MaCurdy found that less than 40% of wage increases [from a minimum wage hike] went to people earning less than twice the poverty line, and among that group, about third of them are trying to raise a family on the minimum wage. In other words, something like 1 in 8 people who do receive the minimum wage (and ignoring any potential adverse effects of it), are actually in what you might call the “targeted” group. 7 out of 8 people who receive minimum wage increases fall outside the targeted group.
Archive for the ‘Economics’ Category.
We discuss a lot of economic issues on this site, and economics has become pretty much a staple of political discussion. If concepts such as price elasticity, compensating differentials, or tax wedges leave you scratching your head, this is a great (free) online video series teaching the fundamentals of microeconomics. Complete this course and you will be way ahead of 99% of politicians and journalists. Of course, the newspaper headlines will start to drive you even crazier than they likely do today, with their total ignorance of basic economics, but there is a price to everything.
Last week, I was giving my usual introduction speech to some of my front-line employees. One of the things I said to them is that this was a very low-margin business, which meant that wages were not very high but we try hard to compensate by making the job fun (since all of our employees essentially get to live in campgrounds). It turns out that Cowen and Tabarrok actually have a lecture on this very topic in chapter 13 of their series.
There is a debate growing in California about whether crops like almonds (that use a lot of water) should be allowed. But all that authoritarian command and control debate about "allowing" certain activities is unnecessary. Just raise prices to some sort of supply and demand matching level (it is a bit awkward to do this because there is not a true free market in water supply but any attempts have got to be better than the current absurdly low prices). Then the almond growers themselves, and the rice growers, and the golf courses, and everyone else will decide if they can still operate in CA or not. No politicians' commands necessary.
Raising prices also creates a secondary benefit over government-imposed rationing -- it provides incentives for people to seek out and invest in new sources of supply. Desalinization, any one?
This quote from a hotel owner in Venezuela that now asks its patrons to bring their own toilet paper caught my eye:
Camacho says she refuses to buy toilet paper from the black market on principle.
“In the black market you have to pay 110 bolivares [$0.50] for a roll of toilet paper that usually costs 17 bolivares [$ 0.08] in the supermarket,” Camacho told Fusion. “We don’t want to participate in the corruption of the black market, and I don’t have four hours a day to line up for toilet paper” at a supermarket….
I see this all the time, the notion there is somehow a "correct" price that no one is willing to charge. There is nothing real about the 17 bolivares price. It is a fiction. There are only two real prices in the market -- 110 bolivares PLUS any risk/penalty from breaking the law or 17 bolivares PLUS 4 hours of your personal time. My sense is that if the legal risk of buying on the black market is low, and you knew the average order size and the value people placed on their own time, you would find these two prices converging. But in any case, it is dumb to continue to insist that 17 bolivares is the "right" price.
The other day when I expressed my (temporary) ennui about blogging, I said I was tired of posting about things like "why the minimum wage is a terrible anti-poverty program" and getting back one line comments such as "you hate poor people." In looking back at that post, I realize I actually haven't put in one place my reasons why minimum wage increases are a bad way to fight poverty. So here they are:
1. Only a tiny minority of workers make the minimum wage. Something like 5% of hourly workers, and 3% of all workers, are paid minimum wage or less. This number is not quite right for two reasons. One, many states have higher minimum wages than the Federal rate and this analysis by the BLS is done at the Federal rate only. Thus this understates the number of minimum wage workers in those higher minimum wage states. But, these numbers also exclude tips, which about half these workers receive. If one reasonably includes tip income, these numbers are overstated. On balance, if one looks carefully state by state and excludes workers who get tips, the percentage of all workers who make the minimum wage holds around 3%.
Further, about half (53% by the source above) of minimum wage earners are 24 years old and under. These are not the folks activists generally picture when they say "A family cannot live on that wage..." Thus only about 1.5% of all workers are people 25 and older making minimum wage. The target for this "anti-poverty" program is thus truly tiny.
2. Most minimum wage earners are not poor. The vast majority of minimum wage jobs are held as second jobs or held by second earners in a household or by the kids of affluent households (source)
Most of the data I have seen points to about a third of minimum wage jobs held by earners in families below the poverty line. So 2/3 of the increased wages from a minimum wage increase go to non-poor households (it is actually probably more than this given #4 below).
3. Most people in poverty don't make the minimum wage. In fact, the typically hourly income of the poor appears to be around $14 an hour. The problem is not the hourly rate, the problem is the availability of work. The poor are poor because they don't get enough job hours.
4. Minimum wage increases kill unskilled labor hours. You can certainly find Leftish studies that point to niche situations where a minimum wage increase maybe kindof didn't hurt employment. But in general I think most people understand that when you raise the price of something, people will use less of it. In this case, businesses will find ways to hire less unskilled labor as the price of such labor rises with the minimum wage. Even if businesses hire the same number of people after a minimum wage increase, they likely will demand and get more skilled and experienced employees for this money, which likely will leave the poor out in the cold just as much as if the job were eliminated.
If one replaces the words "minimum wage" with "starting wage for new unskilled workers", the problem becomes more obvious.
5. Minimum wage laws ignore substantial non-monetary benefits of entry-level jobs. Many young workers or poor workers with a spotty work record need to build a reliable work history to get better work in the future, just as a young couple must build their credit history with small purchases before they can take out a mortgage. Further, many folks without much experience in the job market are missing critical skills -- by these I am not talking about sophisticated things like CNC machine tool programming. I am referring to prosaic skills you likely take for granted (check your privilege!) such as showing up reliably each day for work, overcoming the typical frictions of working with diverse teammates, and working to achieve management-set goals via a defined process. I wrote a lot more about these here. By defining acceptable compensation of jobs only as dollars of pay rather than to include softer skills and such, these wages disproportionately discriminate against unskilled and inexperienced workers.
The previous chart on beer availability reminds me of an issue I have been thinking about for a while -- that we do no know how to measure prosperity.
