Monthly Archives: February 2015

Take the Red Pill

MorpheusMany people still get their news from television, at home and in public spaces like bars and airports. While CNN is not the most watched news here in America, it is regarded as the American news station of record overseas. What they know about us in Europe, for example, they know from CNN. Not the facts, mind you, but the spin. International viewers know that our news reporting is strongly influenced by government PR efforts, and so they watch to learn what those are.

Amber Lyon, a correspondent at the network, claimed in 2011 that she had been instructed by CNN to ensure her reports helped sway US opinion towards supporting an attack on Syria, and even Iran.

Imagine two traveling businessmen with CNN playing in the airport lounge. One is an American, the other from Central Europe. While Jeremiah ignores the news and checks his email, Ivan watches American propaganda.

Anita Dunn boasted of having total control over the news media and, of course, retired White House spokesmen invariably end up working for CNN. Russians used to call it the Clinton News Network.

Cynicism about the news media increases as you travel eastward across the continent, maybe due to Eastern Europe’s experience with Soviet propaganda – or maybe due to less material wealth. As long as there is a chicken in every pot, people are willing to believe the party line. This “prosperity theory” of propaganda may explain why modern Russians are losing their edge, and why Americans are so completely obtuse.

Jeremiah regularly coaches you to seek out new sources of opinion, like the blog links at right. If you must watch TV news, here are some suggestions:

  • Al-JazeeraAl Jazeera brings you much broader coverage of the world, and much more intelligent coverage of the Middle East. They have a certain “perspective,” of course, which you must take into account – but so does any other news station. In fact, we found a surprising level of objectivity here, on the Gaza conflict.
  • Russia Times – “RT” keeps trying to brand itself as something other than Russia Times. They have a strong anti-American bias, and you will see direct rebuttals of our foreign policy pronouncements – Sergey Lavrov calling John Kerry a liar, for example. We like it for coverage of police and surveillance abuses which, obviously, are hushed up here at home.
  • Fox News – We started taking Fox seriously when the administration started bitching about it. This is the voice of the opposition, and the only place on TV where you can hear that. The mainstream has also, foolishly, allowed Fox to acquire a monopoly on libertarians. The schedule is here. We recommend Special Report, which is a traditional news hour format.

As patriotic Americans, we believe in our country. We also want to believe in our government, and hope that its policies are right. Blind faith, however, does not serve our cause. It is our job, as voters and activists, to critique the policies and correct the politicians. We can’t do that job if we allow ourselves to be fed a steady diet of bullshit on the television.

See also: U.S. ranks 46th in press freedom

Update: The Economist directly attacks RT as Russian propaganda. Charlemagne calls for amping up the European side, with government funds, to counter it. Best line: there is truth in reporting, not “just a postmodern potpourri of perspectives.”


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American Gulag

There is some scary stuff going on with law enforcement in America. Last week, we reported on civil asset forfeiture, and now the leading practitioner of this nefarious program has been nominated for Attorney General. We have been following the trend of police militarization and, today, we bring dispatches from America’s carceral state. Meanwhile, habeas corpus looks like it’s gone forever.

Now, in our outsourced, corporate gulag, you can be locked up and never see your family again – at least not live. The new thing is prison visits on low-def video, for which your loved ones will pay a premium. That means more revenue and lower costs for the prison industrial complex. If you have ever had the experience of a prison telephone visit, you know what a cruel scam it is. Video calls will certainly be worse and, no – they are not allowed to visit in person.

America has about 5% of the world’s population but almost 25% of its prisoners, with the world’s largest number of inmates and highest per capita rate of incarceration

Law and order types say that prison is intended to be punishment. We refer them to the Constitution’s prohibition of “cruel and unusual” punishment, and the Supreme Court’s ruling against California. Ironically, while California is generally a liberal state, it is also broke. The Supreme Court found that extreme overcrowding in Californian prisons amounted to something like torture. Prisoners are left to die from agonizing diseases. If you’re one of these law and order types, go ahead and read the judgment.

The answer to overcrowding is not simply to build more prisons. We incarcerate more people, per capita, than any other civilized country – by a wide margin. See chart below, and this wonderful infographic from Pew. There are 2.5 million Americans behind bars. If the “carceral state” were actually a state, it would be our 36th largest, just behind Nevada. In his book, Jonathon Simon makes the case that mass incarceration is fundamentally at odds with the Eighth Amendment.

