Work on what is desirable, not what is feasible

I am at a conference on the North American Free Trade Agreement, hearing about lessons one can learn from the EU (don't have a common currency, do have structural funds). It is clear that economics is not a zero sum game and free trade areas really do hugely benefit everyone involved. 

But it isn't signing an agreement or a charter or even a constitution that makes this happen, as much as a wise approach to regulation. US regulatory agencies are powerful, and they can be islands - not necessarily connected to the big picture. Someone is telling the story of how regulatory differences are hurting trade in North American jellybeans -- and how many more industries would flourish if regulations were unified, clear, and protective of consumers without being too rigid and holding back economic growth?
"You need large ideas to overcome the small obstacles," says Bob Pastor, Director of the Center for North American Studies at American University. He adds a piece of advice for government agencies: "Work on what is desirable, not what is feasible".
Those words strike me as a mantra for life. How often do we focus on the short term, on getting through the day, the month or the quarter? 
Every so often we should stop what we are doing, close our eyes, and ask ourself what the big picture looks like, what is the direction, what is the dream. Then our large ideas will become clear enough to overcome whatever small obstacles are keeping us focused only on the feasible. Worth thinking about.

Meritocratic Capitalism

Since the recent financial crisis, the search for a better economic model has accelerated. Some have questioned the way our society measures success: should quarterly GDP growth remain our guiding metric, or should we focus on something else to measure, say, happiness? Does it make sense to continue to honor the god of the free market when greed is its driving force, and that greed has destroyed the lives of so many? Should highly educated people be running on a hamster wheel after short-term profits, oblivious to longer-term changes all around them that they ought to be planning for? Does it still make sense for our new generations to take out loans they'll never be able to pay back in order to afford a college education that won't place them in a job and won't teach them the skills they'd need if they got one?

America has slipped way down in global social mobility rankings; the "have nots" are no longer able to access the echelons of the "haves". Put more bluntly: the American Dream is dead.

The electoral debate is about how Keynesian we want to be, how much or little we want government to stimulate economic growth and which approach will work best (top down, or starting with the middle class). 

But perhaps the debate should be much more radical: how do we bring back a system that allows excellence to emerge, out of every pocket of society and every income bracket, and rewards hard work and merit?

The man who coined the word "meritocracy" in the 1950s, British Labour Party strategist Michael Young, said society needed two things: equal opportunity for all through quality, free education, and a system that would recognize and reward merit through social mobility. This would not only be a just society; it would be an economically competitive society because the most productive of its members would rise to leadership positions and lead well. The best and the brightest would rally businesses, create jobs, train youth, launch new ideas, plant seeds.

But Young warned that a day would come when those Darwinian geniuses at the top who had risen through the ranks to lead, would begin to enjoy their power and want to consolidate it, wall themselves into the citadel they had reached, change the legislation to keep the "haves" in and the "have nots" out. Only the offspring of the elite would have access to superior education and superior jobs. These would compete among themselves for more power and money, leaving the rest farther and farther behind. 

Eventually, the rest would revolt. They would hit the streets, throw tomatoes, perhaps bombs. The revolt would be the downfall of all, proof that greed as driving force does not, in the long term, create a functionally efficient society.

What does? Long-term thinking does. Sustainable thinking does. Good governance with checks and balances. A system with leaders who act as guarantors of equal opportunity for all (education, the public library system that Andrew Carnegie founded, the Internet, Big Bird teaching children of all social classes to read). A system with leaders elected to further the COMMON good, not just the good of their constituencies. 

An economic system where investors adopt long-term thinking and demand the same from corporate leaders. 

The UN Global Compact, and many other public and private organizations, are spearheading projects to bring such thinking mainstream. It is catching on. 

Short-term greed won't go away. But perhaps it will become less effective as a driving force. Will we learn this before, or after, the revolt Michael Young predicted?

Regulating the Global Financial Industry

The Commodity Futures Trading Commission, the not very transparent 5-person committee of Republicans and Democrats charged with regulating the US derivatives industry, is reportedly split over the question of regulating overseas trading by US-based financial institutions.

The New York Times reports concern by commissioners that too much regulation in the US could encourage financial institutions to operate elsewhere.

