Tuesday, May 31, 2011

Farmers Are Not to Blame for the Food Problem

A new Oxfam report, Growing a Better Future, warns correctly of a risk of hunger in the next decade because of shortages and high prices. Its analysis of the situation, though, is bizarre and inexplicable. Within the last decade, Oxfam has gone from supporting the world’s struggling farmers to the opposite position, essentially blaming farmers for failing to solve all the world’s problems.

At first glance, Oxfam’s blame-the-farmer message is an extreme position, with phrases like “a powerful minority” and “self-serving elites” dismissing the entire food sector at once. Some of the recommendations are nearly this extreme when you look deeper into the report. It is understandable that Oxfam is looking for lower prices that more people will be able to pay, but its suggested policy changes would so lower farm earnings that millions of farmers would be reduced to subsistence farming on a much smaller scale than currently, or would be forced to look for other work. It almost seems as if the phrase “self-serving” is better applied to Oxfam than to the struggling farmers it is so eager to blame.

The problems in food production are fundamentally those of energy, and that is a larger issue that cannot be addressed in isolation in agricultural policy. Water is a looming crisis also, but the equipment to purify and deliver water is well understood and could be provided if the energy were available to operate it. If farmers are being squeezed in recent years, it is because of high energy prices. This is a problem put onto the food sector from outside. Yes, some crops go to produce fuel, but without the income from those cash crops and others, how would farmers collectively pay for the fuel they need, and where would the fuel come from? It may be helpful to note that, as much fuel as crops produce, the food sector uses more fuel than that just to cultivate and transport crops.

Of course we would like to see more food produced at lower prices even though production costs are going up, and without driving farmers into poverty in the process, but this is just the kind of suggestion that prompts economists to answer that there is no free lunch. Historically, food prices have been lowered only by reducing the relative number of farmers, and in the near future, with energy prices increasing, that connection will surely continue to hold. The solution to hunger will not be found by artificially lowering food prices, but by increasing the incomes of the poorest consumers.

Indeed, as important as it is to improve the way food is produced, the larger issues with food have to do with the way it is consumed. This side of the food issue really has to be addressed first. The picture here is really quite stark: every day, more grains and more agricultural products in total are fed to farm animals than to humans. This is unavoidable as long as there are so many farm animals. Currently, the global population of large farm mammals is at least as large as that of humans. It hard to imagine the number of small farm animals, but it is obviously a much larger number. In the short run, if we want to feed all the people, we would only have to find a way to cut our global meat and dairy consumption by about 2 percent, then give a small fraction of the money we save to food charities. The solution is perhaps more simple and direct than we would like to acknowledge.

I cannot talk about meat consumption without talking about overeating, now that we know how closely related they are. To be fair, the Oxfam report does mention the problem of obesity and overeating as something more than an ironic contrast, but it fails to highlight the scale of this problem, which has been sneaking up on us for some time. We have reached the point where half of the world’s people eat more than is healthy. Whole countries, not just the United States, eat 20 percent more food than nutritionally they should. Solutions for this problem, solutions more effective than the naive answers of self-control and surgery, will have to be found. Even a partial solution would take a lot of the pressure off the world food supply. The problem of overeating looms larger than that of starvation. In the short run, the hunger problem could be solved by finding a way for people who overeat to eat less, while distributing some of the food crops that are saved to those who are eating too little. In the long run, it will be a Pyrrhic victory if we solve the problem of starvation only to have twice as many people die of the diseases of obesity. We need to solve the hunger problem now, of course, but the obesity problem cannot wait either.

If the world’s farmers have been unable to solve the world’s problems, the blame lies not so much with the farmers but with the rest of us. If farmers cannot solve every problem, we may be mistaken in asking them to do so much.

Monday, May 30, 2011

Germany, Nuclear-Free

The pundits who said last month that the nuclear events in Fukushima would have no lasting consequences were mistaken. In Fukushima itself, of course, the situation is a disaster — the city may be too dangerous to occupy for a year or longer. And halfway around the world, the Fukushima disaster tipped the political balance in Germany. There, in February and March, the pro-business government had barely fended off the country’s safety and financial concerns in order to work out a deal that would effectively have extended its nuclear program indefinitely, overriding a previous plan that would have had the aging German nuclear power plants carry on for only nine more years.

But then, Fukushima. A new public outcry. A safety review. Mass protests across the country. And today, the announcement that half of Germany’s nuclear power plants are closed. This includes seven that may be too old to operate safely and one that has had recurring operational difficulties. They have been offline and cooling down for a month during the safety review, and the public policy interpretation of the review is it is safer not to restart them. One of them will be kept on standby for a few years for extra power on cold winter days, but I do not imagine it will actually be restarted during that period.

The other part of the announcement concerns the nine newer plants in Germany. They are set to go offline between now and 2021, with a one-year extension likely for the three newest. Eleven years from now, according to the plan, Germany will no longer be generating nuclear power.

Critics point out that Germany has had to replace 10 percent of its electric power already because of the nuclear shutdown, and it will have to replace another 10 percent by 2021 as the remaining plants go offline. But in truth, Germany will save a fortune by investing in small-scale, inexpensive forms of electric power in place of its nuclear power stations. And it will save even more if it undertakes a meticulous, Scandinavian-style approach to energy conservation.

Considering all that there is to be gained from that transition, if the political opposition gains power in Germany, the nuclear phase-out is likely to happen a few years sooner.

One issue that Germany did not consider, for example, is the coming shortage of nuclear fuel, which some in the uranium trade believe could arrive as soon as next year. Probably dozens of countries will complete construction on nuclear power stations in the 2020s but be unable to fuel them. Germany might well choose to shut its reactors down early in order to sell off its remaining nuclear fuel.

Sunday, May 29, 2011

Thin Ice in Spring

After a spring season of more typical ice extent reports, Arctic ice is back in near-record territory. Today’s ice extent is just a few days behind the rapid spring ice melts seen in 2005–2007.

