As I wrote in the last post, I think Trump is a travesty. He represents so much of what is wrong in America, and he does so in a way that almost seems like it should be a joke - that he is some sort of caricature of a Fox News/Rush Limbaugh politician. I feel pretty confident in saying that it is not a joke, he is exactly as awful as he seems. But McArdle makes a really good point in the article - for as awful as Trump is, he knows how to spin the right story. Before even taking office, he has been "making deals" and putting on a show. The self dealing with foreign governments and Trump properties are disgusting, but I think the Carrier deal is probably even worse. If Trump continues to enrich himself, his businesses, and his family through the power of the presidency, he will probably end up impeached, perhaps sued, and maybe even imprisoned. The Carrier deal is just as wrong, but will likely have much farther reaching and longer lasting effects. And the worst part is that Trump's fans love it.
McArdle describes this very problem. Why do so many Americans support this type of protectionism and interventionism? From the article:
Trump’s tiny deal with Carrier was far more politically effective than all the Democratic railing about traitorous companies moving their headquarters abroad. After all that railing, what Democrats were proposing to do in the end was just to create even more impersonal laws, some incomprehensible amendment to an already opaque tax code. What Trump gave them was direct action -- action that said “I’m on your side, and I’m not going to sell you some nonsense about abstract economic principles; I’m going to go out there and save your jobs right now.”There is an old saying in writing - show, don't tell. Democrats told voters they would fight to keep companies in America, Trump showed them he would. Unfortunately, both of these are bad positions to take, though you wouldn't know it considering the rhetoric throughout both campaigns. But both of those policies sound more appealing than talking about market forces and long run increases in total welfare. Basically, sound policy has a messaging problem.
These well-worn arguments, however true, have the unsavory flavor that Anatole France aptly summed up in an epigram: “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”
This is the nature of principles-based systems. They are cold and impersonal, and ostensibly neutral machinery often produces results that look grossly unfair by any common-sense moral standard: rich people getting better treatment from the legal system than poor ones, bankers who gambled on mortgage bonds getting a safer retirement than truck drivers who gambled on an overpriced house. If the “fairness” of following principle departs too widely from the “fairness” of following our intuitions, then people are going to start asking what’s so great about those principles.Who is going to fight for principles that seem to disproportionately benefit wealthy over poor? McArdle brings up the case of banking executives such as Dick Fuld of Lehman Brothers and how well they all seem to have fared after the 2008 crash. While many of those executives have lost substantial amounts of money, power, and prestige, they are still wealthier than 90%+ of Americans. That isn't a satisfying consequence for people who came out of the financial crisis without a job, home, or any savings. But, as McArdle points out, there have been plenty of eager prosecutors that would happily make a name for themselves by throwing the Fulds of the world in jail. The problem is that there isn't enough compelling evidence that a crime was actually committed.
For people who work in finance, this probably isn't that surprising. Financial instruments can be very complicated - there is a reason so many math and physics PhDs work for investment firms. But to compare it to something more tangible, suppose you have a company that makes cars. Well, what if you wanted to make a self charging electric car. This new car uses a new charging system and battery that can go 1,000 miles without stopping. It is a brand new technology, but your engineers assure you that it is safe. They have run all kinds of tests in the lab and based on the test results, the car would only fail if subjected to temperatures of over 120 degrees for more than six hours. Based on simulations, the probability of that happening is 0.01%, and hasn't happened in the US since 1974. So you start selling these new cars and they are immensely popular. Several years later, however, you see on the news that a heat wave is rolling over the southwest with temperatures well above 120 degrees in several large cities. What those engineers didn't think about was that when that extremely unlikely heat wave does come, it will impact a lot more than just a few cars. Within a week, you have a class action lawsuit saying that your cars have been linked to thousands of fires and $500 million in damages and your company goes bankrupt.
This is (mostly) what happened in the financial crisis. Banks and investment firms had developed a new product: credit default swaps ("CDS"). A CDS is basically like insurance on a loan. For example, let's say I owe the bank $1 million. My bank might rightly see that as a lot of risk concentrated on a single person. So they get an insurance company to write a policy that basically says the insurance company will pay off any debt I am unable to pay in case I declare bankruptcy. The bank pays the insurance company a premium and feels all warm and fuzzy because they don't have to worry if I go belly up. The problem in the financial crisis, is that insurance companies forgot to account for how risks relate to one another. They wrote all these insurance policies (CDSs) thinking that the possibility of each policy having to pay out as unrelated. They ran some simulations and found that it might be something like a 0.1% chance that they would get a claim and priced the insurance accordingly. The problem is that these entities don't exist in a vacuum. As it turns out, the conditions that caused one company to fail caused a lot of companies to fail, and suddenly companies like AIG are on the hook for billions of dollars.
In the case of the self charging car, I don't think people would be parading down Pennsylvania Avenue asking for the car engineers' and CEO's head on a platter. But they did come out with their pitchforks and torches ready for AIG, Lehman Brothers, and Bear Stearns. There were even calls for Obama to throw someone in prison even just as a symbolic gesture. Why? People wanted to see action. Explaining the complexities of derivatives and financial contracts wasn't going to pacify anybody. Unfortunately, McArdle doesn't have a great answer for this problem either. As the world becomes more complex, this issue is likely to get worse, not better.
No comments:
Post a Comment