The report raises several issues. The first is the question of "regulatory arbitrage". It seems insane that in a world of global finance there is still only local regulation. Obviously banks and other financial institutions will want to go where the regulation is most lenient; governments do not want their countries to lose business to other financial centers, especially when all are fighting to reduce public debt and deficits (and competing with each other for anything that can bring economic growth).

The second issue is a governance issue. The Commission operates very much behind closed doors, and there appears to be a lack of clarity on what the ultimate goal is. I believe that a regulatory body should focus only on safeguarding consumers from risk (and clearly this is the mandate, based on Lehman, J.P. Morgan etc.), not on competitiveness of the industry versus London or Hong Kong.

Another issue has to do with the scope of the regulations. How can only certain kinds of institutions be included and not others? What about hedge funds? How can you even regulate these things in a world where any average Joe can go online and invest in some formula unrelated to anything concrete (a future on a hypothetical event with a hedging factor based on something else packaged and resliced, with an algorithm based on a graph hitting a ceiling or a floor) located not really anywhere (somewhere in the 'cloud')?

Perhaps the G20 or other transnational forum should begin a serious discussion of all this, so fundamental to the future of our children.

What Happened to the American Dream?

The problem with Mitt Romney's taxes isn't Mitt Romney. He shouldn't be considered a bad person because he works to make a profit, is successful, and pays the legal tax rate on his earnings.

The problem is that if elected, he is not likely to change that particular tax rate structure and improve America's economy.

American capitalism was once based on what was known globally as "the American Dream". It was based on the founding fathers' meritocratic ideals: incentives were built into the system such that people would want to work hard; then society would reap the benefits of the hard work of its citizens.

Those meritocratic incentives had two pillars to them: equal opportunity at the starting gate, and then a competitive environment that would reward merit (a combination of talent and hard work). The human instinct for the pursuit of happiness would take care of the rest.

Equal opportunity means all citizens should have access to the basic tools needed to compete, things like freedom, protection from violence, an education.

Then, a competitive environment with rewards is needed. Soviet communism didn't work because without rewards people don't have a reason to work, to bring forth new ideas, to build. The measure of whether a society has a functional reward system is social mobility; the more people are changing their level of wealth (for better or for worse), the more the society has incentives in place that reward merit. Societies with high levels of social mobility tend to also have high levels of economic growth, such as China today.

Back to Mitt Romney's 15% tax rate. Studies are showing that social mobility has slipped in America. It is harder than it used to be to improve one's status. The 1% are hoarding the wealth, hanging onto it and making it grow for them by lobbying, powerfully, to pay lower tax rates than the middle class (with notable exceptions like Warren Buffett). The rich-poor gap is increasing. The education divide is increasing. Equal opportunity has gotten lost, and the reward system (falsified lately by easy credit, leading to broken dreams) is distorted and dysfunctional.

Tax rates really need to be fair, and need to be structured precisely around a study of how progressive they can be to provide both equal opportunity and rewards for hard work. The American Dream needs to be brought back, and then the economy will work again too.