It is important that Arctic ice has not declined as much in spring as in the other three seasons. In late winter and early spring, the sun in shining on most of the Arctic ice, and ice reflects the sunlight much better than sea water does. If the ice is covered with a thin layer of snow, it reflects better still. Reflecting the sunlight back out into space slows the Arctic region’s warming trend.

The slower decline of Arctic ice in spring is consistent with measurements showing thin ice. Thinner ice breaks more easily and is more mobile. This allows ice to spread out from the areas where it forms. In April, the cold weather allows this ice to accumulate in places where it is not quite cold enough for ice to form. For example, ice that formed at the north end of Baffin Bay drifted southward and accumulated along the Labrador coast. But the ice at Labrador melted away in May. By June, this same dispersal effect reduces the ice area. When ice breaks, the new edges start to melt away, and any ice that drifts off on its own tends to melt quickly.

Climate models predict that summer Arctic ice will mostly disappear between 2040 and 2100. The climate models, though, track Arctic ice only up to about 1998; they fail to account for the rapid decline in Arctic ice since then. A naive extrapolation of ice trends for the past 13 years suggests that the sunnier months could be free of ice, at least in the open ocean, much sooner than that. The model that fits the recent experience most closely says it could happen around 2016. Significantly, this model suggests that May will be one of the months that will be ice-free. If the ice in spring keeps getting thinner, eventually, it will have to melt through.

Saturday, May 28, 2011

Distressed Sales Are Here to Stay

When will the distressed home sales stop so that the real estate market can get back to normal?

This is a question that many in the real estate business have been asking. It is a serious question, and various experts offer a wide range of answers: 2012, 2015, 2025. But all of these answers are wrong. It is a question based on a mistaken assumption. Distressed sales are not going away, and the real estate market wouldn’t be normal if they did.

Distressed sales have always been a significant part of the real estate market. There is a lot of emphasis now on foreclosure sales, and rightly so, as they are happening at the fastest pace in history. This is partly because of economic factors, such as unemployment and stagnant wages. But no one can claim that unemployment and stagnant wages will be going away. At the peak of the real estate bubble, unemployment was around 5 percent. Since 2009 it has been around 10 percent. There is some reason to hope that unemployment can fall to 5 percent again someday, even without a change in government policy in that area. But even then millions of homeowners will be unemployed, half as many as we have now. Similarly, even in the best of times, more than 5 percent of employed workers see no wage growth from one year to the next. An improvement in the economy could reduce some of the causes of foreclosure, but no one can claim that it will eliminate them.

Besides, many of the causes of distressed sales have relatively little to do with the economy. Often illness and the associated medical bills are what force a homeowner to sell. The timid health care reform measures that go into effect over the next decade will do little to take away the risk of illness or of catastrophic medical bills. Distressed home sales occur because a homeowner becomes disabled, dies, is incarcerated, or is called into active military service. We can attempt to reduce the frequency of these events, but that is quite a separate problem from the state of the economy.

There is also the issue of the underwater mortgages. In financial terms, you might look at these mortgages and conclude that the homeowner is stuck in the home they have for the rest of their lives — they may never be able to pay off the mortgage. But in practical terms, very few of these households will actually stay put for the next 25 years. Some will, of course, but it is a safe guess that more than four out of five will be forced to move for a new job or when their employer relocates. The steady stream of distressed sales from underwater mortgages will not last forever, but it can hardly go away until the underwater mortgages themselves go away, and that is a process that could take at least until 2040 to fully work itself out.

Even in 2006 at the peak of the real estate bubble, there were houses sold at auction every weekend. That was always considered a normal part of the real estate market. It is normal now. If you study real estate price trends over the last two years, every quarter you see real estate values go up in some regions of the United States and down in others. That was also what you saw before 1993. Pre-bubble, it was always considered normal for prices to go up and go down. It should be thought of as normal now.

The people who are waiting for a real estate market without distressed sales and with prices that go up and not down have been taken in by bubble thinking. So too, I am afraid, are most of the speculators who are buying so many of the distressed home sales this year. Bubble thinking is the mistaken idea that the pricing patterns that occurred during the bubble are normal. History tells us that a bubble is followed by a crash, and that what happens after the crash is closer to normal than what happens before. Based on this, for the U.S. real estate market, what we are seeing now is a reasonably good approximation of normal.

Friday, May 27, 2011

This Week in Bank Failures

One of the most flagrant abuses uncovered in the foreclosure fraud investigation involves banks foreclosing on the homes of people serving in the military. Laws specifically protect active duty service members against lenders who would take advantage of their absence by foreclosing while they are away on active duty. The law does not completely prevent such foreclosures, but requires courts to take the military service into account in deciding whether to order a foreclosure. Yet major lenders in recent years have routinely foreclosed on active duty service members without disclosing the borrower’s military status to the courts as the law requires. In some cases, lenders simply didn’t check whether the borrower was on active duty. In others, lenders knew the borrower was on active duty but filed false court papers asserting the opposite. In the first major settlements in this issue, Bank of America will pay $20 million and Morgan Stanley, $2 million for improper foreclosures between 2006 and 2009. Military reservists called up to active duty are more likely to fall behind on their mortgage payments because of the lower income they receive while in military service, in comparison to their civilian salaries. On the other hand, at least a few of the foreclosures in question were undertaken against service members who were current on their mortgage payments.

Update: Washington state banking regulators closed First Heritage Bank of Snohomish, which had 5 locations and $163 million in deposits. The failed bank had financed several failed real estate development projects with loans that were large relative to the size of the bank. It had been in business for 30 years. Columbia State Bank is taking over the deposits and purchasing the assets, paying a 0.75 percent premium for the deposits.

Thursday, May 26, 2011

No Emergency Fund

Most people, even wealthy people, have less money than you would think. A CNNMoney.com story, “Many don’t have $2,000 for a rainy day”:

Half of Americans say they aren’t prepared for a minor financial emergency.

A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch, for example in the event of an unanticipated car or home repair, a large medical bill or legal expenses.