GDP growth and unemployment reduction are terrible measures. Just to give one example, these measures looked fabulous in WWII. But the average person living in the US had access to almost nothing -- they couldn't buy anything under rationing, they couldn't travel for leisure, etc. GDP looked great because we were building stuff and then blowing it up, the economic equivilent of digging a hole and filling it in (but worse, because people were dying). And unemployment looked great because we had drafted everyone and sent them off to get shot.
But median income and net worth numbers fail to measure prosperity as well. The reason was described in this post here way back in 2007.
The home on the left was owned by Mark Hopkins, railroad millionaire and one of the most powerful men of his age in California. Hopkins had a mansion with zillions of rooms and servants to cook and clean for him, but he never saw a movie, never listened to music except when it was live, never crossed the country in less than a week. And while he could afford numerous servants around the house, Hopkins (like his business associates) tended to work 6 and 7 day weeks of 70 hours or more, in part due to the total lack of business productivity tools (telephone, computer, air travel, etc.) we take for granted. Hopkins likely never read after dark by any light other than a flame.
If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die. All the rage today is to moan about people's access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis. Hopkins died at 64, an old man in an era where the average life span was in the early forties. He saw at least one of his children die young, as most others of his age did. In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin's business partner and neighbor. The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.
How do we take into account that even if a person has the same income as someone in 1952, they are effectively wealthier in many ways due to access to medical procedures, travel, entertainment, electronic devices, etc?
Somehow we need to measure consumer capability -- not just how much raw money one has but what can one do with the money? What is the horizon of possibilities? Deirdre McCloskey tends to eschew the term capitalism in favor of "market-tested innovation." I think that is a pretty powerful description of our system. But if it is, we really are only measuring the impact of productivity and cost-reduction innovations. How do we measure the wealth impact of consumer-empowerment innovations like iPhones? Essentially, we don't. Which, by the way, may be one reason our current crappy metrics say we have growing income inequality. With our current metrics, Steve Jobs' increase in wealth is noted in the metrics, but the metrics don't show the rest of us getting any wealthier by the fact that we can now have iPhones (or the myriad of competitors the iPhone spawned). The consumer surplus from iPhones undoubtedly dwarfs the money Jobs made, but it doesn't show up in any wealth calculations.
A few years ago I told a youth group that there were still many things left to discover in the mundane world -- by this I meant the everyday world we encounter and not just at the limits of the universe or at the scale of quarks. The example I gave at the time is that there is a lot of room for better techniques to tease out causality in complex systems -- e.g. how much did the stimulus really affect the economy or how much does CO2 really affect temperatures. I would add this question of measuring prosperity as a second item in this category.
Dynamic scoring of budget proposals has been on the Republican wish list for decades. They have always been frustrated that tax cut proposals look like such budget losers with static scoring. In their supply-side bones, Republicans know that tax cuts will stimulate economic activity and thus increase future tax revenues. Taking this second order effect into account is what they mean by dynamic scoring (see: Laffer Curve).
I have some sympathy for this argument, but in making it Republicans are falling for the "this will work great when our guys are in charge" fallacy (I need to find a name for that). Democrats fall into this all the time, expanding government power only to be shocked at what their political enemies do with this power once in charge.
Because it is pretty clear what dynamic scoring will mean in a Democratic Congress. Remember that stimulus bill? Democrats all thought that expanded the economy, so its costs would, by their Keynesian assumptions, appear much lower under dynamic scoring. The Left thinks the auto bailout was stimulative. They even think that Obamacare was stimulative. Do you really want some BS Keynesian fudge factor obscuring the true cost of such proposals in the future?
Related: Greg Mankiw discusses why, if I read him right, dynamic scoring is impossible to do correctly
I followed a link the other day to this academic paper purporting to show that the bailout of GM and Chrysler was a success. I was flabbergasted to see that the authors are Austan D. Goolsbee and Alan B. Krueger. WTF? These folks were part of the Obama Administration. This is their own policy they are passing historical judgement on. This is roughly equivalent to a economics journal seeking a paper on the success or failure of Obamacare and having Valerie Jarrett write it. How does this kind of conflict of interest pass any kind of muster?
I only skimmed the paper. I know these are two smart guys but it seems to include exactly the sort of facile analysis you would expect from a political hack, not two smart economists. I can't believe these guys would have accepted many of the assumptions they make here had they not been directly involved. Just to pick two things at random:
- They seem to stick with the assumption that millions of jobs would have simply gone *poof* had the government not intervened. Yes, this happened at Solyndra, but in most cases industries operate almost seamlessly in bankruptcy. The odds are, for example, that you have flown on an airline in Chapter 11 and didn't even know it. They make a specific argument that somehow it would be bad to have both in bankruptcy at the same time, but I can remember several times when there were multiple major airlines in bankruptcy. In fact, if both went bankrupt at the same time, one could argue it would lessen their market share loss since a major competitor was in the same boat. To the extent that the companies would have continued to operate under Chapter 11, which is 99.9% likely, then all the government did was insert itself into the bankruptcy process to overrule laws about who gets what in a bankruptcy to redirect spoils to their favored constituencies
- Yes, GM and Chrysler are doing OK now, but they usually do OK at the top of a business cycle. To my eye though, nothing fundamentally changed about how they are managed and operate. The same structural and cultural problems that existed before exist today. The same under-utilization of talented workers and valuable assets that existed before exists today. No real reckoning occurred -- in fact the bailout looked to me at the time as an exercise to use taxpayer money to avoid a true housecleaning. These companies have done OK, but what would they have done with a more thorough housecleaning?
Deirdre McCloskey wrote a truly massive review, and in some senses a rebuttal, of Thomas Piketty's Capital in the Twenty-First Century
I am not really going to comment on the details of her paper -- many prominent economists have already done so. I will say that I learned a lot from it not just about Piketty's proposition but about economic history in general. It is an interesting read.
No, what I wanted to comment on -- in this era when rebuttals usually take the form of impugning the other person's funding, integrity, honesty, and motivations rather than their actual arguments -- is that she begins her article with this:
It has been a long time (how does “never” work for you?) since a technical treatise on economics has had such a market. An economist can only applaud. And an economic historian can only wax ecstatic. Piketty’s great splash will undoubtedly bring many young economically interested scholars to devote their lives to the study of the past.....
It is an honest and massively researched book. Nothing I shall say—and I shall say some hard things, because they are true and important—is meant to impugn Piketty’s integrity or his scientific effort. The book is the fruit of a big collaborative effort of the Paris School of Economics, which he founded, associated with some of the brightest lights in the techno-left of French economics. Hélas, I will show that Piketty is gravely mistaken in his science and in his social ethics. But so are many economists and calculators, some of them my dearest friends.
Don't have an opinion on what this means, but it is interesting. Via Zero Hedge
At first, the link I followed told me this story was from CBS. I found it astonishing that a major news network would challenge a previously agreed on Obama Administration narrative, and sure enough I found that this was not actually from the people at CBS who are paid to write the news (they are too busy reprinting White House talking points) and is actually from one of their financial bloggers.
Never-the-less, it is a great post that gets at why every serious academic study tends to debunk the 77% gender pay gap myth. All of it is good but the consistently most powerful point that I tend to use if I am only given time in an argument to make one point is this one:
Despite all of the above, unmarried women who've never had a child actually earn more than unmarried men, according to Nemko and data compiled from the Census Bureau.
Women business owners make less than half of what male business owners make, which, since they have no boss, means it's independent of discrimination. The reason for the disparity, according to a Rochester Institute of Technology study, is that money is the primary motivator for 76% of men versus only 29% of women. Women place a higher premium on shorter work weeks, proximity to home, fulfillment, autonomy, and safety, according to Nemko.
It's hard to argue with Nemko's position which, simply put, is this: When women make the same career choices as men, they earn the same amount as men.
One would think that this quote from Obama's own Department of Labor would be enough to kill this meme:
"This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers."
We generally use startup activity as a proxy for positive innovation and future increases in productivity and consumer value. But it is only a proxy - based on the theory that in a free economy new startups generally add new value or die. Startups per se are not inherently positive, especially when all they are doing is fixing the inefficiencies and mandates imposed by government regulation
I wrote about a new study suggesting that new federal regulation doesn't inhibit the creation of new startup companies in an industry. In fact, it might actually stimulate the creation of startups. This seems counterintuitive, but a reader with some experience in the education and health care sectors—which were influenced by NCLB and Obamacare, respectively—proposes an explanation for this:
Healthcare startups have absolutely exploded post-ACA....This was pretty well anticipated by venture capital; a bunch of Sand Hill firms started putting together ad-hoc health IT teams shortly after the ACA was passed, on the basic logic that anything that changed an industry as much as the ACA did would necessarily create a lot of startup opportunities.
Drum says, well this may be good or may be bad. Look, it HAS to be bad. All this investment and activity is going into trying to get back to even from productivity losses imposed by the government, or is being spent addressing government mandates for new services that the market did not want or value. This is a diversion of resources from new value-creation to fixing things, and as such is just the broken windows fallacy re-written in a new form.
The language he is using, of shaking things up, is a bit like that of chemistry. He seems to imagine that markets can reach and get stuck in local maxima, so that government action that shakes the system out of these maxima (like annealing in a metal) is positive in that it allows the system to progress to a better state over time even if the government's action initially makes things worse. I know of absolutely no evidence for this being true, and my strong suspicion given how many industries the government has trashed is that this is rare or non-existent. And impossible to spot, even if it did exist. Not to mention the fact it is a total joke to talk of health care as if it was some pristine untouched-by-government industry before Obamacare.
From the business owners I’ve talked to, it seems clear that companies are responding to rising labor costs by embracing automation faster than ever. That’s eliminating thousands of low-paying, unskilled, entry level positions. What will that mean for those people trying to get started in the workforce? My job as an usher was the first rung on a long ladder of work that lead me to where I am today. But what if that rung wasn’t there? If the minimum wage in 1979 had been suddenly raised from $2.90 to $10 an hour, thousands of people would have applied for the same job. What chance would I have had, being seventeen years old with pimples and a big adams apple?
A Unified Theory of Poor Risk Management: What Climate Change Hysteria, the Anti-GMO Movement, and the Anti-Vaccination Movement Have in Common
After debating people online for years on issues from catastrophic man-made climate change to genetically-modified crops to common chemical hazards (e.g. BPA) to vaccination, I wanted to offer a couple quick thoughts on the common mistakes I see in evaluating risks.
1. Poor Understanding of Risk, and of Studies that Evaluate Risk
First, people are really bad at thinking about incremental risk above and beyond the background risk (e.g. not looking at "what is my risk of cancer" but "what is my incremental added risk from being exposed to X"). Frequently those incremental risks are tiny and hard to pick out of the background risk at any level of confidence. They also tend to be small compared to everyday risks on which people seldom focus. You have a far higher - almost two orders of magnitude - risk in the US of drowning in your own bathtub than you have in being subject to terrorism, but which do we obsess over?
Further, there are a lot of folks who seem all-to-ready to shoot off in a panic over any one scary study in the media. And the media loves this, because it drives the meter on their earnings, so they bend over backwards to look for studies with scary results and then make them sound even scarier. "Tater-tots Increase Risk of Ebola!" But in reality, most of these scary studies never get replicated and turn out to be mistaken. Why does this happen?
The problem is that every natural process is subject to random variation. Even without changing the conditions of an experiment, there is going to be random variation in measurements. For example, one population of white mice might have 6 cancers, but the next might have 12 and the next might have zero, all from natural variation. So the challenge of most experiments is to determine whether the thing one is testing (e.g. exposure to a particular substance) is actually changing the measurements in a population, or whether that change is simply the result of random variation. That is what the 95% confidence interval (that Naomi Oreskes wants to get rid of) really means. It means there is only a 5% chance that the results measured were due to natural variation.
This is a useful test, but I hope you can see how it can fail. Something like 5% of the time that one is measuring two things that actually are uncorrelated, the test is going to give you a false positive. Let's say in a year that the world does 1000 studies to test links that don't actually exist. Just from natural variation, 5% of these studies will still seem to show a link at the 95% confidence level. We will have 50 studies that year broadcasting false links. The media will proceed to scare the crap out of you over these 50 things.
