Is Economic Propaganda Ethical?

Ever wondered why government officials use fancy sounding terms like 'quantitative easing' instead of the much easier to understand 'printing money' when they both effectively mean the same thing?

Yale Professor Rober Shiller, who correctly predicted the housing market crash, weighs in on this topic with a piece in this weekend's NY Times. In the article he describes how to handle the inevitable next financial crisis.

His rather surprising answer?  By using the right vocab.

In what so far as I can tell is a first by an esteemed member of the academic community, Schiller goes on public record rationalizing the use of propaganda by government officials.

Shiller states:

"in times of crisis...confidence (expressed by the government) is also vital, even if government can’t absolutely guarantee that it’s justified...for people who don’t fully understand the financial system’s complexities "

In other words, Shiller is making the argument that it's not only ok, but advisable for the government to be less than frank with voters. During a financial crisis, Shiller argues, this lack of candor is actually in the public's own good.

Putting aside the subject of the ethical responsibilities of public officials for a moment, the first question is would Shiller's recommendation even work?

To help answer that question we can turn to a recent example from early 2008, prior to the apex of the financial crisis. On March 28, 2008, Fed Chairman Ben Bernanke, testifying before Congress about the housing market, made the now infamous false assurance that the subprime real estate crisis was "contained".

There are two possibilities here: either a) the Fed Chairman honestly believed that the Fed's actions had magically put the breaks on the real estate meltdown; or b) he was consciously using propaganda to reassure people, as Shiller advocates.

Regardless of which of these two possibilites is correct, what we do know is that his reassurances did absolutely nothing to prevent the financial crisis, which hit full force later that year in September. Perhaps Bernanke's comment postponed the crisis, but postponement may in fact have made it worse by allowing the problem to further fester under a blanket of false Fed confidence.

Are 'bailouts' and 'printing money' hopelessly beyond the general public's understanding, as Shiller believes? And instead of coming up with the proper vocab, shouldn't officials and financial experts be working on how to prevent the next financial crisis?

Video: Why Printing Money is referred to as 'Quantitative Easing'

Armchair Budget Balancer - You Play Congress & the President

Something nifty courtesy of the NY Times. Here's the description of their new, interactive budget balancing tool:

"Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online."

Related article here.

Update: There has been some criticism of the lack of options provided in the NY Times' tool. For example, the option of switching from an income tax to a consumption tax (e.g., Fair Tax) was left out. According to the NY Times Economics blog this was done due to the fact that such a change is not politically feasible. I expressed my disappointment in the comments that an economics blog was concerning itself with political feasibility at the expense of promoting optimum economic policy:

"There are a lot of great ideas that don't garner much support in Congress. This may explain why Congress's approval rating is around 10%."

David Brooks and Dick "Buy Lehman" Bove Perpetuate TARP Profitability Myth

David Brooks

Some myths just won't die. And if repeated often enough they can become legend.

Banking analyst and regular CNBC talking head Dick Bove is doing his part to keep the TARP was 'profitable' myth afloat. Joining this cause is NY Times columnist David Brooks, who on a recent episode of Charlie Rose made it abundantly clear that accounting is not his forte. Like Bove, Brooks mistakenly believes that TARP is 'profitable'.

To my knowledge Brooks, who based on appearances could easily be mistaken for an accountant, is no financial expert. So perhaps he can be forgiven for sending his proselytizing mouth into terra incognita. Bove, on the other hand, should definitely know better.

As discussed previously here, here, and here, the only way to claim that TARP is profitable is by viewing it in isolation of the entire government bailout, which in addition to TARP includes GSE conservatorship, Fed asset purchases, etc. Bailing out Fannie and Freddie alone could wind up costing taxpayers trillions, thereby swamping any gains seen by TARP.

The results of TARP are intimately connected and influenced by the other government bailout programs. Claiming that the relatively small TARP bailout sliver is profitable is intellectually dishonest and emblematic of the accounting shenanigans which continue to distort the balance sheet picture of our financial system and government.

Is there a political motivation behind the repeated claims of TARP profitability? Establishing this perception would certainly make the the banking sector look better in the eyes of taxpayers. It would also cast a more favorable light on the massive government intervention initiated by 'Government Sachs' and Treasury Secretary Hank Paulson and then furthered by the Obama administration.