The average American faces a loss of liquidity, at least temporarily, if surprised by a relatively minor problem. The study specifically looked at the sum of $2,000, but obviously, many minor emergencies cost more than that. Most people think of emergencies as personal situations, but a larger emergency may affect millions of people at once. When people are living close to the edge as it is, any economic shock, even something as routine as a hurricane evacuation, can find them without the flexibility to respond.

Much has been made of the lack of liquidity in the banking system, the late insolvency of the federal government, and the absence of consensus on any problem at all in Congress, all of which give the country less than its usual ability to respond to a minor economic shock. Based on this study, consumers are not doing much better, and will not be able to do much to save the country if an economic emergency occurs.

Wednesday, May 25, 2011

Smoke-Free Sidewalks in New York City

The heavily traveled corridors of outdoor New York City are officially smoke-free under a new law that took effect there Monday. It’s a measure that makes sense for New York and may make some sense for other major cities.

The purpose of smoking bans is to protect non-smokers from the effects of cigarette smoke — a more urgent consideration now that we know that a single puff of cigarette smoke can trigger a heart attack in a bystander. Smokers like to imagine that their cigarette smoke is dispersed by the outsider air, but that isn’t a realistic prospect on New York City sidewalks, where there are almost certain to be several strangers passing by within a seven-foot radius no matter where you stand. The ban covers plazas, parks, and beaches but does not cover the less-crowded median strips or parking lots.

New York City is not the first place to ban smoking in selected outdoor areas — Puerto Rico, for example, has long banned smoking on beaches — and it is remarkable how little controversy there has been surrounding the new rules. There are some gripes, of course, but nothing at all compared to when the ban on smoking in restaurants took effect.

Budget pressure helped push the new measure through. Cigarettes account for half of the litter that city workers have to pick up, and facing the same budget pressures as other municipalities, New York couldn’t realistically continue to spend so much money cleaning up after the dirty habit of a small fraction of its citizens.

Tuesday, May 24, 2011

Hunting for a Meltdown at Fukushima Daiichi

While the greatest risk may have passed at the Fukushima Daiichi nuclear power plant, the news is still bad. The operator, Tepco, now says it is likely that reactor 1 probably had a complete meltdown within a day or so after the tsunami struck. In the best case, this means that all the radioactive metal is sitting in a lump, or puddle, at the bottom of the reactor. All Things Nuclear examines this scenario and points out that it implies at least five more years of ad hoc cooling before the nuclear fuel decays enough to consider moving it. On the other hand, some engineers who have examined the public statements say the heat readings are too low for a full meltdown, which could mean that some or all of the nuclear fuel has escaped the reactor vessel. If it did, no one knows exactly where it is. We can be pretty sure the reactor vessel is broken because water pumped in isn’t filling up the vessel. A total meltdown in reactor 1 is bad enough, but Tepco says it is possible that the same thing has happened in reactors 2 and 3.

Tepco’s financial condition is worrisome in itself. It reported a $15 billion loss for the year, the largest ever for a Japanese corporation outside of banking. Its president resigned on Friday. Politicians are arguing over its shape for the near future, something the company itself will have very little say in. Tepco needs to show competent management of the nuclear crisis at Fukushima, as that is surely the only thing to save it from liquidation.

Monday, May 23, 2011

Expert Panel Says Processed Meat Causes Cancer

A scientific panel that regularly reviews cancer research is telling people to stop eating processed meat.

The new Expert Panel report released today cautioned about red meat — which contributes significantly to colorectal cancer because people eat so much of it — but found a stronger link with processed meat. From the World Cancer Research Fund press release:

WCRF/AICR recommends that people limit consumption to 500g (cooked weight) of red meat a week — roughly the equivalent of five or six medium portions of roast beef, lamb or pork — and avoid processed meat.

Processed meat is a broad category that includes lunch meat, hot dogs, ordinary sausage, bacon, and ham. The panel estimated that 1 in 14 people who eat 100 grams of processed meat per day will develop colorectal cancer. It’s a high enough risk for them to advise people not to eat processed meat.

The risk from red meat is also substantial, but only half that of processed meat. Excess body fat and alcohol consumption also contribute to colorectal cancer, according to the report, but not to the same extent as meat. Exercise and dietary fiber reduce the risk, and there is some evidence that dietary calcium and garlic may also help. These factors, though, have been suspected or known already; the one surprise in the report is the magnitude of the link between processed meat and colorectal cancer.

Meat is not featured in a healthy diet anyway because it is relatively empty in a nutritional sense. The scientific findings that connect meat to cancer and other diseases are just more reasons to eat less meat and more real food.

Sunday, May 22, 2011

The Limitations of Planning

Today in the Fear of Nothing blog there is a look at the risks and limitations of planning. In general, planning is more effective when it focuses on the near term and known because the risk of intervening events is less, yet most planning systems emphasize planning for the distant and unknown. The resulting plans may have be rewritten multiple times, at considerable cost, when unexpected events render them obsolete.

Saturday, May 21, 2011

Fewer Shopping Trips

With gasoline prices around $4 a gallon, U.S. consumers are making fewer shopping trips to save on gasoline. We have all heard stories about this, but a survey last week confirmed that it is a widespread reaction. From a Reuters report, “Americans buy less food as gas prices rise: survey”:

About a third of Americans surveyed by America's Research Group said they were making fewer trips to stores due to higher gas prices . . .

The survey also found that many shoppers are spending less on food. Previously, Walmart had said that many of its customers were making only one shopping trip per month.

Postponing and combining shopping trips makes good sense when fuel prices eat up a significant fraction of the shopping budget. If high fuel prices last through the summer or longer, as many expect, this could become a permanent feature of consumers’ shopping habits.

A shopper doesn’t just save fuel by shopping less often. The time saved may be even greater. If a weekly shopping trip takes 1.5 hours, a monthly shopping trip may take 2.5 hours, saving 4 hours a month. With consumers increasingly pressed for time, once we learn how to shop just once a month, it will be hard to find the time to go back to shopping once a week.

With fewer shopping trips, consumers have fewer chances to pick up impulse purchases. This is bad news for retailers, which depend on the high markup on impulse items to provide much of their profit.

Friday, May 20, 2011

This Week in Bank Failures

Now that the U.S. government is insolvent it is important for bank depositors to consider that the FDIC’s solvency is no longer effectively guaranteed by the U.S. Treasury. In the event of a major bank failure — hardly a far-fetched notion at this point — the FDIC would not necessarily immediately have the funds to reimburse depositors. This affects not just depositors at the major bank itself, but also at any other bank that fails at the same time or subsequently. Until Congress acts to restore solvency to the Treasury, you must not rely on any one bank for cash to operate your daily life (or business). Have enough food and cash out of the bank to survive until your next paycheck, or hold credit cards that you are certain are from separate, unaffiliated banks.

The FDIC has mostly underestimated the magnitude of the current series of bank failures, failing to predict the number of failures that have occurred and usually underestimating its costs in liquidating bank failures. More than a year ago I became concerned that the FDIC’s estimates of its costs in individual bank failures had lost most of their relevance. That is, the cost estimates published when a bank failed often seemed to be arbitrary numbers that had no apparent relation to the problems with the bank’s assets. This concern is perhaps validated by the FDIC’s revised estimates of its costs for individual banks. Most are upward revisions. We have seen estimates revised down by 10 percent, but others revised up by as much as a third. It takes at least five years after a bank liquidation before a relatively reliable estimate can be made, so we will not know the true magnitude of the costs for some time to come.

At closing time tonight, Georgia closed two more of its banks. The two failed banks were Atlantic Southern Bank, with 16 branches, based in Macon, and First Georgia Banking Company, with 10 branches, based in Franklin. Each bank had just over $700 million at last count. Deposits from both failed banks have been transferred to South Carolina-based Certus Bank, which is also purchasing the assets.

On the West Coast, Washington state regulators closed Summit Bank, based in Burlington in the northwest corner of the state, with $132 million in deposits. Columbia State Bank is taking over the deposits, paying a 0.75 percent premium, and purchasing the assets.

Thursday, May 19, 2011

Borders’ Unraveling Diminishes Books and Authors

If reputation derives largely from being associated with success, then bankruptcy could pull the rug out from under it. As the Borders bookstore chain continues to unravel in bankruptcy, its decline has diminished the importance of everyone associated with books, including publishers and authors.

Today Borders is in court to explain that its prospects are not strong enough to allow it to continue its joint venture with Seattle’s Best, which runs coffee shops in about 90 percent of its stores. That is not the only thing that has happened in bankruptcy to suggest that Borders probably cannot continue in its current form.

We heard a week ago that there were no credible bids for the Borders chain, though several interested parties put in bids for a small number of stores. Barnes & Noble, for example, is said to have offered to buy out 10 Borders locations. Financing so far is falling short, so Borders, having entered bankruptcy by closing a third of its stores, will surely have to sell off additional stores and close some that it cannot sell in order to exit bankruptcy.

There is worry that Borders’ financial troubles could spread. Barnes & Noble, in particular, has warned that competing with store-closing sales may wipe out its chance at a profit this year.

All of this is the opposite of the air of success that the book business had in its best years. There is still a lot to hold up the book business’s legend: history, celebrity, graphics, television, The Oprah Winfrey Show (well, through Wednesday, anyway). But the money and the massive physical presence of the stores are noticeably less than they were at the beginning of the year.

Wednesday, May 18, 2011

Computers and Office Supplies: Connecting the Dots

Reports from Staples and Dell confirm trends already hinted at by their competitors. Businesses are spending less on computers and less on office supplies.

There is a connection to be drawn here, I believe: it’s a sign of the decline of paper documents, particularly the more ephemeral documents used from day to day for collaboration within a business. Traditional office supplies such as paper clips, highlighters, file folders, and binders are used mainly on computer-generated paper documents. The number and extent of those documents are declining. You’ll get complaints, for example, if you hand out 15 pages of documents at a 30-minute meeting. It’s a turnaround from a decade ago, when if you didn’t have a stack of handouts people might suspect that you hadn’t really prepared for the meeting.

People scoffed five years ago when Citibank took the color laser printers out of its offices to save money on toner, but now other businesses are doing the same thing. The real documents, after all, are on the computer screen and shared over the network. Paper documents are often just placeholders and summaries for discussion purposes, and in these situations, color, formatting, and length don’t count for much.

When paper documents become less important, computers also become less important. That’s because preparing paper documents is one of the most demanding things we ask computers to do. Compare the cost and complexity of word processing software to that of email software and you’ll what I mean. Both prepare documents, but a word processing program has to make a document look good on paper, so it costs 10 times as much and is 10 times as hard to use. In a similar way, the need to routinely connect to a printer (and potentially a scanner) adds complexity to a computer system. With less reliance on paper documents, today’s computers may not need to be replaced by newer ones, at least not so quickly.

Businesses aren’t sacrificing by creating fewer and smaller paper documents. Like everyone, they are just trying to save time. After all, “paperwork” long ago became synonymous with “a frustrating waste of time,” so why wouldn’t a business look for ways to get work done with less paperwork? And if this trend has now become large enough to become visible in the financial reports, it’s fair to guess that it will carry forward for a few more years.

Tuesday, May 17, 2011

Your Digital Profile and the Law of Exploitation

The work I did in the banking industry identifying different customer segments and types, so that banks could target customers with sales pitches, is kids’ stuff compared to what Internet companies have been doing in the last few years. Google search results and ads, for example, are customized for your personal biases and tendencies. If you’ve ever noticed a weird annoying advertisement that seemed to follow you from one web site to another, you’re seeing your own digital profile in action. It’s an advantage to an advertising company like Google to show you ads that you are more likely to respond to. But if the Internet provides your window on the world, you can lose touch with reality by looking at an Internet that reflects your own ideas back at you. And what’s good for advertisers is not necessarily good for you.

