Friday, January 29, 2016

Option for Near-Term Economic Depression: The Gorillas They Ignored at the Debate Last Night

The Republican Candidates’ debate last night reminds me a lot of that famous short video, where a big 900 pound gorilla actually appears on screen right in the middle of a crowd of people in the middle of the screen but most people don’t even notice it. And no – I am not referring to Trump, who did not appear at all. Actually, there were a few interesting zingers, which the CNN commentators did not notice...

The biggest zinger for me was Rand Paul’s reference to a bill to “enforce transparency and accountability” over the Federal Reserve, which Cruz strongly supported. Yes, it seems clear now that Cruz is most fundamentally a puppet of the oil folks, whose biggest endorsement is from Perry of Texas, another such... but there are also folks out there who really do want to abolish the Federal Reserve. There are SOME greedy folks in the financial sector who give money to selected puppets to try to get favors which take from the middle class and give to the poor, but there are other folks in the financial sector who simply appreciate how bad it would be for all of us to have a world economic depression. Serious talk by a leading candidate aimed at abolishing the federal reserve is certainly a reasonable explanation for a lot of donors of the second kind.

Just how serious is it with the Federal Reserve?

The Federal Reserve has a lot of parallels to the National Science Foundation (NSF), where I worked for almost 30 years until almost one year ago. There are lots of pockets of excellence and honesty in the federal government, and lots of areas of the exact opposite – but on the whole I think of NSF and the FED as the two areas where the highest level of excellence has been maintained the most over the last few decades. Government OFTEN is stupid and oppressive and corrupt, but it does not have to be that way.  Ironically, a lot of the worst corruption is associated with cynical people, such as some of the Republican Congressmen swept in as part of Reagan’s coattails (with some time delay) who will say that government is terrible, and then act to make sure it becomes so. I have seen egregious tings on the Democratic side too, but a lot of the complaints sound the way it would... if Nazi Germany did a PR attack on Israel, complaining about how much military might Israel had mobilized... not mentioning their own.

Of course, I know NSF better. NSF was funding above all two areas – high risk basic research and education – which any really serious market economist knows do call for effort above and beyond what short-term market forces would provide. The great vision of Vannevar Bush, the greatest Bush by far, was to build a foundation which was “in the government but not of it,” operated as much as possible away from politics, based on the highest possible standards of excellence, like a great university, staffed in great part by university people trained to high independence and excellence. It was a vision of truly open competition, with as much transparency as possible – and full feedback to all applicants on the full truth of what happened to their proposals (to within the legitimate limits of the privacy act and respect for IP) and the most constructive possible guidance. No pork barrel additions or plus-up earmarks whatsoever. None. Many generations of NSF directors (mostly recommended by the American Physical Society APS or by “the deans”) were very strict about defending this system, about not allowing even a tiny foothold for corruption (a slippery slope), and about supporting the kind of free speech and honest dialogue essential to making it work.

I remember very clearly the time in 1988/1989 when I transitioned from a very important but very constrained job at the Department of Energy to NSF – about the same time as the fall of the Berlin Wall. “I fell like those other Germans... escaping from the Iron Curtain to the free world, back to free speech and the America I THOUGHT I was growing up in, in those old days in Philadelphia.” I remember a colleague at DOE (higher in the chain) who said to me: “Your escape gives hope to the rest of us locked up here (“lifers”) between these four white walls.” Cynics said: “You have moved from a company which was a joint venture wholly owned by the oil companies and the nucs to a smaller one jointly owned by APS and the deans. You will benefit from a better corporate culture... for now... until the oil folks get motivated to try M&A, or other stakeholders get into the game.” And so it was. At first, when a new Congressional initiative was announced on “Transparency and Accountability,” I shrugged my shoulders and thought: “so what else is new? Those are two of the most fundamental values NSF has always stood for. Sure, it’s good to reaffirm them, and we’ll do that... but I have some other work to do in that space.” But then... well... did Goebbels ever spearhead a “peace in our time” initiative? For awhile, the science societies tried to push hard against the very worst of the abuses, when it became clearer who the community was supposed to become accountable to as their new line employers... and when certain staffers appeared to micromanage the handling of selected proposals.... Chakkah Fattah, for all his failings, spearheaded a lot of the resistance, until the FBI took him down, at the urging of the same “cybersecurity expert” using it to take down Hillary Clinton with far less real justification. And no, I have no plans at all to just dump in the open all the many concrete threads and scenes of this complicated story. Still, one thread: a minor staffing problem, requiring more transfers from other agencies to fill in positions, especially program director positions formerly held by rotators from universities, a system which several Congressional staffers say they want to stop.