Unfortunately this notion of TARP profitability seems to have gained a toehold in the mass media. As such we can expect to see future government bailouts justified on myopic, misleading accounting.

Chimerica Rap Video: U.S.-Sino Currency Rap Battle

When to Pull the Plug

Is there another subject that is both more complex and deeply personal than medical ethics?

Seven years ago this subject came up in a conversation with World Business Academy Founder and President, Rinaldo Brutoco. In the dictionary next to the world 'polymath' there should be a picture of Rinaldo.

Rinaldo and I were going over a speaking circuit checklist, discussing the subjects he felt qualified to lecture on. It was a long, diversified list, and he confidently checked every box except one: medical ethics.

Realizing that this was a topic that not only stumped Rinaldo, but also left him uncomfortable or unable to defer to another expert, I promptly tabled further contemplation of the subject. For me, the topic reemerged during the recent health care reform debate when rumors of  "death panels" began circulating about.

Below is a preview from the highly regarded PBS program Frontline, which will be profiling medical ethics in an upcoming program.

Watch Facing Death on PBS. See more from FRONTLINE.

Here is the press release from the show:

"How far would you go to sustain the life of someone you love, or your own? When the moment comes, and you’re confronted with the prospect of “pulling the plug,” do you know how you’ll respond? Unfounded rumors of federal “death panels” grabbed headlines last summer, but the real decisions of how we die -- the questions that most of us prefer to put off -- are being made quietly behind closed doors, increasingly on the floors of America’s intensive care units. In this film, FRONTLINE gains access to the ICU of one of New York's biggest hospitals to examine the complicated reality of today’s modern, medicalized death. Here we find doctors and nurses struggling to guide families through the maze of end-of-life choices they now confront: whether to pull feeding and breathing tubes, when to perform expensive surgeries and therapies or to call for hospice. The film also offers an unusually intimate portrait of patients facing the prospect of dying in ways that they might never have wanted or imagined."

Venturing into a discussion of medical ethics often becomes deeply emotional. Perhaps there is no better illustration of the gap between the intellectual disciplines, such as economics, medicine and philosophy, which have attempted to provide insights into medical ethics, and our humanity.

Does Money Buy Happiness?

“Gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets.”

"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.”

-Robert F. Kennedy, 1968

While interest in qualitative economic indicators, such as happiness, has grown substantially in recent years, the above quote from over four decades ago suggests a longstanding interest in holistic economic measurements which encompass more than the venerable gross product of a nation, or individual income.

Research on subjective indicators, such as happiness, has lead to new and interesting economic insights. Observing the growth in happiness related research prompts interesting questions in its own right: has the world become more complex, therefore necessitating more sophisticated heuristic techniques in heretofore underexplored economic provinces? Or has the development of modern social science methods, in fields such as statistics, psychology and micro-econometrics, made recent scholarship possible in areas previously rife with challenge?

Happiness and Income

Can money truly buy happiness? Perhaps no other question throughout history is responsible for as much debate. In recent years economists have been able to put this question to actual scientific test. Research has shown that happiness is in fact directly related to income. However, income aspirations increase alongside income growth, thereby undercutting the favourable effect of income growth on happiness. In other words, the concept of diminishing marginal returns appears to apply when measuring happiness derived from income (Easterlin 2001).

In addition, while wealthier individuals appear happier than those less well off at certain points in a life cycle (‘context specific’), over the entire life cycle (‘context free’) actual experienced happiness remains constant on average (Easterlin 2001). In short, the answer to life’s age-old debate is “yes”, but with limitations. Further, happiness derived from money is not absolute, but relative (Duesenberry 1949; Blanchower & Oswald 2001).

Further happiness research has provided a number of interesting, and perhaps surprising insights:

• A high correlation has been shown between income and happiness across countries (Deaton 2008)
• Income and happiness are positively correlated but other institutional factors, such as local autonomy may be a more important determinant than income on happiness (Frey and Stutzer 2000).
• On an individual level, well-being over a life cycle plots a U-shape curve, with the happiness trough occurring in life’s middle years and peak happiness occurring both early and later in life. This pattern suggests a release of aspirations and adaptation to one’s life circumstances (Blanchower & Oswald 2001).

Criticisms

Happiness is a direct but subjective measure, and like all subjective measures it has quantification limitations. For example, Blanchower & Oswald point out that the evolution of a word’s meaning over time may pose challenges (e.g., ‘happy’ may no longer mean exactly the same thing today as it did 40 years ago). This creates significant challenges for the measurement of happiness, particularly across time and space. 