This is the subject of the new Eli Pariser book The Filter Bubble: What the Internet is Hiding from You. Pariser argues that we need to be more aware of the way Internet search, retail, and advertising companies filter and censor the Internet to give us an individual view of it. There is a lot at stake, he says. From a CNet interview:

. . . Stanford researchers Dean Eckles and Maurits Kapstein . . . figured out that not only do people have personal tastes, they have personal "persuasion profiles." So I might respond more to appeals to authority (Barack Obama says buy this book), and you might respond more to scarcity ("only 2 left!"). In theory, if a site like Amazon could identify your persuasion profile, it could sell it to other sites--so that everywhere you go, people are using your psychological weak spots to get you to do stuff.

It’s easy to see how Google and Amazon can build a more complete digital profile on you than the banks I worked for ever could. Banks in the United States can’t use information about the purchases you make with your credit or debit card to profile you, so they may have a very limited set of your actions to look at to try to figure out what kind of person you are. A bank typically has to figure out who you are based on your actions and decisions that are reflected in its own records — typically fewer than 100 of them. Your actions on the Internet, though, may provide more than 100 data items on you per hour. Potentially, every word you search for, every click in a search result, every purchase, the length of time you look at a product or movie, and the ratings you provide for anything you come upon online all say something about you. Of course, on Facebook, your likes, answers to questionnaires, and who you know provide all the information a corporation would want to profile you in detail. And it doesn’t necessarily stop there. The words used in messages you send and receive on the Internet are also potentially collected for your profile, as are the words spoken in voice chat and telephone conversations you have on the Internet. It’s a gold mine of information, and the corporations that collect it are free to use it to sell to your personal interests — or to prey on your individual weaknesses.

As a online writer, all the words I write on blogs and Twitter feed into my profile, and from this, it is easy to see how menacing the personalized Internet could be. A month ago when I wrote a few things about the money laundering scandals in online poker, I started to see a lot more gambling-related advertisements. It’s easy to imagine that this kind of targeting could be a problem to a person who has a gambling habit. Since I identify myself as a shaman, there was a period in which I was getting more than my share of marijuana-targeted advertisements, not selling marijuana itself, I assume, but various obviously related products. The connection between shamanism and marijuana is pretty dubious, in my view, but I had to put up with the ads across literally hundreds of web sites for months before they went away. For all I know, they will come back now that I am writing about marijuana here. But again, imagine the impact on a person using the Internet to search for help with a marijuana problem. The personalized Internet might feed the problem more vigorously than it points to the solution.

And that’s the problem with having a digital profile. It is the law of exploitation that I repeat so often: whatever tendencies you have will sooner or later be used against you. When you have a digital profile, it is more likely to happen sooner. You can’t easily keep from having a digital profile, but you can know what it says in a commercial sense just by seeing how your Internet advertisements, and search results, are different from everyone else’s.

Monday, May 16, 2011

High Finance and the Failure of Proportion

The top two stories in high finance today surely leave most people scratching their heads.

The head of the International Monetary Fund, a globe-trotting deal-maker who worked daily with unimaginable amounts of money, briefly turned into a fugitive on Saturday. He was in such a rush to leave his hotel and the country that he left his phone and other possessions behind. Criminal charges aside, the accounts of his actions that day fail to reflect the attitude of care and caution one would expect from a person entrusted with the world’s money.

Today, the United States, the richest country in the history of the world at the richest point in its history, is effectively putting itself into bankruptcy. Congress has balked at authorizing the borrowing needed to pay for the expenditures it has already ordered. By the end of the work day today (some observers say it has happened already), the national government will have run out of money and will be unable to borrow more. Uncle Sam is now the trillionaire on the block who won’t pay for his own pizza.

We would wish that with the largest financial obligations we would find the most rational decision-making, but that does not appear to be the case. There is something about institutions that deal with hundreds of billions of dollars that makes people take leave of their sense of proportion. Without proportion it is impossible to make rational decisions — “proportion” and “ratio” are synonyms, after all. This disconnect between high finance and rationality has gotten markedly worse in the last 15 years as the largest institutions have grown larger, so this may reflect an operative limitation of human management abilities. There may be other solutions, but the only answer I can suggest at this point is that we find ways to not place so much reliance on the decisions of the largest institutions.

Saturday, May 14, 2011

When Levees Aren’t Enough

Today thousands of people are out keeping an eye on the levees. In Manitoba, the province finally cut a hole in one dike to lower the water in a flooded river, the Assiniboine, which is still days away from cresting. In Mississippi, a century-old levee fell apart after water started to flow over the top, something that had never happened before. Water is overtopping dozens of backwater levees on tributaries of the Mississippi River, but most of them are still holding. Here too it is at least two days before the crest in the river. In Louisiana, for the first time, the Army Corps of Engineers has opened all three of the major spillways for the Mississippi delta, diverting a flow of water considerably larger than the average total flow of the river. The three diversions may lower the river enough to save New Orleans, but it all depends on the levees there. A river flood in New Orleans would be far more serious than the hurricane flooding the city has experienced. The hurricane flood water sat near sea level, but a river flood could potentially fill the city with flowing water that remained 10 meters above sea level for a month.

If people are already pointing fingers over the flood control systems that didn’t completely prevent the flooding, it is little more than a sign of the frustration and uncertainty that goes with trying to control a force of nature. Nature, after all, is hard enough to predict, harder still to control. More rain fell today over most of the Mississippi basin. It wasn’t much rain, but any runoff at all delays the day when the rivers return to their normal levels.

Friday, May 13, 2011

This Week in Bank Failures

Every weekend, it seems, new problems are found with the European bailouts, and there are new revelations about the interdependencies between national governments and banks. This is a problem that the United States shares, in perhaps nearly the same degree.

The term of FDIC chief Sheila Bair will be ending in a few weeks, and she’s making sure we remember her for her warnings about the “too big to fail” system. This is a line from a recent speech:

. . . there is genuine alarm about the immense scale and seemingly indiscriminate nature of the government assistance provided to large banks and nonbank financial companies during the crisis . . .