I was certainly not the first to retire as the New Order came in, and there are certainly others younger and more energetic than myself who may have a good chance to fully restore the great vision of Vannevar Bush.  But there are also many others who simply chose to retire even before I did. I remember asking one of them, who got hit a lot sooner and harder than I did: “Exactly what happened?” His reply: “All I can say is... I owe you SOME answer... I can say... it is not the same NSF.”

And so: last night, when Paul and Cruz announced they wanted a similar “accountability and transparency” initiative at the Fed, a giant flood of explanation and possibility and other aspects I haven’t written up yet all flooded into my mind. In a way, it was similar to the “near death” experience in Florianapolis which I mentioned in my previous blog post.  Especially since I do also know a lot about the Fed, and about what it has been doing.  

Of course, I also know about people like Sarah Palin who legitimately distrust “all those rich establishment people who are screwing us” (except for her minor “drill baby drill” connections), and would be as eager to see the heads of those rich people on a platter as were similar women at the time of the French Revolution. Understandable. Maybe even Sanders might have quiet sympathies with those feelings. Certainly I remember the Burr-Hamilton duel, and a serious threat that SOME English-oriented bankers posed to the new emerging Republic. But unconditional “racism” against bankers is as bad as unconditional “racism” against Moslems or against self-proclaimed Christians, even though all three groups do have some awful subgroups.  (Jesus himself warned about the evil folks who would come later pretending to speak in his name, but he didn’t get to speak on Fox News last night... though in one brief moment Megan Kelly did give a hint of his existence, which CNN commentators didn’t seem to notice. Now that I think of it, Ayn Rand also warned against certain phony representatives of the private sector in DC politics, and her follower Alan Greenspan is very much a part of the story of the Fed.)

There is little doubt in my mind that there is a serious risk now in American politics of candidates not only for President but for other offices (like those already capable of imposing a Dunkirk on NSF) imposing a twisted version of “accountability and transparency” on the Fed which would be “transparent” only in the sense of dumbing it down,
and accountability and accessibility only to those campaign contributors who lurk behind the likes of Rand Paul and Ted Cruz.

This is a really serious risk, a risk to the entire world, because a really serious global depression could result. The fact is that the world economy is a nontrivial complex system. One might compare it to a complex aircraft (like SR-71), where ripping out the automatic controls and turning it over a gee-whiz enthusiastic two-year old unaware of the physics ... would be a way to kill the two year old himself or herself as well as crash the aircraft. The world economy is in a very delicate situation exactly right now. It could be handled better... but on balance, the US part is in better shape and at less risk than the EU or China part for now... despite things which could have killed us. The opportunity to crash it all really fast is really obvious, to those who know how it works.  No, it’s not just another play kitchen. It requires the very highest levels of insight, excellence and understanding... even to do the less-than-perfect job we see today.

Why I do think I know that, enough to feel as upset as a parent in the passenger seat as a wild kid drives next to ... lots of ways to die?

