25 October 2016

Dark Age Ahead -- the review

Jane Jacobs is most famous for her Death and Life of Great American Cities, a book that I continue to recommend to anyone interested in the way that cities create value by encouraging human interaction (and destroy value by inviting cars to disrupt and impede that interaction), but Jacobs was also a prolific thinker and writer on a number of other topics.

In this 250pp 2004 book, she looks back at past dark ages to identify the patterns that she sees emerging in North America. (She was born in the US but migrated to Canada as a 52-year old after she was arrested  in 1968 for disrupting plans to "pave over" Greenwich Village. She died in Toronto.)

In her definition, a "dark age" is one in which a culture loses its past knowledge, falling into a mass amnesia in which life grows more miserable and short under the influence of quacks, fear and superstition, with each resulting failure driving people further into desperation, isolation and further self-destructive action.

The key idea is that dark ages arise internally within a culture, even as failures are blamed on outsiders, thereby creating a dynamic in which further reliance on homegrown "solutions" leads to more failures because those solutions are untested, inefficient and oversimplified.

As an economist, I would put this theory in the context of trade, i.e., the exchange of goods or services that leads each trading party better off by allowing both to benefit from the resources and experience (the comparative advantage) of the other. Such win-win exchanges clarify why a reduction in trade (towards "self-sufficiency" or autarky) is so harmful: it turns us from specialists able to benefit from our productivity into generalists who must learn skills and use resources over which we are more amateur than expert.

You should be seeing some parallels to Brexit and Trump by now, but those parallels are merely the most recent version of a long-running human desire for simple answers that end up failing, thereby increasing misery and poverty.

Jacobs discusses five pillars of culture whose decay moves people towards a dark age:
  1. Community and family
  2. Higher education
  3. The effective practice of science and technology
  4. Taxes and government powers connected to needs and possibilities, and 
  5. Self policing by the learned professions
In making this list, she notes that she is not listing racism, environmental destruction, wealth inequality, and so on. That's because -- and I agree -- she sees those problems as the result of failures of the deeper factors listed above.

Let us look briefly into how the weakening of each of these pillars leaves a culture vulnerable to demagoguery, civil strife and collapse.
  1. A weakening of family and community has multiple negative impacts on individuals. First is the loss of social interactions that support tolerance, provide mutual insurance, help children mature, and protect the commons from decay. Single parent families, gated communities, and "government charity" signal such weaknesses at the same time as they provide less-than-complete replacements.
  2. Higher education gives people skills in critical thinking and exposes them to new ideas. The biggest problems with higher education these days comes from an emphasis on STEM (science, technology, engineering or mathematics) degrees over other fields (especially humanities such as classics, languages, history and so on) that are not "marketable." This emphasis, combined with the need to earn money to repay student debts, leads to a narrowing and biased collective perspectives rather than skills in critical thinking or acceptance of other perspectives.
  3. Science and technology can provide an important check on superstition and fantasy, but its effectiveness will be undermined by "know nothings" who think with their guts and reject experts ("we've had enough of experts"). All that remains are echo chambers of group thinkers who lack the ability -- and inclination -- to reconcile their views with those of others, as well as with reality.
  4. Taxes and powers are a big topic, but their effective use contributes to our collective prosperity just as their abuse contributes to conflict and corruption. Government powers should be used with caution, not for the abuse of citizens (war on drugs or on minorities), foreigners (wars in Iraq and Afghanistan), or the other party (Congressional sabotage of presidents dating from 1994).
  5. Professionals such as lawyers, police, doctors and bankers have all undermined their credibility and contribution by blocking attempts to improve their accountability, introduce competition where they abuse market power, and so on. The rise of "occupational licensing" has made it hard for unemployed people to get jobs cutting hair just as it's blocked the expansion of AirBnB or Uber.
I'm sure that you can add your own arguments and examples to these categories, but Jacobs's claim is that their mismanagement undermines our collective wealth, cooperation and tolerance, leaving the door open to quacks and demagogues who promise quick victories over "those guys." The Economist recently covered this story by way of Trump's campaign, but you can see similar lies by "leaders" in Russia, China, the (semi-)UK, France, Turkey, Egypt and many other countries. The upshot of lies and deception in all corners is an increase in paranoia and permissiveness towards "us versus them" policies that makes everyone worse off.

What drives this process of undermining the five pillars? Money provides an excuse to sacrifice others. Jacobs describes how the US car industry did its best to remove public transportation and pedestrians from city streets that would be freed for use as parking lots and expressways. She also identifies "credentialism" businesses that make money from selling access to jobs that used to be open. (I'd add universities that have raised their prices just as fast as "affordable loans" were issued to  students.)

Then you have the "job creators" who seem to think that it's ok to pollute the environment or kill children if someone gets paid to produce that death. The US Chamber of Commerce just claimed that "EU energy prices in the US" would cost the average American household $4,800/year. This travesty of an analysis misses the obvious point that higher prices in Europe are due to taxes that can easily be recycled to families. Energy intensive US businesses, OTOH, are NOT eager to pay for their pollution, as that would force them to use waste less energy. (Don't even get me started on Wall Street's Crony Capitalism.)