There was talk this week of a slap on the wrist for the largest U.S. banks for their involvement in foreclosure fraud — a payment of $10 billion, or perhaps just $5 billion, that would exonerate the banks for potentially millions of forged and otherwise improper documents filed in foreclosure proceedings. It tells you something that this kind of token settlement is being discussed. It tells you that regulators realize that if a fair and proportionate penalty were exacted from the banks, some of them would surely be insolvent afterward. Like the shadowy tax breaks awarded to some of the U.K. banks last year, it is a sign of the bizarre extralegal status that a bank attains when the government begins to treat it as too big to fail. If a bank is too big to fail, then it may also be too big to tax and too big to penalize. No longer subject to quite the same legal process as its smaller competitors, it is free to do essentially whatever it wants.

The giant banks, for the most part, have not paid income taxes for the past three years or more, and this is part of the reason for the dire financial condition of the United States government, which is projected to become insolvent on Monday unless Congress intervenes. The Treasury has said it can stay out of the federal government’s equivalent of bankruptcy until August 2 through a series of increasingly creative accounting maneuvers, but this is uncharted territory and the exact sequence of events is unknown. At some point along the way, if Congress fails to act, U.S. government securities would no longer be considered investment-grade, and this would affect the solvency of essentially all banks in the United States, and probably hundreds in other countries as well. It is important to note that this federal budget predicament is, in part, another consequence of the government decision to protect the largest banks, when they became unprofitable, against their smaller competitors, who otherwise would mostly have been profitable over the past two years.

Thursday, May 12, 2011

The Austerity Budget and the Downward Spiral

It’s easy to understand how federal budget planning can confuse people. The answers are not as easy as you would think they should be.

If there is a budget deficit, you might think you could cut spending to close the deficit.

It isn’t as simple as that. Most federal spending goes to pay workers to do work. When the federal budget is cut, that means fewer worker working, and fewer workers getting paid.

The plan floated this week by House Speaker John Boehner, for example, would all but shut down the U.S. military, along with the other “discretionary” budget items. Colonels and privates alike would be on the unemployment lines. The engineers and factory workers who make military vehicles and weapons would similarly be unemployed.

It would be the same, of course, with the food safety inspectors, the epidemiologists, and the trademark examiners. With the national parks closed to the public, the park workers who assist visitors would also be unemployed.

With fewer workers working, that also means that fewer workers would be paying taxes. That would reduce the federal government’s tax revenues, along with tax revenues for states, counties, and cities. This is not a minor adjustment, but may amount to nearly a third of the original spending cuts.

At the same time, the newly unemployed workers represent a greater expense for the government, starting with unemployment compensation, assuming, of course, that the government has not done away with that as well.

But it gets worse. With no income to speak of, unemployed workers spend hardly anything, compared to employed workers. This means less revenue for all the businesses whose customers became unemployed. In response, these businesses too have to cut back. This creates more unemployed workers, and still less in tax revenues for the government. It’s a cycle.

That doesn’t mean you can’t balance the budget by cutting back. But the cuts you need to arrive at a balanced budget are roughly twice the deficit that you want to close. If the budget deficit you’re looking at is $1 trillion per year, you need to make cuts of $2 trillion per year. That’s why John Boehner is talking about trillions in cuts, when the deficit is only about $1 trillion. It is not that he is confused. It takes about $2 trillion in cuts to close a budget gap of $1 trillion.

Cutting anything by $2 trillion a tall order, of course. The total federal budget is less than $4 trillion. To balance it by cutting spending, you have to do away with more than half of the spending. That’s why Boehner is talking about budget cuts that would include actions that a year ago would have been unthinkable. Mothballing the U.S. military. Cutting Social Security and Medicare benefits in half. Perhaps doing away with unemployment compensation.

Because even cuts as stark as that won’t come close to closing the budget gap. There is some spending that you can’t reduce. The biggest non-negotiable budget item is interest on the federal debt. That’s a quarter trillion dollars per year that the government is contractually obligated to pay, so it makes up more than a tenth of Boehner’s hypothetical balanced budget. There are substantial security functions that are also non-negotiable. For example, you can’t just shut down the U.S. military. You can bring all the ships back into harbor and ground all the airplanes, but you still need thousands of people to protect them so they don’t fall into enemy hands. The many things you can’t cut means that you have to cut everything else still more. In the hypothetical balanced budget, the things Americans think of as the federal government would have to be cut back by about 80 percent.

But there are problems with even this approach. First, much of what the federal government does is protect business from criminals. Without the current level of protection from counterfeiters, hijackers, and illegal dumping by foreign businesses, U.S. businesses would find that some of their initiatives were too risky. They would be forced to shut them down to cut their losses. This would lead to a further reduction in the legitimate economy, while seeing an expansion in the criminal, black market economy — and the latter, of course, tends not to pay taxes. This would represent a further erosion in the economy and the tax base. All in all, the scale of the U.S. economy would shrink by about 20 percent, comparable to what happened in the Great Depression. And that would somewhat defeat the purpose of the balanced budget. The reason to rein in the federal budget is to have assurance that the federal government will have the ability to pay back its debts. The financial metric people look at to assess the risk of a federal government default is the ratio of the national debt to the annual GDP. The rule of thumb is that a ratio around 1 (or 100 percent) may be safe, but a ratio around 1.25 (or 125 percent) is surely a problem. U.S. national debt is expected to pass GDP around 2012. That’s a problem. But a budget policy that cut GDP by 20 percent would mean that the ratio of national debt to GDP would jump from 100 percent to 125 percent, not because the debt got larger, but because the GDP got smaller. The problem with this is that as the debt to GDP ratio passes 125 percent, the interest payments that debt holders expect goes up sharply. For other countries in the last two years, interest rates have gone up by a factor of three. If spending one eighth of the hypothetical balanced federal budget on interest looked like a problem, it is even more of a problem when interest payments become three eighths of the budget. That would then force another round of budget cuts.