Italy's Formula

The European debt crisis rages, with the waters (temporarily?) calmed due to a successful strategy by the European Central Bank, with other banks, to keep liquidity flowing and bond issues subscribed.  The governments of Greece, Ireland, Spain, Portugal, and above all Italy (too big to fail?) need to bring debt and deficits down to sustainable levels.  That comes through austerity measures: after decades of loose spending, costs must be reigned in and bills paid. Yet austerity compromises economic growth, the most important ingredient for sustaining interest payments and paying back debt. Noone really has answers as to how European governments can stimulate growth at the same time as administering austerity. The solution is good management. Business schools abound with case studies on how companies on the verge of bankruptcy have been turned around and made successful, in the face of seemingly impossible challenges. Italy's new management has just put forward a bill designed to remove various systems and structures inhibiting growth, unleashing the hidden potential in the economy. The government claims, citing independent studies, that such unleashing of potential could boost annual GDP by more than 10%. The tricky part will be convincing interest groups (taxi drivers, lawyers, pharmacists and so on) to let go of acquired, beloved protectionist mechanisms, to not go on strike, to not take to the streets, to yes roll up their sleeves and get down to work for the good of the nation. The beauty of the government's bill lies in the detail. Lawyers will be required, for the first time, to issue an estimate of their fees in advance. Local governments have been commanded to remove any rules that "condition, impede, or delay the launch of new businesses or the entry of new economic players", by the end of this calendar year. There are many other parts to the package, mainly liberalizing the economy but also pumping money into infrastructure projects that will create jobs and move the economy. Little things like lawyers offering estimates can go a long way. Healthy competition will be created. Consumers will get in the habit of shopping around more. Lawyers will have an incentive not only to charge less, but to offer better quality services. Hard work and talent will mean getting ahead. Young people will have an incentive to work hard, because in a free market hard work pays off (in Italy you tend to have to "know someone" to get ahead; talent doesn't necessarily get you anywhere). The government's bill also takes a stab at improving Italy's judicial system by carving out a section of the courts, to be specifically devoted to company disputes. It aims to get such disputes settled quickly and effectively. There is a great story about how in the land of random justice and never-ending trials, the court in Turin decided to introduce an efficient "first in, first out" policy to push cases through quickly. This had huge repercussions: companies started paying their suppliers because they knew if they didn't they'd be forced to in court. Once laws became enforceable, people started abiding by them. The rule of law is the most basic foundation for a functioning economy. (This, by the way, is the best way to combat the mafia, or corruption: introduce a functioning, clear, effective judicial system.) In the end, freedom to express potential in a fair, meritocratic system should be the key to the conundrum of how we can have austerity and stimulate growth at the same time.

Where are the Ideas?

Where are we in history? We've rolled out Republican ideals, toyed with Libertarianism,  breezed through Marxism, tussled with Anarcho-Sindacalism, accepted the victory of Capitalism. Today formerly Communist and Socialist economies are marching forward with their own varieties of Capitalism, about to beat the West at its own game and sweep the broken pieces under the rug. But economic systems - the ways humans choose to organize themselves in community - never stop evolving. So what is the next wave? Clearly in the West it isn't about the struggle of the Worker anymore. It is, more likely, about the widening of the rich-poor gap, the 1 percent versus the 99 percent. Our finance-weighted capitalism, if left to its own devices, uncurbed, widens that gap. Possible future scenarios range from a magical, never-ending supply side growth trend with happy trickle-down effects that appease the poorest even as the gap is widening, to a day of reckoning when all the debt is called in and dominoeing defaults freeze credit, liquidity, and life as we know it. Or we could see growing frustration, revolution, an Occupy movement engulfing everything. Or globalization accelerating to a gallop and newer parts of the world sucking financial wealth like a vacuum far away to distant lands. In the US the debate is very much focused on large government versus small government. It is somewhat misguided, in the same way purely theoretical ideologies like Marxism or Libertarianism have been misguided: human nature always comes into it and ruins everything. Thus a society with big government will inevitably become unwieldy and corrupt, while too little government provokes injustice and fails to address societal issues that cannot be addressed at the level of the individual. Any group forming a community must have rules, as well as the tools to make sure those rules are respected. Beyond that, there is a crucial role for government: it should pursue the long-term benefits of the society as a whole, benefits such as clean air, education, or infrastructure. Society as a whole can wear different hats. It can be the Consumer. In a country where the Consumer is king, the government might decide that legislation should aim to make a wide choice of products available with prices competing downward. But in certain cases this can have dangerous consequences, such as the lack of a single standard for cellphones across America, or the electricity blackouts in California. It could mean risking product safety, or allowing for abusive child labour. Another hat is the Taxpayer. The government can decide the Taxpayer is king and needs his taxes cut no matter what. Or the government can focus on Constituencies. Lobbies. Interest Groups. One versus the others in a vicious power game involving votes and money. Or society can wear the hat of Future Generations. This would be the wisest way for a government to approach society (though practically impossible within our current political systems). It would mean cleaning up air pollution to save on future health costs. It would mean investing in technological innovation. It would mean lots of training programs and support for entrepreneurial initiative. And it would mean spending money wisely, working together, creating value for all.