't know if the tabloids can be found elsewhere in the store as well.  I'm quite sure the candy has its own aisle.  One can walk right past that aisle, no problem.  One cannot avoid checkout.  The bible says, "lead us not into temptation."  The market says otherwise.

Then think of the sponsored ads in Facebook, which appear in the right sidebar adjacent to your news feed, just below the trending items.  Those ads have a tabloid feel to me and recently I've had the thought that the checkout at the grocery is being recreated in other facets of our lives, often in virtual environments where they are even more pernicious because they appear to be omnipresent.  I never bought a tabloid at the grocery store - never.  (It's not that I'm a purist.  When I did ride the subway during the summer after my sophomore year in college, I would on occasion pick up a discarded copy of the Daily News that somebody left on their seat.  But I never paid for a copy of the Daily News myself and most people wouldn't even regard it as a tabloid.)   Quite recently I have clicked on occasion on those ads in Facebook.  We do things on our own computers at our own homes that we'd never do in public. 

Next, think about those online threats that are obviously more pernicious, phishing and malware.  Because I still monitor some listservs for information technologists I know that phishing threats are on the rise.  I know further that on my own campus they've taken a proactive step to deter phishing by not allowing an immediate click through on links embedded in email.  This seems necessary, though it is somewhat cumbersome.  Anyone remember the Microsoft Vista OS?   The necessity has arisen because education efforts aimed at making users more alert to phishing have failed.  I asked myself why education of this sort doesn't seem to work.  When I was in the campus IT organization I argued for more of this sort of education effort.  I really don't know the answer to this question, but my guess is that advertising is so pervasive and people click through so often, mainly in an unthinking way, that too often they don't perceive the threat until it is too late.

The economist's "solution" to all this moral hazard as scamming, which should gum up markets so they don't function well at all, is to look to "money burning" for the answer.   The issue is inference and what an uninformed consumer makes out of such an action by an informed seller, given that at first such money burning appears entirely irrational.  A paper that influenced my thinking at the time I read it, by Milgrom and Roberts, treats product pricing and advertising as conjoined signals of product quality.  The argument is very clever.  But it is either wrong or incomplete when applying the theory to practice.  Too often consumers make the wrong inference, in actuality.  In theory, consumers figure out what is going on. This seems true not just for ordinary folks like me and my parents.  It seems just as true for top-flight regulators vis-à-vis the markets they are supposed to keep on the straight and narrow. Consider that Alan Greenspan thought the financial markets were self-regulating.  How could he believe that considering all the evidence to the contrary?

* * * * *

I rarely go to the movie theaters these days.  The last picture I can recall seeing at the theater was Lincoln.  One reason for this is that my tastes diverge from the mainstream so that even so-called good movies quite likely won't appeal to me.  Couple this with an inherent sensibility as a cheapskate; the thought of paying money to sit through a movie I don't like offends me.   As an alternative I sometimes surf the various movie channels on the satellite TV to see whether any appeal to me enough that I might record them.  The supply is abundant.  Very few of the films make it through my own internal filter.  I can't explain what it takes for a picture to grab me.  Even some of the films I do record I end up watching only a bit and then turn them off. 

Last week, when the rest of the family was out of town, I recorded two such movies that I hadn't seen before.  The first I'll mention is The Wolf of Wall Street.  It gets quite high ratings on the IMDB site and the main review is very favorably disposed to the film.  But I could only watch a little of it before I became disgusted with it and turned it off.  The story is told from the perspective of the scammer, the consummate salesman, a complete bs artist.  It's not a perspective that provides entertainment for me.

The other movie is Noah.  It starts off in a weird way, with odd special effects.  It occurred to me while watching it that I really only have the briefest of sketches in mind about the Noah story - the flood, the saving of the animals, the building of the Ark.  I don't know the details at all.  I had the sense at the beginning of the movie that it was straying substantially from the story.  So I paused it and went to read the review at IMDB.  The review confirmed my suspicion.  It said the movie was horrible as did the generally low rating.  Nevertheless, I continued to watch it.  I did find a different review that was quite enchanted with the film and its director, Darren Aronofsky.  That was part of the reason I kept viewing.  The other part was asking how Russell Crowe and Jennifer Connelly would agree to make a film that seemed this bad.  I recalled the Freedom Writers had started out pretty awful and for the first half hour was hard to view, but ultimately turned into a worthwhile film.  By the end of Noah, I felt likewise.  And maybe it didn't stray too far from the actual Noah story, though on that I'm not sure and I'm not driven to read it just now.  Here I simply want to consider it an allegory that is relevant to the present.

Noah has the reputation as an honest, strong, and good man. This is why "The Creator" chose him.  (The word "God" is not mentioned in the move.)    But Noah makes a mistake in trying to understand what The Creator has asked him to do.  Noah correctly understands it is his task to save the animals.  But he incorrectly infers that mankind is to die out, as punishment for all the sins.  This includes his own progeny, who themselves have not sinned.  Noah sees there is badness in all of us humans.  From that he infers that humans should not be allowed to live beyond saving the animals, who don't have the evil in them that is in humans.  Based on this belief Noah makes a horrible and irreversible mistake.  He allows the potential mate for his son Ham to die when he was in a position to save her.  Where the son trusted the father until then, now the son has doubt about whether that trust is warranted and if instead he should seek vengeance on his father for this horrible act.

Further, by a miracle, the wife of Noah's other son, Shem, is taken with child after she had been thought to be barren from a near fatal injury wrought in childhood.   Noah pledges that if the baby is female he will kill it, to keep his promise that mankind must die out.  By his behavior Noah loses the embrace of his wife and the rest of his family.  They plot to rescue the parents and the baby.  But Noah foils the plot.  At birth it turns out there are twins, both girls.  Noah starts in on the task of ending their life.  But he can't go through with it.  They live and mankind can then regenerate.  Noah becomes a recluse, punishing himself for his bad acts.  At the end of the movie, however, he reconciles with his family, who have forgiven him.  They wonder why he didn't carry through on his promise to kill the babies.  Noah tells them that when he looked at the babies he saw goodness in them.

* * * * *

When I was in college it was popular to believe that you could judge a person by how they acted when the chips were down.  Somebody who came through then you could trust.  Somebody who punted then was a jerk.  Subsequently I learned there's a bit more to it.  First, there may be a  mitigating circumstance so that a person doesn't come through but that is not enough for you to infer the person is a jerk.  Second, many of us are neither purely trustworthy nor purely a jerk.  We have our better angels but at other times make a pact with the devil.  Batting average matters here.  Then there is that ignoring ordinary behavior and looking only at situations where the chips are down is throwing out a lot of information, some of which is apt to matter.  Someone who regularly demonstrates small acts of kindness in circumstances that aren't quite so stressful deserves to be trusted.

As a campus administrator I learned about a different way to earn trust.  This was about how to manage bad news.  The approach is called "No Surprises" and is based on the idea to get bad news out early, so people can act on it and take appropriate mitigations.  I should note here that getting bad news out early is not something that will be appreciated at the time.  People will react to the bad news, first and foremost.  The fact that you're letting them know early is of secondary importance to them, at best.  So No Surprises works primarily in the negative.  If you conceal bad news that in retrospect does come out and people feel they were entitled to hear the news early, then your reputation for honesty is lost and it subsequently becomes very difficult, if not impossible, to repair the reputation afterwards.  In other words, No Surprises is the policy you embrace when you realize that the cover up is always worse than the original crime.

You would think that No Surprises would epitomize decision making within Higher Ed administration, but my experience is that is often not true.  The near term goal arises to "control the story" and such a goal is inconsistent with No Surprises.  So information that might have some elements of bad news in it gets held closely and is not released for public consumption.  Bad news invites criticism.  The fear that such critique might turn into a tidal wave of protest via social media, a fear that has some foundation, tends to trump the potential good from avoiding a coverup. 

Many people make free speech their cause.  They argue that when dissenting voices are silenced we all lose.  We become too smug in our own beliefs.  We fail to see the error in our ways.  This view gets sanction, of course, from the First Amendment of the Constitution.  There is no Amendment of the Constitution that directly addresses No Surprises.  There is instead something else, a tradition of muckraking based on Freedom of the Press.  It is the job of the Fourth Estate to expose the bad news.  One can't trust people in authority to disclose it on their own.

As an empirical matter this is perhaps true.  But I'd like to look at the two taken together, freedom of speech and No Surprises both.  Were both to hold sway, public criticism of ideas must be a normal function, something that is tolerable, even if the criticism is expressed in extreme form.  But real and meaningful criticism, the type that promotes debate which forces the original ideas either to strengthen or to die out, seems a rarity to me nowadays.  Instead, we have the preaching to the choir type of critique only, which forces positions to harden rather than to be reconsidered.  And in this way No Surprises has a potential very large role to play to reverse things, because people in the know don't see the release of information as an ethical issue to which they themselves are accountable.  If it were otherwise, it could very well shift the nature of the debate itself.

* * * * *

In this last section I want to briefly consider Paul Krugman's column from last Friday on the Trans-Pacific Partnership.  This is the salient paragraph from the piece:

In any case, the Pacific trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes. And it’s by no means clear that either of those changes is good for America.

In writing this Krugman is taking on the Obama administration.  Not that long ago, Krugman was found extolling the Obama Presidency.  So this critique is unlike the criticism, really ridicule is a better description than criticism, of the President from the Right, where Obama bashing has become a kind of sport.  While at the beginning of his essay Krugman lauds the administration for its mainly transparent approach in governing, on the Trans-Pacific Partnership the administration has been anything but.

Contrast what Krugman says to what Secretary of Commerce Penny Pritzker says in a recent interview on the Charlie Rose show.  She argues that TPP is mainly about opening up emerging markets in Asia, where high protective tariffs prevent U.S. firms from competing, "on a level playing field."  It is believable to me that the overall picture is sufficiently complex that there are instances which support what the Secretary says.  But those instances don't suffice in making the argument.  What is the the gist of TPP?  I can't determine this on my own.  I rely on what I read about from pundits like Krugman and what I hear from government officials like Secretary Pritzker to form my opinion.  All I can say for sure is that regarding the gist of the TPP the two views are inconsistent. 

So I'm in a position where to make a determination I need to make an inference.   The facts that I'm aware of are insufficient in themselves to do the task.  In other words, I very well might be fooled.  Given that, I look at who has incentive to mislead me, which is deciding things on quite other than the merits of the arguments about TPP. 

If this is really the best that can be done, how is possible to keep the electorate from becoming extremely cynical, where it might not have been already?  Or am I reading this wrong?  I have several friends who are strong supporters of the President.  Several of them tend to agree with what Krugman says as well.  In this case you can be one or the other but not both.  It would be good for us to argue about TPP, but as I've already discussed in the previous section, we don't seem capable of having these sorts of discussions.  The loud tend to drown out the reasoned.   That becomes quite unpleasant.  Then why bother? 

In the movie Noah, Ham leaves the family because there is nothing left to keep him together with them.  That's the type of feeling I have now, on the scamming and on TPP as well.

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