Jacobs has her own (sound) logic for debunking the "cars=jobs=growth" garbage spewed by the car/oil/cement industries, but what matters here is the combination of weak communities that cannot oppose new roads, undereducated graduates who cannot think of the human impacts of cars everywhere, a lack of sound science to counter lobbyists, the distortions of lobbying to oppose taxes on harmful car/fuel use and to favor those industries, and -- finally -- the lack of consequences for lawyers and engineers paid by industry to forego their professional methods as they serve their employers' PR departments. Jacobs's point, in other words, is that the social infrastructure that has opposed exploitation of the many by the few (aka "privatize profits and socialize losses") has weakened to the point where we risk slipping into a Dark Age.*

Recall that she published this book in 2004.

Her solution, as ever, is "subsidiarity," which would often be more effective than centralization, e.g., cities controlling their budgets and policies (something that's prevented by provincial governments in Canada, Washington DC in the US, and Brussels in the EU). Greater subsidiarity makes it easier to avoid one-size-fails-all policies,** but not it is not the solution to larger issues such as international trade or climate change. Those issues cannot (and should not) be resolved at the postal code level, BUT it would surely be easier to talk about free trade if people lived in safe communities, felt protected by poverty-reducing taxes (e.g., basic income as an insurance against unemployment) and so on.

Speaking of communities, she has an interesting discussion of the housing bubble and its "inevitable collapse" due to supply outpacing demand. She predicts that collapse will create an opportunity to cut back on sprawl and "densify" cities and suburbs as people find cheaper ways to live in the existing housing stock. This analysis has turned out to be exactly right, except in the magnitude of the damage from the bubble blowing up from its Wall-Street-DC-supercharged size.***

Hopefully, this review gives you a feel of the topics under discussion -- topics that can hardly be more important in today's world. As additional notes, I will mention that the book seems to be structured into a series of essays rather than one long thesis, which can make it seem more like a series of magazine articles than a book, even if its chapters all revolve around the same topic. Further, the book has end notes that are far more interesting than normal. Jacobs was clearly a passionate thinker on these topics.

Bottom Line I give this book FIVE STARS for its timely (timeless?) examination of the forces that support and undermine our communities. The forces propelling us towards a Dark Age are already there, and we must understand them if we are to fight for our quality of life today and in the future.

* The current difficulties of the no-brainer carbon tax in Washington State -- lefties oppose it because they cannot spend the tax money on their pet projects -- is a perfect example of where a good policy will be undermined by ideological greed, much to the pleasure of the oil lobby. Hello Baptist and Bootleggers!

** Her bashing of zoning codes (e.g., single family residence vs light industrial) was gratifying. She doesn't call for a Houston-style free for all, but "performance codes" that allow buildings and behaviors that do NOT contribute to heavy traffic, noise, smells, blocked skies, ugly lighting and unharmonious building shapes. The US adopted codes in 1916 that banned high density and separated commercial and residential uses. Those codes produced dead neighborhoods that required cars to access. (My Amsterdam neighborhood is full of mixed uses; I was sad to see the metal working shop shut down but the owner was retiring...)

*** Again, you can use her five factors to explain how weak communities (who needs community when you're getting rich?), etc. contributed to the housing crisis. The sad thing is that there's no sign of the Federal Reserve or Fannie Mae/Freddie Mac changing their poor underwriting policies.

18 October 2016

Water Integrity Global Outlook -- the review

Back in 2008, Transparency International highlighted the depth and impact of corruption on operations in the water sector. In this post on that report, I wrote:
To understand why water provision is especially vulnerable to corruption, consider this "equation":

Corruption = monopoly + discretion - accountability.

Thus, you see why I spend so much time on this blog discussing the troubles with monopolies, asymmetric information (water managers know more than us), and community oversight of water agencies.
Those problems have not gone away,* so I was interested to see the update on that report, the Water Integrity Global Outlook (WIGO) that the Water Integrity Network (a spinoff of TI) published on World Water Day this year.

This edition was disappointing, as it seemed to put far more weight on managed, bureaucratic "solutions" than creative, community control. Consider their recommendations:

Overall recommendations
  • Ensure the full involvement of all relevant stakeholders in processes to build integrity and fight corruption in the water sector.
  • Generate reliable data on the extent of corruption in the water sector and the economic and social damage that results.
  • Put principles into practice: build ‘integrity walls’ appropriate to the context.

Chapter 1: A Global Mandate for Water Integrity
  • Explicitly recognize and address the lack of integrity and the presence of corruption as major concerns in water governance and management.
  • Strengthen water integrity in order to support the implementation of the SDGs and ensure the fulfilment of the human rights to water and sanitation.

Chapter 2: How Policies and Laws Can Support Water Integrity
  • Develop and enforce water policies that incorporate TAP [Transparency, Accountability and Participation] principles along with anticorruption measures in accordance with the obligations of the human rights to water and sanitation.
  • Ensure public scrutiny and balance stakeholder interests in political and legislative processes.

Chapter 3: Following the Money
  • