Scandalous Reflections

The news is dominated by two scandals, one each in the public and private sectors. While "sobering" (one of the president-elect's apt descriptors), they are hardly surprising.

Bernie Madoff's asset management business is but the latest Ponzi scheme to fall apart, with the distinction that his fraud operated for at least a decade - a remarkably long duration - and sucked in A-list investors. Financial markets put a premium on cash right now, and undoubtedly the dramatic ebb tide of cash flow over the last three months made Madoff realize the inevitable end was at hand.

The Madoff scandal illustrates the limits of both public and private checks and balances. There are news reports of Madoff being reported to the SEC repeatedly, and yet nothing was done. Sophisticated investors were supposed to do their homework, yet nothing was done by the victims or their advisors. Reportedly some advisors kept their clients away from Madoff, who refused to discuss investment strategy or disclose true financial records. Transparency and accountability would have shortened the fraud's duration, but sometimes enforcing these essential principles requires backbone, forcefulness and fearlessness of being unpopular. And how many humans posess such strengths, either in government or the private sector? Democracy and capitalism are limited in their speed of self-correction by the frequency of human fallibility.

One common sense aphorism I've often used is "if it sounds too good to be true, it probably is." Homeowners and investors alike were lulled into an uncritical stupor by perennially rising asset appreciation. The good times were too good to be true, and now many are paying the price (me included - and I've used the phrase "don't confuse brains with a bull market" many times in the past).

Meanwhile, the Blagojevich scandal is another reminder that greed motivates both public and private leaders. Surprising? Not really. But the next time you hear a gratuitous screed against corporate greed, just reply "What about Blagojevich?" There are no genetic differences between those in the public and private sectors, so we shouldn't be surprised when financial incentives drive behavior, scandalous or otherwise, of public and private leaders.

Democracy and capitalism are designed to have multiple layer of checks and balances driven by financial and other incentives. Sometimes the incentives are mis-aligned (think mortgage meltdown), but sometimes it's just bad actors who bully their way through the levees of checks and balances upheld by mere mortals. No law can entirely overcome human weakness. It is the Sysiphean imperative for all of us to keep our eyes open.

First Principles II

The following is a continuation of yesterday's random laundry list of centrist principles, world views and policy prescription summaries.

Principles

What Works

Centrists value what works – which is not to be confused with “the ends justify the means.” With a 360-degree, long-term view, centrists don’t advocate expediency for short-term results or horrific means to achieve them. 

Genetic Similarity

There’s no reason to think humans who choose business careers have a nature or nurture substantially different from public servants. The litany of human weaknesses and quirks that can lead to untoward business results also plague those on government payrolls. So while liberals give government benefit of the doubt and conservatives cut business a break, centrists give the public and private sectors equal measures of support and skepticism.

Distributed Honeypots

Part of the genius and success of American democratic capitalism is that power and money are widely distributed among competing government branches and industry giants, which helps mitigate (but does not eliminate) self-dealing by Big Leaders.

Bill of Responsibilities

In a world of conflicting rights, individuals must exercise responsibility, the first of which is to respect others’ rights.

Equal Opportunity, Not Equal Results

Exceptionally capable people happen, and we all benefit when their abilities are amply rewarded. Progress and growth are highly dependent on outliers. At the same time, we all benefit when human capital is fully developed across the board. Equal opportunity is in all of our enlightened self-interest as well as being the right thing to do.

Transparency

In government and commerce, transparency is essential to proper functioning. It’s often battled, occasionally for good reasons but more often to hide socially undesirable behavior.

Accountability

Democracy and capitalism don’t work without accountability. Incumbents will forever attempt to escape or soften or delay or defer their judgment days.  Widespread bailouts and 95% re-election rates are not a good sign.