Easterlin goes on to point out that scientists have begun to discover the effects of genetic traits on disposition, which in turn influences (and perhaps ultimately determines) happiness. Contrasting with Deaton’s comparative country findings, individual countries such as Japan have experienced rapid income growth but no material upward or downward change in happiness during the same period (Vennoven 1993).

Blanchower & Oswald studied happiness in modern Great Britain and the United States. In the case of the U.S., over the past 30 years happiness has been declining while per capita income has been rising. However, real wages over this period have largely remained stagnant (Mishel and Bernstein 2007).

There is also some criticism over whether society should invest its scarce resources in the measurement of something as nebulous as happiness? Does a sufficiently precise and agreed upon definition of what happiness is even exist? Without one there will be intractable problems with measurement. 

Finally, there is a fundamental philosophical criticism of whether or not happiness is, or should be, a shared cultural goal. In other words, should everyone adopt Taoism’s motto of “happiness is my duty”? There is no definitive global, or perhaps even national, answer to this question.

Conclusion 

Overall, while there appears to be a correlation between income and happiness, definitively determining causation may prove elusive. Also, the question of whether income is a derivative of happiness or vice versa is unclear. The subjective nature of happiness and the difficulty of measuring it across cultures, time and space places limitations on reaching strong comparative economic conclusions. 

However, while happiness research (and perhaps research into other qualitative measures) carries limitations, it is an important area of research due to the perhaps even more problematic limitations of existing objective measures, such as GDP per capita. Objective measures may also fail to take into account all economic incentives and goals. 

Perhaps the argument for the usefulness of happiness as an economic indicator is strengthened when it is not pitted solely in relation to income, but rather combined with other subjective and objective measures to form a more comprehensive picture. For example, the Prosperity Index was recently launched by the London based Legatum Institute. The index ranks countries across eight different wealth and well-being measures, including a number of subjective measures such as ‘Trust in Others’ and ‘Satisfaction with Health’. The purpose of the index is to “provide new insights into the factors that produce successful countries and fulfilling lives”.

The Legatum Prosperity Index also makes use of other qualitative data sources and indexes, including:

• Global Peace Index
• Global Competitiveness Index (World Economic Forum)
• Governance Indicators (World Bank)
• Index of Economic Freedom (Wall Street Journal/Heritage Foundation)
• Freedom in the World Report (Freedom House)

The Prosperity Index is indicative of growing interest in happiness measures by governments from around the world. For example, the U.K. recently announced that its Office of National Statistics will be surveying the British population in an attempt to measure well-being, along with sustainability measures. The decision to pursue this study follows the recommendation of Nobel Prize winning economists Joseph Stiglitz and Amartya Sen. The U.K.’s announcement follows similar moves by governments in France and Canada (Rumsey 2010). Overall, the measurement of happiness would appear to be on the rise.

The proliferation of subjective economic indicators continues unabated. Looking ahead, the emergence of new qualitative economic lenses through which social scientists may attempt to better understand the world suggests strong interest, and perhaps funding, for further research on the economics of happiness and other subjective measures.

Taking a Geopolitical Vacation

An interesting read on a rather unusual approach to taking a holiday from STRATFOR.

Quote of the Day

In reference to World Bank President Robert Zoellick's recent gold standard op-ed in the Financial Times, the quote of the day comes from the WSJ:

"mentioning the word "gold" in the orthodox Keynesian company of the Financial Times is like mentioning the name "Palin" in the Princeton faculty lounge"

In related news, gold has throttled well past $1400, as predicted.

Common Ground in Krugman vs. Ferguson

Paul Krugman & Niall Ferguson

Hard as it may seem to believe in today's world, there was a time when not all bankers were reviled.

Equally shocking, perhaps, is that prior to the 1980s the U.S. financial system really didn't experience a major financial crisis for the previous half century. This also was an era of significant economic progress for America as a whole.

For several months now Professors Paul Krugman and Niall Ferguson have been squaring off on camera and in print over whether the U.S. needs a second government stimulus to kickstart the economy. You can check out videos of their their respective arguments on CNN here and here.

While there is a large gap on where they stand in the fiscal debate, there is a topic where they appear to share common ground, and that is the need to fix banking.