Prison Chart

The answer, in terms of policy choices, is blindingly obvious. As judge Morris Hoffman writes, “there is a large body of criminological research that shows that just a handful of criminal law doctrines — including three-strikes laws and mandatory minima for simple drug possession — drive sentences substantially higher than the average citizen believes is just.” The ACLU should be campaigning hard against these doctrines.

Just a handful of criminal law doctrines — including three-strikes laws and mandatory minimums for simple drug possession — drive sentences substantially higher than the average citizen believes is just.

Behind the doctrines is a sinister convergence of interests between “law and order” politicians and commercial interests. Politicians can reduce crime by budgeting more money for law enforcement or, more cheaply, by passing tough sentencing laws. Like pension commitments, these laws create unfunded liabilities that come due after the politician is gone and the prisons are full. Yes, in America people really do serve life in prison for marijuana.

[Supreme Court Justice] Kennedy… called it “sick” that the state’s prison-guards union had sponsored a notorious ballot measure that … now keeps far too many Californians locked up.

The commercial interests include private prison operators, subcontractors, and – for public prisons – the prison guards’ union. These are groups who profit from a large prison population. They lobby very effectively for long sentences, and against rehabilitation. Corrections Corp. has annual revenue of $1.6 billion, and is currently rated a strong buy. See stock chart, below.

CXW Chart

This is not to say that private prisons are bad, operationally, but it does mean that we have a system of perverse incentives. Instead of rehabilitating people, we have incentives to warehouse them cheaply for as long as possible. As with much else in government, this boils down to cost accounting. We do not hold our leaders to account for the economic and social costs of their decisions.

It was nice to see the Supreme Court rule on this, but it took an extreme case. We, the voters, should be taking action. Otherwise, we can add the Eighth Amendment to the growing list of “rights we used to have.”

See also: End Mass Incarceration Now

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Greek Debt Dilemma

We heard that Greece’s new finance minister, Yanis Varoufakis, is an expert on game theory, and we thought it would be fun to analyze the Greek debt crisis from that perspective. Patrick Young says the EU is in a lose-lose predicament, and that certainly sounds like applied game theory.

On one horn of the dilemma (a Greek invention) the EU may accede to Varoufakis’ demands for restructuring. Some of these demands are quite extreme, like growth linked bonds, perpetuities, a bridge loan, and more haircuts. If the EU blinks or, more accurately, if the troika blinks – then the other bailout countries will want the same concessions. Also, as Patrick Young says, it would be unfair to countries like Ireland, which took the medicine.

Germans at all walks of life are sick and tired of seeing their own municipal facilities closed down … bailing out the Greek economy to the tune of €700 per family. That’s a transfer payment the Germans didn’t sign up for.

Morally, this is where Jeremiah stands. Estonia lived through an internal devaluation and emerged stronger for it. Someday, some Greek government will have to make reforms – to cronyism, tax evasion, and unsustainable social spending. Germany seems to be the only fiscally responsible country over there – and they’re pilloried for it. Jeremiah’s moralizing is not the topic, however. We’re talking about game theory.

On the other horn, if the troika plays hardball – halting the ECB collateral waiver, suspending the next tranche of bailout cash – then Greece will be “forced” to exit the Eurozone, and maybe the Union. We put “forced” in quotes because, at this move in the game, Varoufakis would not accept the troika’s terms. Greece would exit, and play the victim. Of course, as Thomas Schelling will tell you, the key is to make sure the troika knows you’re not bluffing.

This is where the IMF comes in. Exiting the euro has always been the right answer for Greece (see this comparison with Argentina). They’re in primary balance, and they could easily implement the three D’s – drachma, default, and devaluation. There would be some pain, but Greece has already endured some seven years of pain. If they had exited right away, they’d be back in the bond market by now. However, like Argentina, they would need help from that lender of last resort, the IMF.

The government quickly collapsed and was replaced by one that devalued the currency and defaulted on the country’s debts … growth resumed a few months later

The IMF is blocking the exit, by cooperating with the EU and ECB. This is because a successful exit, like a successful renegotiation, would also set an undesirable precedent. Spain would be next, the Eurozone would dissolve, and the IMF would have to fund more emergencies than it can handle. It would be the capital equivalent of a refugee crisis. If Greece were to exit, the troika would prefer them to crash and burn, pour encourager les autres.

