Monday, November 7, 2011

The Next 100 Years: Incentives

Today, incentives are structured in the U.S. to avoid thinking about the crucial challenges we face, so we are busy digging deeper the hole we are standing in.

Mankind faces two fundamental challenges that are external to the political system, i.e., not the result of faulty governance: climate change and population growth. Mankinds response might be bottom-up, as suggested by the Occupy movement; all seven billion of us might slowly accept new cultural priorities. However, the behavior of government will surely have a huge impact, and by far the most influential government is that of the U.S. The U.S. government itself faces two constraints on its ability to rise to meet these challenges: its addiction to global military activism and its support of elite financial exploitation. With the natural leader of global governments thus distracted, an effective governmental response to the two major global challenges seems a long shot.

Washingtons international focus on using military force to spread its influence and its domestic focus on facilitating the enrichment of the super-rich at the expense of everyone else undermine its ability to address the two key external challenges. Focusing on the uncritical enrichment of all the rich rather than, say, allowing the enrichment of those who perform socially useful tasks while punishing those who behave irresponsibly is a critical failing. The choice is not between the wealthy and the poor: there is no obvious reason to assume that equality would lead to resolution of global problems. There is no obvious reason why the incentive of becoming rich in return for making greater contributions to society cannot be a socially responsible approach.

Abetting the mindless enrichment of the few, regardless of their behavior, on the other hand, clearly obstructs effective steps to meet common challenges. Playing the stock market using other peoples money with the assurance of government bailouts for all the rich who lose offers an enticing prospect for the rich that will suck away into meaningless financial contortions funds that could be employed for long-term projects of benefit to all, including projects to redesign society to meet the challenges of climatic and demographic change. A foreign policy that frames international issues in terms of military competition similarly drains away funds while simultaneously exacerbating social problems by destroying infrastructure and provoking refugee flows, to cite just two effects. Both financial exploitation and war are socially destructive forms of behavior that simultaneously drain away government resources and distract government from addressing real problems.

More, they create zero-sum psychological contexts that inhibit cooperation between the two sides. Concerning war, one need only note the difficulty of Israelis and Palestinians cooperating on a mutually beneficial program to share scarce water resources or the difficulty of Washington and the Taliban reaching agreement on a mutually beneficial program to develop Afghanistans economy amidst endless violence. Concerning finance, the lack of Wall St. efforts after the 2008 Financial Crisis it did so much to provoke to take responsibility for the damage it caused to the American public and the rapidity with which efforts to call the uber-rich to account were slandered as class warfare betray the same elite zero-sum perspective.

As Paul Krugman said back in 2009 in answer to his own question about why some bankers suddenly began making vast fortunes just before the 2008 collapse:

It was, we were told, a reward for their creativity for financial innovation. At this point, however, its hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes. [New York Times 4/26/09.]

Krugman goes on to point out that the issue concerned not just the bankers but the whole system, in which the government provided vast amounts of corporate welfare to promote their accumulation of wealth:

Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.
And, writing in 2009, Krugman of course did not refer to the scandalous bias, reported just recently, built into U.S. tax law permitting many of the richest corporations in the land completely to evade taxes in years when they made billions of dollars of profit.

Yet what has been the performance, three years after the onset of the 2008 Financial Crisis, of Big Finance in thanks for being handed the hard-earned dollars of the 99%, some 20 million of whom are now either officially unemployed, under-employed, or so discouraged they have dropped out of the market? In 2010 Big Finance foreclosed on an all-time record of over 1,000,000 homes. The Republican allies of Big Finance in Congress are advocating that Washington pull back from reforming the fraudulent foreclosure process, and House Majority Leader Eric Cantor (R-VA)who recently called the Occupy Wall St. protesters a mob”—has received hundreds of thousands of dollars in campaign support from Big Finance during 2011. Meanwhile, the acting Comptroller of the Currency John Walsh is telling us that foreclosure reform could take a year, butpending such reformof course the foreclosures conveniently continue [LA Times 9/23/11]. Banks, surprise-surprise, are still fabricating documents to promote foreclosure [America Blog 9/1/11]. As for Wall St. fraud, the possibility of perjury charges against Goldman Sachs CEO Blankfein for 2011 remarks to Congress is emblematic of the attitude of Wall St. [Fierce Finance 4/14/11].

A political focus on the pursuit of short-term military victory that provokes long-term hatred or the accumulation of wealth without concomitant production ofanythingalso has a subtle psychological impact by encouraging short-term thinking. In war, it is hard to get away from the obvious goal of winning the next battle; at the stock market, it is hard to get away from the obvious goal of making profitable short-term investments. To ask a general facing the threat of defeat or an investor facing the threat of financial ruin for a thoughtful assessment of where society will be in a generation is laughable.

Were the general charged instead with guarding a generation-long international effort to construct something or were the trader told his profits would be a function of progress toward some generation-long social goal, those two individuals would have entirely different attitudes toward the future of society. In a word, socially useful thinking and socially productive behavior can be bought. Generals and traders are neither good nor evil: incentives matter.

War and its domestic equivalent, financial exploitation organized by a minority as an institutionalized component of the system, are short-term, zero-sum activities, while the real dangers on mankinds horizon call for century-long programs supported by everyone. U.S. elite priorities do not just miss the target of protecting our future but exacerbate the problems we must address, and the way the system is designedwith incentives for short-term thinking and socially destructive behaviormake it almost impossible to reform those anti-social elite priorities.

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