I have never seen this explained better than in this XKCD cartoon (click to enlarge):
All of this is just exacerbated when there is fraud involved, an unfortunate but not unknown occurrence when reputations and large academic grants are on the line. This is why replication of the experiment is important. Do the study a second time, and all but 2-3 of these 50 "false positive" studies will fail to replicate the original results. Do it three times, and all will likely fail to replicate. This, for example, is exactly what happened with the vaccine-autism link -- it came out in one study with a really small population and some evidence of fraud, and was never replicated.
2. The Precautionary Principle vs. the Unseen, with a Dollop of Privilege Thrown In
When pressed to the wall too hard about the size and quality of the risk assessment, most folks subject to these panics will fall back on the "precautionary principle". I am not a big fan of the precautionary principle, so I will let Wikipedia define it so I don't create a straw man:
The precautionary principle or precautionary approach to risk management states that if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking an action.
I will observe that as written, this principle is inherently anti-progress. The proposition requires that folks who want to introduce new innovations must prove a negative, and it is very hard to prove a negative -- how do I prove there are no invisible aliens in my closet who may come out and eat me someday, and how can I possibly get a scientific consensus to this fact? As a result, by merely expressing that one "suspects" a risk (note there is no need listed for proof or justification of this suspicion), any advance may be stopped cold. Had we followed such a principle consistently, we would still all be subsistence farmers, vassals to our feudal lord.
One other quick note before I proceed, it turns out that proponents of the precautionary principle are very selective as to where they apply the principle. They feel like it absolutely must be applied to fossil fuel burning, or BPA use, or GMO's. But precautionary principle supporters never apply it in turn to, say, major new government programs and regulations and economic interventions, despite many historically justified concerns about the risks of these programs.
But neither of these is necessarily the biggest problem with the precautionary principle. The real problem is that it focuses on only one side of the equation -- it says that risks alone justify stopping any action or policy without any reference at all to benefits of that policy or opportunity costs of its avoidance. A way of restating the precautionary principle is, "when faced with risks and benefits of a certain proposal, look only at the risks."
Since the precautionary principle really hit the mainstream with the climate change debate, I will use that as an example. Contrary to media appellations of being a "denier," most science-based climate skeptics like myself accept that man is adding to greenhouse gasses in the atmosphere and that those gasses have an incremental warming effect on the planet. What we deny is the catastrophe -- we believe we have good evidence that catastrophic forecasts from computer models are exaggerating future warming, and greatly exaggerating resulting forecast climate changes. Whenever I am fairly successful making this argument, the inevitable rejoinder is "well, the precautionary principle says that if we have even a small percentage chance that burning fossil fuels will lead to a climate disaster, then we have to limit their use immediately".
The problem with this statement is that it assumes there is no harm or risk to reducing fossil fuel use. But fossil fuel use pays enormous benefits to everyone in the world. Even if we could find near substitutes that don't create CO2 emissions (and it is every much open to debate if such substitutes currently exist), these substitutes tend to be much more expensive and much more infrastructure-intensive than are fossil fuels. The negative impact to the economy would be substantial. One could argue that one particular impact -- climate or economy -- outweighs the other, but it is outright fraud to refuse to discuss the trade-off altogether. Particularly since catastrophic climate change may only be a low-percentage risk while economic dislocation from reduction in fossil fuel use is a near certainty.
My sense is that if the United States chose to cut way back on fossil fuel use in a concerted effort, we could manage it and survive the costs. But that is because we are a uniquely rich nation. I am not sure anyone in this country understands how rich. I am not talking just about Warren Buffet. Even the poorest countries have a few rich people at the top. I am talking about everybody. Our poorest 20% would actually be among the richest quintile in many nations of the world. A worldwide effort to eliminate fossil fuel use or to substantially raise its costs or to force shifts to higher cost, less easily-used alternatives would simply devastate many developing nations, which need every erg their limited resources can get their hands on. We are at a unique moment in history when more than a billion people are in the process of emerging from poverty around the world, progress that would be stopped in its tracks by a concerted effort to limit CO2 output. Why doesn't the precautionary principle apply to actions that affect their lives?
College kids have developed a popular rejoinder they use in arguments that states "check your privilege." I thought at first it was an interesting phrase. I used it in arguments a few times about third world "sweat shops". I argued that those who wanted to close down the Nike factory paying $1 an hour in China needed to check their privilege -- they had no idea what alternatives those Chinese who took the Nike jobs were facing. Yes, you middle class Americans would never take that job, but what if your alternative was 12 hours a day in a rice paddy somewhere that barely brought in enough food for your family to subsist? Only later, I learned that "check your privilege" didn't mean what I thought it meant, and in fact in actual academic use it instead means "shut up, white guy." In a way, though, this use is consistent with how the precautionary principle is often used -- in many of my arguments, "precautionary principle" is another way of saying "stop talking about the costs and trade-offs of what I am proposing."
Perhaps the best example of the damage that can be wrought by a combination of Western middle class privilege and the precautionary principle is the case of golden rice. According to the World Health Organization between 250,000 to 500,000 children become blind every year due to vitamin A deficiency, half of whom die within a year of becoming blind. Millions of other people suffer from various debilitating conditions due to the lack of this essential nutrient. Golden Rice is a genetically modified form of rice that, unlike conventional rice, contains beta-Carotene in the rice kernel, which is converted to vitamin A in humans.
By 2002, Golden Rice was technically ready to go. Animal testing had found no health risks. Syngenta, which had figured out how to insert the Vitamin A–producing gene from carrots into rice, had handed all financial interests over to a non-profit organization, so there would be no resistance to the life-saving technology from GMO opponents who resist genetic modification because big biotech companies profit from it. Except for the regulatory approval process, Golden Rice was ready to start saving millions of lives and preventing tens of millions of cases of blindness in people around the world who suffer from Vitamin A deficiency.