So, when Varoufakis threatens to borrow from China or Russia, this is not as petulant as it sounds. Whether a practical matter or a bluff, he needs a source of funding other than the IMF – and the IMF has done a lousy job of including emerging economies. Small wonder that China is willing to lend contrary to Western preferences. We wonder, by the way, if the IMF will be so hardnosed when the time comes for France.

So, while there is no guessing how Chancellor Merkel will play the troika’s hand, the likeliest outcome seems to be a continuing fudge while the EU grinds steadily toward mutualization.  They should arrive at that goal just in time for the whole Union to go bankrupt together. Pyrrhus, another Greek.

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Social Value

James Montier has a good post over at GMO, The World’s Dumbest Idea, in which he tries to diagnose what has gone wrong with American capitalism. This is now a popular debate. Montier is a superb market analyst, and he adds to the debate by showing, quantitatively, what has happened to American companies over the past forty years. Jeremiah’s readers will recall that America started going to hell in the 1970s.

Before 1976, professional managers were in charge of performance in the real market and were paid for performance in that real market.

Montier lays the blame on Milton Friedman and a management fad called shareholder value maximization (SVM). He makes observations about corporate short termism, executive compensation, and social responsibility. Montier distinguishes the SVM period from an earlier (and better) “era of managerialism.” Here is his chart showing how SVM has shortened the lives of successful American companies.


To some extent, this is a semantic argument about the meaning of “shareholder value.” Obviously, if myopic (and overpaid) executives are destroying big companies, that is no one’s idea of value.

Writing in 1970, Friedman had probably the same idea of value as did most professional managers, i.e., “if we take care of the customer, then the profits will take care of themselves.” Those were the days of investing for the long term, for retirement. The leading newsletter was called Value Line. Montier, himself, is a “value” investor. The idea that executives could use leverage to juice their options hadn’t been invented yet.

If [a sole proprietor] acts to reduce the returns of his enterprise in order to exercise his “social responsibility,” he is spending his own money, not someone else’s.

Friedman’s point was that executives are not hired to spend the shareholders’ money on social projects. They should focus on making a profit, and then the shareholders can – individually – support social projects as they desire.

A confirmed free marketer, Friedman believed that a company serves society best by creating products that people want to buy, and jobs that people want to hold. This is not too different from the oft cited mission statements of companies like P&G and J&J.

Friedman never actually said “shareholder value maximization.” He talked about increasing profits, which – in the old days – was understood to depend on those other values.

We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come.

In the old days, people didn’t expect to get rich quick on their investments. In a market based on value, that is not realistic. The way to get rich quick is to pillage the value built up by more responsible managers.

Montier cites the case of IBM, and their plan to double EPS in five years. Seriously, double EPS in five years? Any cogent director would have to ask how the new CEO plans to do that. Is there a magic elixir to double our sales? Or, is he planning to slash R&D, cut staff, and load up on debt? You would hope that someone whose family name is on the building defenestrates him at that point – Montier supplies a comparison with privately held firms.

The real problem is not Friedman and not, strictly speaking, SVM. The real problem is that mechanisms have been invented whereby executives can pump their share prices, and their compensation, while actually destroying value. Studies and samples vary, but corporate debt in America has gone from something like two times earnings, in the old days, to four times earnings today.

For the last 35 years, stock-based compensation has been tried. It had the opposite effect of what was intended.

Montier’s article is filled with facts about the perverse consequences of stock based compensation, but he doesn’t make any serious recommendations for public policy. He leaves us hanging with a vague notion of “stakeholder capitalism,” and an apology for sounding socialist. Of course, this is where a socialist would say that government should run all the companies, because “the government doesn’t have to make a profit.”

That is actually the world’s dumbest idea. It would merely exchange one set of rapacious managers for another, probably worse. It is also a case of freeze-frame economics. Socialists always want to take over the existing companies, with no provision for entrepreneurial new ones.

So, what about policy? The Forbes article quoted here contains specific legal reforms, like getting rid of forward guidance. Another obvious reform would be to hike interest rates. The Fed is ostensibly “independent” so that they can choke off asset price inflation, financialization, and structural traps. It doesn’t take independence to be the stooge of Wall Street.

See also: The Dumbest Idea in the World: Maximizing Shareholder Value

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