What defines true sustainability?

The idea of sustainability has been around for some time, but I think it is worth some reflection to decide what it really means. True sustainability has to beyond an environmental focus. We have seen in the past few years that financial sustainability is also something that deserves more attention. I wonder what other kinds of sustainability we should be considering in our lives.

Before starting to make a list, let’s revisit what sustainability means in general terms. For something to be sustainable, it means you can keep doing it forever without any degradation in performance. So of course environmental sustainability means that a particular behavior doesn’t cause environmental damage at a faster rate than the environment can repair itself. The related idea of resource sustainability means that a behavior does not use up resources faster than they can be replenished. Financial sustainability means that a behavior doesn’t require more money than it produces and that it doesn’t transfer money from one group to another in a way that would cause the giver to run out.

So what other kinds of sustainability are there? How about political/social sustainability? This would be a behavior that does not alienate others to the point that they would enact a law banning it (political) or to ostracize the actor (social).

How about emotional sustainability? This would be a behavior that does not emotionally drain the actor faster than available rest and relaxation can replenish him or her.

Personal health sustainability would be a behavior that does not damage the actor’s health faster than the body can repair itself (smoking or bad eating habits for example)

And for all of these, we can think in terms of an individual, group, or the world at large. I may do something that is financially sustainable personally, but has externalities on the world that are not sustainable. And the opposite can also be true – I can do something that is not sustainable in some way to myself, but doesn’t impact anyone else. Or maybe the behavior is not sustainable to myself if I do it alone, but as long as other people also do it, we become sustainable as a group because we balance each other out.

Maybe if we put more time into ensuring that the things we do personally and professionally are sustainable in all of these ways, we could really make the world a better place. Or at least avoid destroying it!!!

Better than regulations

Larry Fink, the CEO of Blackrock (the investment company) had an idea to reduce the chances of future financial crises like the one we are coming out of that does not involve more regulation. He suggested eliminating the tax on really long term capital gains (> 5 years) and balancing it with an increase in short term (< 1 year) capital gains and dividends. This would incent people on the long term investments that really benefit the economy while disincenting the short term trading that was part of the problem. Because its not a regulatory solution, it avoids the frictional costs and externalities that usually accompany regulations. It also may be possible to sell, even though there is a tax hike (oh no, not that!!!) inside, because it is balanced and it is clearly related to the emergency.

I think this is a great idea. Hopefully the pols in DC were listening.

Media Hype

When swine flu first hit the news, it was overhyped the way the 24/7 news industry typically does it. We got 24-hour coverage for several days and they made it out to be a disaster just around the corner. Of course they are chasing ratings, which is their business model, so it's hard to blame the media. We should blame ourselves for watching.

Then, after a few days of this, we all realized that is wasn't nearly as bad as all that, and we got burned out of the coverage. Now, we see very little. Again, without demand, there is no supply.

But I suspect the pendulum has now swung too far the other way. Reading about the NY school assistant principal who died from the swine (oh sorry, the H1N1) flu and the predictions of some experts that it could really get worse makes me a bit concerned. When we really do need to pay attention, which will be when the normal flu season hits us next winter, we probably won't. It will be really old news by then.

Usually, I criticize the hype the media gives these stories as a waste of time and for taking away time that should be spent on important issues and debates. But this time, it could cause actually hurt - or even kill people. This may sound like hyperbole, but if no one is paying attention, any future pandemic will be much worse.

I wonder if some enterprising person will think to sue the media over the issue after a loved one dies from the flu. They could claim that the hype cycle was in part responsible for the death because it reduced the public response. I doubt this would stand up in court, but the media would probably settle (without admitting guilt) to avoid the bad PR. If the settlement is large enough, maybe they would be forced to be more responsible and we would get less hype in the future. In general I hate frivolous lawsuits, but if this happens, I won't complain.

Liars, damned liars, statisticians, and then pundits

The jobs report today is a great example of how statistics can be represented to make just about any case you want.

The number of jobs lost last month was reported as 539,000. This compares to an adjusted 680,000 average over the past five months. But the unemployment rate increased from 8.5% to 8.9%.