Seems like a great idea. Too bad its going nowhere, due to fierce opposition on the Left (particularly from Greenpeace) to hypothetical dangers from GMO's
It’s still not in use anywhere, however, because of the opposition to GM technology. Now two agricultural economists, one from the Technical University of Munich, the other from the University of California, Berkeley, have quantified the price of that opposition, in human health, and the numbers are truly frightening.
Their study, published in the journalEnvironment and Development Economics, estimates that the delayed application of Golden Rice in India alone has cost 1,424,000 life years since 2002. That odd sounding metric – not just lives but ‘life years’ – accounts not only for those who died, but also for the blindness and other health disabilities that Vitamin A deficiency causes. The majority of those who went blind or died because they did not have access to Golden Rice were children.
Note this is exactly the sort of risk tradeoff the precautionary principle is meant to ignore. The real situation is that a vague risk of unspecified and unproven problems with GMO's (which are typically driven more by a distrust on the Left of the for-profit corporations that produce GMO's rather than any good science) should be balanced with absolute certainty of people dying and going blind. But the Greenpeace folks will just shout that because of the "precautionary principle", only the vague unproven risks should be considered and thus golden rice should be banned.
Risk and Post-Modernism
A few weeks ago, I wrote about Naomi Oreskes and the post-modern approach to science, where facts and proof take a back-seat to political narratives and the feelings and intuition of various social groups. I hadn't really thought much about this post-modernist approach in the context of risk assessment, but I was struck by this comment by David Ropeik, who blogs for Scientific American.
The whole GMO issue is really just one example of a far more profound threat to your health and mine. The perception of risk is inescapably subjective, a matter of not just the facts, but how we feel about those facts. As pioneering risk perception psychologist Paul Slovic has said, “risk is a feeling.” So societal arguments over risk issues like Golden Rice and GMOs, or guns or climate change or vaccines, are not mostly about the evidence, though we wield the facts as our weapons. They are mostly about how we feel, and our values, and which group’s values win, not what will objectively do the most people the most good. That’s a dumb and dangerous way to make public risk management decisions.
Mr. Ropeik actually disagrees with me on the risk/harm tradeoffs of climate change (he obviously thinks the harms outweigh the costs of prevention -- I will give him the benefit of the doubt that he has actually thought about both sides of the equation). Fine. I would be thrilled for once to have a discussion with someone about climate change when we are really talking about costs and benefits on both sides of the equation (action and inaction). Unfortunately that is all too rare.
Postscript: To the extent the average person remembers Bjorn Lomborg at all, they could be excused for assuming he is some crazed right-wing climate denier, given how he was treated in the media. In fact, Lomborg is very much a global warming believer. He takes funding from Right-ish organizations now, but that is only because he has been disavowed by the Left, which was his original home.
What he did was write a book in which he looked at a number of environmental problems -- both their risks and costs as well as their potential mitigation costs -- and he ranked them on bang for the buck: Where can we get the most environmental benefit and help the most people for the least investment. The book talked about what he thought were the very real dangers of climate change, but it turned out climate change was way down this ranked list in terms of benefits vs. costs of solutions.
This is a point I have made before. Why are we spending so much time, for example, harping on China to reduce CO2 when their air is poisonous? We know how to have a modern technological economy and still have air without soot. It is more uncertain if we can have a modern technological economy, yet, without CO2 production. Lomborg thought about just this sort of thing, and made the kind of policy risk-reward tradeoffs based on scientific analysis that we would hope our policy makers were pursuing. It was exactly the kind of analysis that Ropeik was advocating for above.
Lomborg must have expected that his work would be embraced by the environmental Left. After all, it was scientific, it achnowleged the existence of a number of environmental issues that needed to be solved, and it advocated for a strong government-backed effort led by smart technocrats doing rational prioritizations. But Lomborg was absolutely demonized by just about everyone in the environmental community and on the Left in general. He was universally trashed. He was called a climate denier when in fact he was no such thing -- he just pointed out that man-made climate change was way harder to solve than other equally harmful environmental issues. Didn't he get the memo that the narrative was that global warming was the #1 environmental threat? How dare he suggest a re-prioritization!
Lomborg's prioritization may well have been wrong, but no one was actually sitting down to make that case. He was simply demonized from day one for getting the "wrong" answer, defined as the answer not fitting the preferred narrative. We are a long, long way from any reasonable ability to assess and act on risks.
This letter to customers from San Francisco bookstore Borderlands is making the rounds. Apparently, the new "living wage" legislation in San Francisco is killing this store:
In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018. Although all of us at Borderlands support the concept of a living wage in [principle] and we believe that it’s possible that the new law will be good for San Francisco – Borderlands Books as it exists is not a financially viable business if subject to that minimum wage. Consequently we will be closing our doors no later than March 31st. The cafe will continue to operate until at least the end of this year.
I find the authors surprisingly open to the Progressive assumptions behind this bill, despite the death of their business. I don't know if this is a pair of hipsters destroyed by their own cause, or if the nods towards Progressivism are merely boiler plate that is required in any San Francisco conversation, like having a picture of Lenin on your wall in Soviet Russia.
Anyway, I found the language here familiar because I spent most of last year writing such letters to angry customer bases. In our case, fortunately, we had the ability to raise prices so the letters were to defuse customer irritation rather than to announce a closure. Here is one example I wrote in Minnesota:
Labor and labor-related costs (costs that are calculated as a percentage of wages, like employment taxes) make up nearly 50% of our costs. The Minnesota minimum wage is set to rise from $7.20 to $9.50 in the next two years, an increase of 31%. Since wages and wage-related costs are half our expenses, the minimum wage increase raises our total costs by 15.5%. This means that all by itself, without any other inflation in any other category of expenses, the minimum wage increases will drive a $3.10 increase in our camping fees (.155 x $20). Note that this is straight math. The moment the state of Minnesota passed their minimum wage increase, this fee increase was going to be required.
One of the problems with these minimum wage increases is that the people behind them, with their hazy assumptions and flawed understanding of economics, typically think that companies will just absorb the increase. Our net profit margin runs in the 4% range, so it difficult to see how any such retail company can absorb a 15+% cost increase, but it happens all the time. After some trial and error, the "this is straight math" phrase seems to work the best in communicating the need for price increases.
