Stockman/Orszag Debate

Hopefully I can finish Stockman's book, The Great Deformation, soon, but until then here is a debate between Stockman and Orszag. 

Is The US Government a Giant Ponzi Scheme?

Continuing with my pre review of David Stockman's book, here is an interview with Stockman. 

How long can the current situation continue? I do not know, but my guess is 5 to 7 years. It could be longer, or it might be next Tuesday. There are some hopeful signs, so I am not quite as pessimistic as Stockman, but as Herb Stein said in the 70's, "If something can't continue, it won't." 

The Great Unknown is the answer to this question. "What will happen when investors quit buying US Bonds?" 

To use precise, technical language, we are headed toward a giant oops.

Stockman on Stockman

I thought the best way to begin to talk about Stockman's book The Great Deformation was to let Stockman explain it himself. So I decided to begin with this book signing speech. 

I must admit that one lady annoyed me in the Question and Answer part as she did not understand that this is not a Republican problem, it is not a Democratic problem, it is bipartisan in origin. 

Another place that you can go to get a feel for what Stockman is saying is his New York Times article, “Sundown in America.” That is a humorous title playing on Reagan's reelection campaign slogan, “Morning in America.” If you decide not to buy Stockman's book, and at 700+ pages I certainly understand, I do recommend you read this article. 

Apocalyptic Bias

We humans tend to think that things will continue as they have in the recent past, while also at the same time worry about an unforeseen catastrophe. This worry is what I am calling the Apocalyptic Bias. Imagine a glass of water. The traditional cliché is that the optimist will say it is half full while the pessimist will say it is half empty. Someone infected with the Apocalyptic Bias will say, "The water is fluoridated, we are all gonna die." It is just the way they look at the world. I have concluded that they can't help it. (This is not to say that water should be fluoridated. The US is the only country that adds this toxic poison to the water, directly impacting our precious bodily fluids.) 

Our precious economic bodily fluids are in danger! At least that is the accusation hurled at David Stockman's new book—The Great Deformation.  Both left and right are not happy with him. Paul Krugman called him a cranky old man. Well, he is old. He is cranky. He is a man. But is he a correct cranky old man? Here is a quote from his introduction to the book:

The real reason for the current crisis of debt and financial disorder is that public policy had veered into the ditch, permitting an unprecedented aggrandizement of the state and its central banking branch. In the process, the vital nerve center of capitalism, its money and capital markets, had been perverted and deformed. Wall Street has become a vast casino where leveraged speculation and rent seeking have displaced its vital function of price discovery and capital allocation.

If you have been reading me here, this is pretty much what I have been saying. So is David Stockman infected with the Apocalyptic bias? Maybe. But then again I may be as well. 

Let me give you an example of the Apocalyptic Bias from the Bible. Matthew 24 from the KJV says this:

⁴ And Jesus answered and said unto them, Take heed that no man deceive you.

⁵ For many shall come in my name, saying, I am Christ; and shall deceive many.

⁶ And ye shall hear of wars and rumours of wars: see that ye be not troubled: for all these things must come to pass, but the end is not yet.

⁷ For nation shall rise against nation, and kingdom against kingdom: and there shall be famines, and pestilences, and earthquakes, in divers places.

⁸ All these are the beginning of sorrows.

I do not know how many times I have heard verse 7 preached that the current world affairs are proof that the end times are near. This is the Apocalyptic Bias in action for Matthew 24 is actually saying the opposite. Here is this same passage from the Message. 

^4-8 Jesus said, “Watch out for doomsday deceivers. Many leaders are going to show up with forged identities, claiming, ‘I am Christ, the Messiah.’ They will deceive a lot of people. When reports come in of wars and rumored wars, keep your head and don’t panic. This is routine history; this is no sign of the end. Nation will fight nation and ruler fight ruler, over and over. Famines and earthquakes will occur in various places. This is nothing compared to what is coming.

Someone with an Apocalyptic Bias is going to go away from a reading of Matthew 24 with a different understanding than someone who is not infected by this bias. 

In the same way someone with the Apocalyptic Bias will see a lot of doom on the horizon. The joke about such people is that they have predicted 10 of the last 5 recessions. 

Is Stockman an example of this? I will give my review later but I will share some interviews Stockman has given recently over the last few weeks so you can decide for yourself. In the meantime here is a Monty Python version of the Apocalyptic Bias.  

Recency Bias

One reason that people cannot see the very negative effects of our current economy is the Recency Effect or Bias, although in this case it is more of a fallacy. Free Dictionary defines it this way

the phenomenon that when people are asked to recall in any order the items on a list, those that come at the end of the list are more likely to be recalled than the others

So when the Dow Jones reaches an all-time high this is given more recall, and also given more importance, than the recent difficulties. It is also forgotten—even if remembered, it is forgotten in a de facto way—that it took 12 years to get this high. And you only broke even, in real terms, forgetting that there was inflation in the last ten years. Of course there were also dividends to help balance inflation, but in general, assuming that you believe the stated inflation rate, if one had invested 12 years ago in the stock market, you broke even over ten years. 

Yet the current stock price is being hyped like it was the Second Coming. This is not to say that those that bought stocks after the crash of 2008 did badly, they did not. But most people cannot market time their purchases. 

Recency bias looks at the near present and expects it to continue. Thus the 2000 Tech Bubble is not foreseen because recently tech stocks did so well. The 2007 real estate bubble is not seen because recently real estate had done well up to the time it didn't. Nor will whatever bubble we are in now be easily seen. Looking backward is like the little sign on your rear view mirror, "objects may appear closer than they are." We think we see clearly but we do not. 

This principle can be applied in many ways. 

Economically, the recent past is not always a good indicator of the future. The fact that things appear to be improving does not mean that this will continue. Personally I think it will for the near term, but there is really no way to know. 

The Bible even talks about the recency bias. 2 Peter 3 tells us. 

^3-4 First off, you need to know that in the last days, mockers are going to have a heyday. Reducing everything to the level of their puny feelings, they’ll mock, “So what’s happened to the promise of his Coming? Our ancestors are dead and buried, and everything’s going on just as it has from the first day of creation. Nothing’s changed.”

Yes, the good times will continue, no need to worry. Stocks will continue to rise. Unemployment will continue to decline. No need to worry. But as the old Henny Youngman joke went, "The economy is so bad that men are having to leave their girlfriends, and go back to their wives." No need to worry. 

An economic Judgment Day is coming. 

A political Judgment Day for America is coming. 

We still have time to get our own personal houses in order. Do not waste whatever time remains. On a religious level God is merciful, giving us time to change.  

^8-9 Don’t overlook the obvious here, friends. With God, one day is as good as a thousand years, a thousand years as a day. God isn’t late with his promise as some measure lateness. He is restraining himself on account of you, holding back the End because he doesn’t want anyone lost. He’s giving everyone space and time to change.

¹⁰ But when the Day of God’s Judgment does come, it will be unannounced, like a thief. The sky will collapse with a thunderous bang, everything disintegrating in a huge conflagration, earth and all its works exposed to the scrutiny of Judgment.

In the metaphor I am drawing here, we still have time to repent, and spend no more. 

There is another bias that we need to be weary of. I call it the Apocalyptic Bias, and I will talk about that tomorrow.