If this scenario sounds somewhat familiar, it is because it is a version of what Greece has been going through over the last two years, and countless other countries before it. It is the downward spiral of the austerity budget. If a balanced budget seems hard to come by in Washington, it is because policy makers are trying to avoid this downward spiral in the economy, while also avoiding raising taxes. Yet if the consequences of an abruptly balanced budget sound horrific, the two most obvious alternatives are not necessarily better. Putting the government in bankruptcy by running into the debt ceiling would have most of the same awful consequences, but more quickly, while continuing the current budgetary course might put off the same fate by only two or three years, and make the crash that much bigger when it finally did occur.

There are answers, of course, and the United States is hardly likely to simply fall into the depression that these three alternatives would seem to dictate. The answers will be obvious enough as soon as the body politic becomes uncomfortable enough to look for them. Or, the answers may be forced upon the country in the coming weeks, if the political process comes off the rails and the federal government falls into bankruptcy.

Wednesday, May 11, 2011

Rapid Pace of Change

You couldn’t necessarily tell that the world is in the middle of an epic series of disasters by watching the news. But if the news seems to be tuning out most of the more serious developments in the world, it is not an accident. The news media follows its viewers, and most viewers are ill-prepared to face the rapid pace of change that the current situation represents.

This is why the flood coverage is about color rather than substance, focusing on Graceland, which has remained above water, more than a nearby interstate highway that was closed for days because of high waters. It also explains why there has been an initial reaction of denial as flooding arrived in Louisiana and Manitoba.

It is up to those of us who are paying attention to navigate a way through the maze of unexpected events. For example, if the situation is just slightly worse than the experts are telling us, we could wake up Monday morning to an insolvent U.S. government, a flooded New Orleans, and major corporations disabled by a PowerPoint worm. If it is not that combination of events on that day, it will be another combination of events on another day. Most of the news audience would simply be shocked, which is the same kind of helplessness that has them avoiding the guts of the recent news. The relatively few who are able to assess and respond will make the biggest difference.

Tuesday, May 10, 2011

An Extra Million

The phase-out of Medicare, which is built into the latest federal budget actions, is bad news for people who are planning on retiring. It is far from certain that the insurance market will have any interest in filling the resulting health care coverage gap. At best, health insurance for retirees will cover routine medical care but won’t touch the extraordinary medical costs that people worry about. For an American planning a comfortable middle-class retirement, then, the price tag just jumped up from $3 million to $4 million — the extra million set aside to cover the large medical expenses that you hope you never have to face.

If people have to save more for retirement, there will be less money to spend now. This will tend to slow down the economy — an ill-timed effect from a Congress that insists it is trying to boost the economy. In general, though, you can’t give a national economy a boost by shifting uncertainty from the government to the already over-stressed consumer sector.

Monday, May 9, 2011

Flooding and Unemployment

The current North American flooding, especially affecting the eastern U.S-Canada border area and the Mississippi River valley, is putting more than a few commercial streets underwater. As a result, thousands of people are unable to work, with work places closed and inaccessible — perhaps 50,000 in Mississippi alone. The concern for the broader economy is not so much the number of people unemployed because of the flooding, but how long they are kept out of work. If water levels are as forecast, most of the affected workers could return to work in one or two weeks. If the water levels are slightly higher than forecast, cleaning up and drying out could take much longer. There could also be problems if there are new storms before the Mississippi River recedes, or if levees in Louisiana and Mississippi that have never been tested with this kind of water fail to work as expected. In any of the more unfavorable scenarios, the floods would have a noticeable impact on national unemployment rates.

Sunday, May 8, 2011

Hospital Layoffs and State of Denial Continue

Layoffs are continuing at U.S. hospitals as administrators are surprised by declines in patient numbers. Hospital layoffs in the first quarter were similar to the pace of the prior two years. You might think that the pace of layoffs would slow as demand for health care has been soft for more than five years, but administrators continue to plan for an increase in demand that shows no sign of materializing.

Layoffs are planned or underway this week at hospitals in Illinois, Maine, New Jersey, Massachusetts, and at least five counties in California.

Perversely, in 2008-2010, many hospitals needed layoffs because of the cost of unneeded expansions. There aren’t so many of those stories this year, as most expansion plans at hospitals have been scaled back or put on ice by now.

Saturday, May 7, 2011

Layoffs vs. Attrition

When you hear about a business reducing its number of employees, you may immediately think of layoffs. News stories sometimes make this mistake too, assuming when a company decides to cut back that layoffs must be on the way. But layoffs are just one of many ways an employer can employ fewer workers.

The fact is, if an employer does nothing, its staff will tend to shrink over time. Workers die, retire, or stop working because of illness or injury. An average employer in normal times can expect to lose more than 2 percent of workers each year from these effects alone. A larger number of workers leave to pursue other interests or more lucrative jobs elsewhere. This varies considerably depending on the company, but it is fair to say that in a normal job market, an employer has to make an effort to keep employee turnover below 20 percent.

These days, it is not so easy for workers to get jobs elsewhere, but an employer can still easily cut back by 7 percent in a year, or reduce staffing by half in less than 10 years, without having to fire anyone. And it can speed up this process if it wants to by making raises harder to get or by offering token payments and job search assistance to selected employees who are willing to leave on their own initiative.

Layoffs are needed when facilities close and when employers are taken by surprise by business events, but most of this year’s job cuts will be part of business as usual, occurring not as a consequence of business events, but at random times as a result of events that take place in the lives of the workers.

Friday, May 6, 2011

This Week in Bank Failures

In Europe this weekend, conditions are being reexamined for bailouts of Greece, Portugal, and Ireland.

In the United States, details came out about enforcement actions against banks for improper foreclosures. There was special emphasis this week on foreclosures against homes of military service members on active duty, where banks utterly ignored the special provisions that apply in those situations.

One Florida bank failed tonight: Coastal Bank, which had its two offices in Cocoa Beach and Merritt Island. The failed bank had $124 million in deposits. The successor is Premier American Bank.

Thursday, May 5, 2011

Do Debit Card Transaction Fee Rules Apply to PayPal?