It’s not that one or two of my four degrees was in economics, or that my GRE scores in economics were about a hundred points higher than the next highest in the Harvard economics department at the time... I learned a lot when I was at DOE, and built the most accurate model ever of industrial energy demand (along with transportation and oil and gas later). The Energy Modeling Forum of Stanford validated that, and statisticians at Stanford had very good things to say about the methodology. One percent error in multiyear backcasting is ‘way better than an “R=square of 99 percent” (which should mean ten percent error in one-period forecasting, but turned out to be far worse when we tested the models then best known in that part of economics – all in the official DOE/EISA documents, details posted on my regular web page). To drive that model, I had to fully understand and use the Wharton Annual Model, which was far away the best model for understanding interactions of energy and economy, AND interactions BETWEEN different sectors of the economy. Both on that model, and on advanced “data mining” statistical methods I developed, I interacted a lot with Mark French, who moved from Wharton to the Fed. It drives me nuts at times to see how many economic policy decisions are made by people whose intuition is limited to a “scalar model,”  WHETHER KEYNESIAN OR MONETARIST, like the simple seven-equation model they taught in intermediate macroeconomics at Harvard.  From tracking real data in periods of change, I learned how important STRUCTURAL CHANGE is, and how important it is to see the whole vector picture, not just seven variables in the head. Scalar thinking is the real reason why the EU is stuck in such a mess, unable to appreciate the concrete things they could do to “have their cake and eat it too.” The Fed does not see the whole picture either, but they have seen enough of it to prevent what could have been a kind of rerun-but-worse of the Great Depression (which, recall, was followed by the Nazi revolution). Hey, folks, the Nazi Revolution would not be better even for the wild donors who think Paul and Cruz are advancing their interests!

Why don’t I show you the math here and now, instead of the background? Well, I have summarized the math in other venues. Today I am retired, and will go back to doing laundry in a few moments. A few hints on a few aspects lie at

A few bits of the other stuff first?


Luda got me to scan Pickety’s book. Yes, there is a new inequality problem. Yes, it is serious. Someday I should do a whole piece on “leisure” for example – how we ought to have more of it after the progress of automation, how the system has been waylaid in part by a kind of imperfect competition like the models of Joan Robinson but applied to the market for Congressmen, as well as to unique input-output characteristic of the oil industry when oil prices are high, how “leisure” has a strong link to key variables monitored in the “economics of happiness” and to spiritual growth, a really serious variable feeding back to the other variables (e.g. clobbering the price of oil when cultural and spiritual and political distortions force overriding our appeals for a higher price on economic grounds)... Konrad Lorenz versus Maslow.  How “reformers” who are working to clobber France’s culture should do the opposite, and assist other people.     

Luda has me watching the Netflix series “Occupied.” A powerful and stimulating series, though of course (as with Ayn Rand and the Bible) best used if examined from different perspectives. For example, do some people in the Middle East already feel “occupied”? And must greens really be so stupid? (Minimizing the probability of a fatal climate outcome calls for a strategy which understands about dynamics of transition – like our RLADP mathematics. I have to admit that I have seen left-brained greens as thick as some in that series.) But... I told my friends in the real world, on the year I worked for Senator Specter... the bandaid they need most for their brains is a better understanding of what Pareto optimum really means. Even Richard Nixon, and even I when twelve, understood how greater automation could be absorbed by a combination of things like more leisure, more education and even negative income tax (with buffers to prevent risky other things like welfare mothers with 12 children on drugs, extremes which can be handled with moderate buffers)... Pareto optimality certainly does NOT require the gradual phasing out of human existence from space first and then earth.

Though NASA was already gutted long before NSF (back when Congress set constraints for the “60 day study” leading to Ares)... another case where rah-rah political nonsense precludes serious technical success.  NASA once was really great, but does anyone in power really have the will to make it so again? I hear from lots of folks who say “yes” – but then degenerate into iron triangle efforts to throw money away, to friends on the left or friends on the right, but with no real prospect of real product in either case.

Am tempted to say something about an intelligent dream from night before last... but ... not a proper time yet. Best of luck.

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