Anyone who wants to say that this is good news points to the decrease in jobs lost. Anyone who wants to say this is bad news points to the unemployment rate increase. The statistician points out that past numbers have been adjusted higher every month for quite a while, so the 539k will not stand up to the test of time.

Or if someone wants to say this is not as bad as previous recessions, they can point out that the unemployment rate is still much lower than in the 1980-1982 recession. But after adjusting for the older population (which any good statistician SHOULD do), it's actually worse.

Which brings me to pundits. Every news program brings on between 1 and 4 "experts" who opine about the numbers. It is really important to the general public to get a sense of what is going on so they can prepare themselves. Is the economy getting worse, in which case I need to save more, suck up at work more, and in general decrease my risk taking? Or is it getting better, in which case I can start spending again, look around at opportunities, and in general increase my willingness to take risks? So pundits are not just for entertainment; they provide an important service.

Except that they are not. They pick and choose the numbers that make the points that they prefer to make based on politics, selling their latest books, or just to get on TV. The general public are not statistics experts, macroeconomics experts, or mind readers. They need the news to give them a sense of reality. So these pundits are really doing us all a disservice. Shame on them!!!

Immigration as an applied ethics question

The basic premise of libertarianism is that any action is OK as long as it doesn’t infringe on someone else’s rights. So you would be in favor of legalizing drugs, but not drugging and driving which can put others in danger. It gets hard with things like putting junk cars on your front lawn, which could lower the property values of your neighbors’ houses. But you start out with the assumption that actions are permissible and you have to PROVE that they infringe to get them restricted.

But a prima facie rights violation starts with the assumption that something is not permissible and then only becomes permissible when you can prove it is beneficial. For example, take the death penalty. In this case, we start out with the premise that it is banned because it infringes on the right of the convicted. You would need to have really hard evidence of substantial benefits to get it approved.

This is more important than you think because of the behavioral science research that has been done in the past ten years on defaults. A study of 401(k) investments found that when the plan was set up as an opt-in (you had to fill out paperwork to enroll), 36% of new employees enrolled. But when it was opt-out (you had to fill out paperwork not to be enrolled), 86% stayed enrolled. The implications of this for the retirement security of the population are huge.

So how do we consider something like a 401(k) plan? Economics aside for a moment, what is the prima facie assumption? Is it ethically OK to automatically sign people up for things, knowing that it will influence their behavior even if they are allowed to opt-out? 401(k)s may seem like a good thing to promote, but we can use this same strategy for all kinds of programs. Think of all the things that are now “optional.” Newsletters, sex-ed in grammar school, allocating $3 of your tax refund to federal elections, etc, etc., etc. Imagine switching the defaults on all of them.

Then I read a great blog post on immigration by Bryan Caplan at George Mason who discusses an even better essay by Michael Huemer. The economic evidence of whether immigration helps or hurts the domestic economy is so politicized that it’s impossible to get a real sense of the implications. We know it helps some and hurts others. But what is the overall impact? But what we also need to ask (and probably the first thing) is what the prima facie assumption should be. Do we let in groups unless we can authoritatively PROVE that it has an overall negative impact? Or do we keep out groups until we can authoritatively PROVE that it has an overall positive impact?

Read the blog post (and the essay if you have time). They are really worth it.

The King is dead. Long live the King

James De Long has an interesting piece today in The American. I just want to comment on one small part of his essay.

Today's society has become much more complex than the Founding Fathers could ever have envisioned. This creates the unfortunate (to De Long and I agree) circumstance that strong special interests are inevitable. There is no way to become a powerful advocate of anything anymore without specialization. And only special interests with real money at stake can afford that kind of time commitment (by hiring full time lobbyists, etc). And each interest group plays a sort of prisoner's dilemma with each other so that they can all keep their power.

This also guarantees an ever expanding government. The only way new ideas can gain any traction is to carve out a new government agency so that they aren't butting heads with entrenched interests that have more power. So instead of rethinking the crazy bureaucracy, we just add to it.