Fast Money brings up an interesting point tonight. PayPal works just like a debit card — it takes money from your checking account and transfers it to a merchant’s account. So is PayPal subject to the new rules that limit transaction fees for debit card transactions?

CNBC’s Fast Money: Ebay to be Impacted By Durbin Amendment?

No one seems to know yet. PayPal, in a letter to the Fed, says it’s a merchant, but it’s referring specifically to the transactions for which you pay PayPal using a credit or debit card. If you have used PayPal, though, I am sure you have noticed the service urging you to pay from a checking account (or using your PayPal balance, if you have one), and most PayPal transactions are done this way. For these transactions at least, PayPal cannot be considered a merchant.

For the purposes of speculation, suppose that the new transaction rules do apply to PayPal. PayPal’s revenue would decline sharply when the new rules go into effect — by about $1 to $2 per transaction. At the same time, consumers’ online spending power would go up by the same amount — imagine how much more you could buy if it cost $1 to $2 less to buy and sell things online using PayPal.

Wednesday, May 4, 2011

“Essential Leadership Qualities” and Shamanic Skills

David Morelli of Everything Is Energy is launching a leadership training program, Enwaken, based on a list of four “essential leadership qualities.” There are introductory videos describing each of the leadership qualities, which can be seen at the links below. Among the various kinds of leaders, Morelli seems to specifically be thinking of people who take on the challenges of creating change in people’s lives or in the world. They won’t succeed, he says, without these qualities:

  1. Presence. For you to be a leader, people have to notice you.
  2. “Leaders create,” designing a course of events rather than just selecting among the alternatives that are offered.
  3. “Leaders make their vision bigger than the obstacles that are in the way of their vision.”
  4. The ability to project energy into work, a space, a group, or a project.

When I first saw the list, it struck me that the four qualities Morelli picked are all traditional shamanic techniques, related to shapeshifting, will, seeing, and attention. It turned out I wasn’t just imagining this shamanic connection. In a subsequent discussion, Morelli specifically describes the shamanic technique of “holding a container.” In its most familiar form, this means maintaining a comfortable energy in a room where people are working together.

Traditional leadership training from the second half of the 20th century is based on a combination of World War II military culture and sales culture. Using shamanic culture as a starting point instead might seem like an abrupt shift, but it probably makes sense at this point. The vocabulary of shamanism is more familiar and accessible to most of us, by now, than the points of reference provided by sales jobs and a war that happened a lifetime ago. To put it another way, more of tomorrow’s leaders have seen a Harry Potter movie than have led a battalion into Germany.

Tuesday, May 3, 2011

Al-Qaeda Disappears Into Its Own Chaos Strategy

Looking back, I realize al-Qaeda made a tremendous effort to destabilize Pakistan, but only a token effort to overthrow it. It wouldn’t want the burden of running a poor country, but it didn’t want the burden of effective law and order cramping its profits either. Disorder and instability are the hallmarks of a country where al-Qaeda has set up shop — it is as if Osama bin Laden read Thriving on Chaos and said, “You know, if you pick a poor enough country, you can employ this strategy on a national scale.” Pakistan was perhaps a little too resourceful and proud for al-Qaeda’s chaos strategy to work there.

One problem with seeding chaos as a strategy is that you can never tell where chaos will end up once it gets started. It is al-Qaeda that is in chaos now, with newfound logistical and administrative problems undermining its revenue just as newly seized documents reveal operational secrets.

The analysts who suggest that al-Qaeda will carry on as if nothing has happened are not following the money. They are treating al-Qaeda as if it were a purely political organization. That’s a form in which it never really existed, though its more idealistic adherents might have imagined it that way. Bin Laden was the financial mastermind behind al-Qaeda, the chairman of the board who saw that few strategic mistakes were made in its criminal enterprises. He was found in part by following couriers. The mere fact that couriers were needed on a regular basis shows that al-Qaeda could not function without bin Laden’s strategic direction. Without him, then, mistakes and financial losses will occur on a regular basis. Deprived of its criminal profits, al-Qaeda will be hard pressed to finance the murder of thousands of Muslims this year — instead, it will be al-Qaeda that is bleeding.

Monday, May 2, 2011

With Osama bin Laden’s Removal, a Less Corrupt Pakistan

The troubles in Pakistan make more sense in light of this morning’s news. Al-Qaeda leader Osama bin Laden had been holed up at the edge of an elite military facility in a district capital there. The kind of severe political problems seen in Pakistan, which have included the rapid assassination of active political figures, can rarely occur without official corruption, and it is hard to imagine a more corrupting figure than a fugitive billionaire-investor drug dealer cult leader on a mission to overthrow civilization. The location of bin Laden’s fortified mansion makes it clear that he was working with factions within the Pakistani military.

The removal of bin Laden from Pakistan can only result in an instant reduction in corruption in that country. To avoid investigation, bin Laden’s collaborators in the military and administration will now be obliged to act as if they had no knowledge of the scheme to destabilize and overthrow their country, which will mean they can no longer meet to coordinate bombings, assassinations, drug running, and other criminal activities. Al-Qaeda will attempt to carry on in Pakistan, but like any criminal organization that faces a serious risk of arrest for the first time, it will find that it is far more limited in what it can do. In addition, many al-Qaeda members do not agree with bin Laden’s vision of destroying civilization, so al-Qaeda will either shrink or be further weakened by internal dissension.

Sunday, May 1, 2011

Weekend Video Viewing

Apparently it’s music video weekend on The Shamanic Economist. Here is another unlikely new music video — this one actually created by economists to discuss some of the unresolved problems in economic policy. It is surely the best economics music video ever created. If you’re a fan of economics or hip-hop, you have to see this:

Fight of the Century: Keynes vs. Hayek Round Two

The discussion of economic matters is important in itself, and besides that, the production values of the video are a startling step forward from the traditional idea of academic audiovisual materials — like yesterday’s video, another example of broader access to the advanced movie production techniques that a decade ago belonged to a short list of well-funded media businesses.