Contextualism, Not Relativism

Centrists believe in the importance of core values like liberty, personal responsibility, supporting the needy, protecting the innocent. They are not relativists who believe that all values are relative and judging one higher than another is pointless. However, in the real world core values can collide, and context is the key to assessing balance – which means that no value is permanently dominant.

World View

Financial Incentives Matter A Lot

If you want to figure out whether markets, businesses, and even government agencies are working as they should, follow the money. 

Watch the Watchdogs

Government isn’t the only important commerce referee. Accounting firms, boards of directors, bond rating companies, stock analysts, buy-side investors, banks and the press all play important roles. If watchdog financial incentives are misaligned, trouble follows.

Elite Hubris

Smart people often over-rate their own abilities. Too often elite policy prescriptions project their over-rated abilities onto their favorite organizations – government, business, religion, non-profits. Average competence is in fact alarmingly low, and it is average public servants, business people and ministers who implement these prescriptions to continual disappointment.

Mistakes Happen

In a complex universe filled with uncertainty, mistakes happen all the time. To err is human, to recognize and correct them quickly is divine.

Unintended Consequences Happen

In a complex universe filled with uncertainty, many choices produce unwanted, unintended results alongside the desirable. Hubris-fired elite myopia compounds the problem with denial. Humble centrists plan for the unexpected and adjust at the line of scrimmage.

Not So Simple

Democracy is more than voting. Capitalism is more than private ownership. Actually, they are much more. The failure of neoconservatives stems from their overly simplified understanding of democracy and capitalism.

The Rules of the Game

Democracy and capitalism have extensive rules that dramatically affect outcomes. It’s often easier to rig the rules in your favor than win on merit, so rule rigging is frequent and attempted rule rigging never ends. Never. 

Watch the Bigs

Big government, big business, big religion, big unions, big non-profits, big military… when power and money amass under one roof, it’s an irresistible honey pot for those who crave power and money, and a heady brew for all who try to lead. Large organizations are uniquely capable of massive projects (think lunar landings) but create Sisyphean imperatives for corruption watchdogs. 

Short Termism

One of our most debilitating human flaws is our propensity to embrace short-term rewards over long-term success. Encouraging long-termism is both important and difficult.

Policy Prescriptions

Democracy 2.0

The US led the world in creating modern democracy, but as other countries have created their constitutions, some of America’s “legacy systems” have not been emulated. It’s time to upgrade.

Votes and Purchases: Crude Tools

In our multi-polar, multi-issue, two-party democracy, a vote provides insufficient information. Is it supporting economic policy? Social? Foreign? Or just good teeth? Similarly, purchasing multi-featured products in crowded markets is insufficient to guide product planning. Democracy and capitalism need more information-rich transactions.

Immigrants Fuel Growth

The data show immigrants and their children contribute disproportionately to America’s growth. Steady immigrant flow is key to creation of new companies, new industries, new jobs, and American competitive advantage in the globalized twenty-first century.

Centrist Economics

Economic Evolution

Capitalist commerce follows evolutionary patterns just like ecosystems and species. Innovations have improved American capitalism, although extinctions and dangerous mutations happen along the way. More innovations are needed to polish capitalism’s rough edges.

Massively Synchronized Errors

Mistakes and failures that happen randomly with bounded and predictable frequency do not hobble modern capitalist systems. When errors are massively synchronized – as in most homeowners and mortgage lenders believing that housing prices can strongly rise without end – recessions happen and bubbles burst.

Economic Acts = Experiments

Every economic action is like a scientific experiment. There is a thesis – demand today will be like demand yesterday; buying this product will make me happy – and the results of the action are forecast with some perceived and actual risk of failure.  

(Un)Manageable Risks

All businesses face daily risks. A business executive’s job is to manage those risks within their grasp: people, technology, competitive strategy, financial management. Government’s job is to minimize unmanageable business risks: unpredictable inflation, unstable growth, infrastructure costs, security, the rule of law, bad actors (economic actors that is, although Hollywood isn’t great at eliminating the other kind).