But De Long makes a very interesting observation. As the special interests control a larger percentage of the government, and the government controls a larger percentage of our lives, the special interests are starting to bump heads. You can't play the prisoner's dilemma game with too many simultaneous players because someone is bound to defect each round. So at some point, and he thinks this point is upon us, the system will break down.

What will come next? He suggests perhaps a new Constitutional Convention (which would require 2/3 of state legislatures to call). I think the lack of civic engagement would prevent this from happening. State legislatures have special interests too. His other suggestion is a third political party will grow based on the promise to exclude special interests. This may be more possible, but how well did Ross Perot do? Maybe someone like Michael Bloomberg could pull it off, being a centrist, rich, and well-respected.

I am hopeful that things will change because I don't like the long term (decades) path we are on. But I am concerned about what the change will be as I have become a bit cynical about our society. The innovation and creativity of the American people has been our greatest strategic advantage. But we haven't applied this to government very well in the past hundred years.

Root causes are hard to solve, whether drugs or CDS

Stratfor (one of the best geopolitical intelligence companies in the world – and that published a great global intelligence report weekly on their website) recently published a report on the drug trade.

One key takeaway is how flexible the drug supply chain/logistical operations are. When the US and its South American partners started achieving success in thwarting the transfer of drugs (primarily cocaine) from Colombia and Peru to the US by ship and air, they switched to overland routes through Mexico. This is one of the reasons for the tremendous growth in the Mexican drug cartels and the shrinkage of the Colombia cartels. If you have been watching the news lately, you can’t avoid seeing story after story about the Mexican cartels. Because Mexico has a much bigger economy than Colombia or Peru, and it has such a porous border with the US to bring in money and guns, it was easier for the Mexican cartels to branch out into other industries than it would have been for the South American cartels. The “war on drugs” may have been a critical tipping point in creating the problem.

Now that the US is turning to the Mexican cartel problem, there is emerging evidence that the logistics chain is shifting more volume back to air and sea. It’s still going through Mexico, but that could change as well if the US and Mexico have success against the cartels.

So what do we learn from this? Solving problems is a lot more complicated than finding a proximate cause and mitigating it. The root cause is always much deeper. Whether it’s addressing demand in the US as stated by Hillary Clinton in her recent speech or legalizing marijuana as requested by the posters to Obama’s Town Hall meeting, what we do know is that the supply chain is not the problem.

Also, this should give us pause as we re-regulate the banking industry. When the G-20 meets this week, that is #1 on the agenda. But if they focus on the proximate cause(s) like the CDO market or AIG, it will all be a waste of time and we will just be setting the world economy up for another crash in the next decade.

The problem wasn’t specific investment types or specific regulations. The problem, as it has been for millennia, is that almost every transaction has asymmetric information. The seller usually knows more about what he/she is selling than the buyer can possibly know. And the buyer knows more about what he/she is paying with than the seller. Capitalism is based on mutual gain through trade. But what looks like a great deal (7% annualized return on mortgage-backed securities backed by the US government through Fannie Mae and insured through an AIG credit default swap) may not be so tasty when you unpeel the fruit.

But regulating MBS and CDS will just shift the financial industry to start dressing up some other investment type. I think that the proposal to require all financial institutions that create derivatives to keep at least 20% of the derivative in house would be a good start. Whatever they dress up, at least they eat 20% of the losses.

The next challenge is the personal incentives. When an investment banker (or anyone else) can get their money out before the market realizes the true worth of what they created, even the requirement I just described won’t work. It would be easy for someone to convince themselves that their newly invented derivative is a great product (not that anyone would do this on purpose), get their millions in annual bonus, and then watch while Rome burns from the comfort of their estate in the Hamptons. This requires moving incentives from short term to long term, perhaps matched to the duration of the securities they work with. If you sell 6-month bonds, you can get 6-month incentives. I’m not sure how to make this work for 30-year bonds, but you get the idea.

I know that if we are true free marketers, this should be done by the banks, not by the feds (or the G-20). But since the banks are run by people getting these same incentives, I think that at least for now, we may need it to be enforced at the government level.