It is hard to look at this data and see anything but a positive story, but apparently the New York Times and the rest of the media only see tragedy. If there is no problem, there is no justification for increased government power, therefore there must be a problem.
(I am presuming this is in real dollars rather than nominal, but God forbid that the NYT ever makes such things clear). They do manage to show a slight negative recent trend in the growth of the percentage of low income Americans, but only by cherry-picking the dates of comparison to the peaks and troughs of the last two business cycles. Overall I would read the story as middle and lower class are moving into upper income brackets, but the Times headlines it as "Middle Class Shrinks Further as More Fall Out Instead of Climbing Up," illustrated with a classic empathy-inducing sad-mom photo.
By the way, since more rich people fall than middle class, it would seem to make sense to discuss instead the falling fortunes of rich people, but of course the NYT has no desire to write that article.
I know I have been warning about a Chinese recession/depression for a while, but it takes a while (and still will take some time) for this disaster to play out. But the warning signs are all there. This article today in the WSJ is a great example.
A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.
But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.
Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008....
Even before its latest step, Beijing had put forward plans to slow local-borrowing growth. But China’s local governments have a surprising ability to resist policies. Another central-government priority—reducing excess production in steel, cement and other industries—has foundered due to local opposition.
“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”
Perhaps we should call this the looming Thomas Friedman recession, as China goes bankrupt doing exactly what Friedman admires - building more and more infrastructure and then taking out debt and building even more.
There is absolutely no reason to believe, as folks like Friedman do, that this investment in infrastructure automatically has a positive return, and in fact there are a lot of reasons to think it does not (ie gluts of housing and basic materials). As I have written before, like light rail spending in the US, these infrastructure investments pay their benefits mostly in prestige to local government officials and rents for politically connected contractors and government workers and not in real returns to future economic growth.
I tend to accept the Austrian theory of recessions, which I would simplify (perhaps inaccurately) as mis-allocation of capital and labor investments leading to economic downturns as the economy restructures. The longer the reckoning is put off, the worse the recession. These mis-allocations can sometimes be due to private causes (e.g. over-euphoric investments in early Internet companies in the late 1990's) but they often have public causes (e.g. artificially low interest rates or government programs to promote investment in a single industry like, say, housing).
I am convinced this is what brought down Japan -- after years of admiration for Japan, inc. and MITI economic management, it turns out the government had directed all capital into a few export manufacturing industries, while continuing to protect retail and agriculture locally from any real change or competition. Which is why 25 years of government directed deficit spending has not fixed the recession -- it just doubles down on the original cause. For those of you too young to remember, the Friedman-types of the world were all praising Japan to the hilt in the late 80's as the model we should all be following. People like this don't admit error, they simply shut up about Japan and started praising the same behaviors in China.
The same reckoning is coming to China. Probably not this year or the next, but within the next 5 years almost for sure. It is 1928 in China.
Postscript: By 1928, I mean a year of apparent prosperity before the Great Depression in 1929. I am not referring to the nominal reunification of China or start of the "republic" under Chiang Kai-shek.
I have written before about how amazing it is that gasoline can be delivered to your car so cheaply. The investments, the technological complexity, the distances covered, the molecular-level processing necessary, the density of retail distributions establishments -- they are all simply staggering.
I hate to steal this in full from Mark Perry, who has an awesome blog, but he has a list of the price per gallon of other liquids you buy. Think about the complexity of, say, orange juice as opposed to gasoline.
|Product||Cost Per Gallon|
|HP Printer Ink||$4,500|
|Real Lemon Juice||$22.91|
|Chicken Noodle Soup||$21.25|
|Tide Laundry Detergent||$18.18|
|Dawn Dish Detergent||$17.92|
|Half and Half Cream||$15.87|
Thomas Friedman, and many others, think it is a sign of America's decline and some sort of failure of government will that other countries are building super-massive showcase infrastructure projects while we are not. They would take this chart as a sign of decline:
I disagree. This is a sign of growing maturity on the part of the United States. Many of these super-tall building projects make little economic sense, but are completed to validate the prestige of emerging nations, like teenage boys comparing penis sizes. Grown men are beyond that behavior, just as are grown-up nations. I discussed this in the context of rail a while back at Forbes. In that case, it seems everyone thinks the US is behind in rail, because it does not have sexy bullet trains. But in fact we have a far more developed freight network than any other country, and shift of transport to rail makes a much larger positive economic and environmental impact for cargo than for rail. It comes down to what you care about -- prestige or actual performance. Again choosing performance over prestige is a sign of maturity.**
The US had a phase just like China's, when we were emerging as a world economic and political power, and had a first generation of successful business pioneers who were unsure how to put their stamp on the world. So they competed at building tall buildings. Many of the tallest were not even private efforts. The Empire State Building was a crony enterprise from start to finish, and ended up sitting empty for years. The World Trade Center project (WTC) was a complete government boondoggle, built by a public agency at the behest of the Rockefeller family, who wanted to protect its investments in lower Manhattan. That building also sat nearly empty for years. By the way, the Ken Burns New York documentary series added a special extra episode at the end after 9/11 on the history of the WTC and really digs in to the awful crony and bureaucratic history of that project. Though Burns likely did not think of it that way, it could as easily be a documentary of public choice theory. His coverage earlier in that series of Robert Moses (featuring a lot of Robert Caro) is also excellent.
** I have always wondered if you could take this model further, and predict that once-great nations in decline (at least in decline relative to their earlier position) might not re-engage with such prestige projects, much like an aging male seeking out the young second wife and buying a Porche.
Update: Here is part of what I wrote on US vs. European and Japanese railroading, which I think is an absolutely awesome example of where the triumphalists like Friedman go wrong:
In particular, both Friedman and Epstein think we need to build more high speed passenger trains. This is exactly the kind of gauzy non-fact-based wishful thinking that makes me extremely pleased that these folks do not have the dictatorial powers they long for. High speed rail is a terrible investment, a black hole for pouring away money, that has little net impact on efficiency or pollution. But rail is a powerful example because it demonstrates exactly how this bias for high-profile triumphal projects causes people to miss the obvious.
Which is this: The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital. It is operated privately, and runs without taxpayer subsidies. And, it is by farthe greatest rail system in the world. It has by far the cheapest rates in the world (1/2 of China’s, 1/8 of Germany’s). But here is the real key: it is almost all freight.
As a percentage, far more freight moves in the US by rail (vs. truck) than almost any other country in the world. Europe and Japan are not even close. Specifically, about 40% of US freight moves by rail, vs. just 10% or so in Europe and less than 5% in Japan. As a result, far more of European and Japanese freight jams up the highways in trucks than in the United States. For example, the percentage of freight that hits the roads in Japan is nearly double that of the US.
You see, passenger rail is sexy and pretty and visible. You can build grand stations and entertain visiting dignitaries on your high-speed trains. This is why statist governments have invested so much in passenger rail — not to be more efficient, but to awe their citizens and foreign observers.
But there is little efficiency improvement in moving passengers by rail vs. other modes. Most of the energy consumed goes into hauling not the passengers themselves, but the weight of increasingly plush rail cars. Trains have to be really, really full all the time to make for a net energy savings for high-speed rail vs. cars or even planes, and they seldom are full. I had a lovely trip on the high speed rail last summer between London and Paris and back through the Chunnel — especially nice because my son and I had the rail car entirely to ourselves both ways.
The real rail efficiency comes from moving freight. As compared to passenger rail, more of the total energy budget is used moving the actual freight rather than the cars themselves. Freight is far more efficient to move by rail than by road, but only the US moves a substantial amount of its freight by rail. One reason for this is that freight and high-speed passenger traffic have a variety of problems sharing the same rails, so systems that are optimized for one tend to struggle serving the other.
Freight is boring and un-sexy. Its not a government function in the US. So intellectuals tend to ignore it, even though it is the far more important, from and energy and environmental standpoint, portion of transport to put on the rails. In fact, the US would actually probably have even a higher rail modal percentage if the US government had not enforced a regulatory regime (until the Staggers Act) that favored trucks over rail. If the government really had been asleep the last century, we would be further along.
The other day I said I was confused by what exactly creates Keynesian stimulus, and in reverse, what constitutes austerity. I had thought that it was deficit spending that creates the stimulus, but then sometimes it seems to just be spending and in the case of the Kevin Drum post I was discussing, he says it is not the level of spending but only the first derivative of per capita real government spending (with no reference to whether it is debt or tax funded) that matters.
I figured that I was just confused because I had not formally studied economics past my undergrad years, but apparently practicing economists are also confused. Here is Scott Sumner:
What is the proper measure of austerity? The textbooks talk about deficits. But most of the Keynesian bloggers focus on government purchases. So which is it? And if it’s purchases, why did these same bloggers claim that austerity would result from big tax increases in the US in 2013, and a big tax increase in Japan in 2014? And why does the measure chosen (ex post) usually seem to be the one that best supports their argument in that particular case?
As a postscript, I will add that every climate skeptic can totally empathize with this Sumner concern:
A number of Keynesian bloggers have recently expressed dismay that the rest of us don’t buy their model. Maybe it would help if they’d stop ignoring our criticisms of their model, and respond to our complaints.
Full-time employment in one fast-food survey drops over last several years from 50% of workers to less than 2%.
This is the conclusion I draw from my survey in December of 136 fast-food restaurants (franchisees) that employed close to 3,500 workers. Before 2014 about half the employees were “full time” as defined by ObamaCare; that is, they worked 30 hours or more a week. The potential cost to the employers of providing mandated health insurance to their full-time staff would have been about $7 million a year. But by the time the employers took advantage of all their legal options they were able to reduce their cost to less than 1% of that amount.
The first step was to make all hourly workers part time. That may seem easy to do, but in the fast-food business it’s not uncommon that employees fail to show up for work. Other employees are asked to work additional hours to prevent the restaurant from shutting down. By the end of 2014, 58 employees had crossed the line to full-time status and were eligible for mandated health insurance in 2015.
There has been a lot of back and forth over the last few years about "austerity". I have wondered how government spending levels over the last few years that dwarf any peacetime levels in history could be called "austerity", but that is exactly what folks like Paul Krugman have been doing. Apparently, the new theory is that the level of spending is irrelevant to stimulus, and only the first derivative matters. In other words, high spending is not stimulative unless it is also increasing year by year. Kevin Drum provides an explanation of this position:
Austerity is all about the trajectory of government spending, and this is what it looks like. You can argue about whether flat spending represents austerity, but a sustained decline counts in anyone's book. The story here is simple: for a little while, in 2009 and 2010, stimulus spending partially offset state and local cuts, but by the end of 2010 the stimulus had run its course. From then on, the drop in government expenditures was steady and significant. It was also unprecedented. If you run this chart back for 50 years you'll never see anything like it. In all previous recessions and their aftermaths, government spending rose.
So, by this theory of stimulus, the fact that we spent substantially more money in 2010-2014 than in pre-recession years (and are still spending more money) turns out not to be stimulative. The only way government can stimulate the economy is to increase year-over-year per capital real spending every single year.
I will leave macro theory (of which I am increasingly skeptical) to the Phd's. In this case however, Drum's narrative is undermined by his own chart he published a few weeks ago:
In his recent austerity article quoted above, he describes a sluggish recovery with a step-change in 2014 only after "austerity" ends. But his chart from a few weeks earlier shows a steady recovery from 2010-2014, right through his "austerity" period. In fact, during the Bush recovery he derides, we actually did do exactly what he thinks is stimulative, ie increase government spending per capita steadily year by year. How do we know this? From another Drum chart, this one from last year. I changed the colors (described in this article) and compared his two charts:
By Drum's austerity theory, the Bush spending was stimulative but the Obama spending was austerity. But the chart on the right sure makes it look like the Obama recovery is stronger than the Bush recovery.
A better explanation of the data is that a recession driven by the highly-leveraged mis-allocation of too much capital to home real estate was made worse in 2008-2009 by a massive increase in government spending, which is almost by definition a further mis-allocation of capital (government is taking money from where the private sector thinks it should be invested and moves it to where politicians think it should be spent). The economy has recovered as that increase in government spending has been unwound.
I continue to see reports about how bad falling oil prices are for the economy -- most recently some layoffs in the steel industry were blamed on the looming drop (or crash) in oil drilling and exploration driven by substantially lower prices.
I find this exasperating, a classic seen-and-unseen type failure whose description goes back at least to the mid-19th century and Bastiat and essentially constituted most of Hazlitt's one lesson on economics. Yes, very visibly, relatively high-paid steel and oil workers are going to lose their jobs. They will have less money to spend. The oil industry will have less capital spending.
But the world will pay over a trillion dollars less this year for oil than it did last year (if current prices hold). That is a huge amount of money that can be spent on or invested in something else. Instead of just getting oil with those trillion dollars, we will still have our oil and a trillion dollars left over to spend. We may never know exactly who benefits, but those benefits are definitely there, somewhere. Just because they cannot be seen or portrayed in short visual anecdotes on the network news does not mean they don't exist.
Ugh, this is just beyond frustrating. I would have bet that at least with oil people would have understood the unseen benefit, since we get so much media reportage and general angst when gas prices go up that people would be thrilled at their going down. But I guess not.
I explained in simple terms why the world, mathematically, HAS to be better off with lower oil prices here.
Arnold Kling on the recent financial crisis:
1. The facts are that one can just as easily blame the financial crash on an attempted tightening of regulation. That is, in the process of trying to rein in bank risk-taking by adopting risk-based capital regulations, regulators gave preference to highly-rated mortgage-backed securities, which in turn led to the manufacturing of such securities out of sub-prime loans.
2. The global imbalances that many of us thought were a bigger risk factor than the housing bubble did not in fact blow up the way that we thought that they would. The housing bubble blew up instead.
What he is referring to is a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency. I will oversimplify here, but basically it categorized some assets as "safe" and some as "risky". Those that were risky had their value cut in half for purposes of capital calculations, while those that were "safe" had their value counted at 100%. So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets. As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.
Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as "safe". Which of course was the whole point -- if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks' shorts about the risks they are taking with their investments. This is the attempted tightening of regulation to which Kling refers. Regulators were trying for tougher, not weaker standards.
But any libertarian could tell you the problem that is coming here -- the regulatory effort was substituting the risk judgement of thousands or millions of people (individual bank and financial investors) for the risk judgement of a few regulators. There is no guarantee, in fact no reason to believe, the judgement of these regulators is any better than the judgement of the banks. Their incentives might be different, but there is also not any guarantee the regulators' incentives are better (the notion they are driven by the "public good" is a cozy myth that never actually occurs in reality).
Anyway, what assets did the regulators choose as "safe"? Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt). So you are a bank president in this new regime. You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in "safe" assets. What do you tell your investment staff? You tell them to go invest the money in the "safe" asset that has the highest return.
And for most banks, this was mortgage-backed securities. So, using the word Brad DeLong applied to deregulation, there was an "orgy" of buying of mortgage-backed securities. There was simply enormous demand. You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason -- banks needed these things. For the average investor, most of us stayed out. In the 1980's, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.
It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice). Grocery stores would instantly be out of oranges and orange juice. People around the world would be scrambling to find ways to get more oranges to market. Fortunes would be made by clever people who could find more oranges. Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang. Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so. Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.
Government regulation -- completely well-intentioned -- had created a mono-culture. The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets. And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages. When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset. The US banking industry was a mono-culture through which a new disease ravaged the population.
Postscript: So with this experience in hand, banks moved out of mortage-backed securities and into the last "safe" asset, sovereign debt. And again, bank presidents told their folks to get the best possible yield in "safe" assets. So banks loaded up on sovereign debt, in particular increasing the demand for higher-yield debt from places like, say, Greece. Which helps to explain why the market still keeps buying up PIIGS debt when any rational person would consider these countries close to default. So these countries continue their deficit spending without any market check, because financial institutions keep buying this stuff because it is all they can buy. Which is where we are today, with a new monoculture of government debt, which government officials swear is the last "safe" asset. Stay tuned....
Postscript #2: Every failure and crisis does not have to be due to fraud and/or gross negligence. Certainly we had fraud and gross negligence, both by private and public parties. But I am reminded of a quote which I use all the time but to this day I still do not know if it is real. In the great mini-series "From the Earth to the Moon", the actor playing astronaut Frank Borman says to a Congressional investigation, vis a vis the fatal Apollo 1 fire, that it was "a failure of imagination." Engineers hadn't even considered the possibility of this kind of failure on the ground.
In the same way, for all the regulatory and private foibles associated with the 2008/9 financial crisis, there was also a failure of imagination. There were people who thought housing was a bubble. There were people who thought financial institutions were taking too much risk. There were people who thought mortgage lending standards were too lax. But with few exceptions, nobody from progressive Marxists to libertarian anarcho-capitalists, from regulators to bank risk managers, really believed there was substantial risk in the AAA tranches of mortgage securities. Hopefully we know better now but I doubt it.
Update#1: The LA Times attributes "failure of imagination" as a real quote from Borman. Good, I love that quote. When I was an engineer investigating actual failures of various sorts (in an oil refinery), the vast majority were human errors in procedure or the result of doing things unsafely that we really knew in advance to be unsafe. But the biggest fire we had when I was there was truly a failure of imagination. I won't go into it, but it resulted from a metallurgical failure that in turn resulted form a set of conditions that we never dreamed could have existed.
By the way, this is really off topic, but the current state of tort law has really killed quality safety discussion in companies of just this sort of thing. Every company should be asking itself all the time, "is this unsafe?" or "under what conditions might this be unsafe" or "what might happen if..." Unfortunately, honest discussions of possible safety issues often end up as plaintiff's evidence in trials. The attorney will say "the company KNEW it was unsafe and didn't do anything about it", often distorting what are honest and healthy internal discussions on safety that we should want occurring into evidence of evil malfeasance. So companies now show employees videos like one I remember called, I kid you not, "don't write it down."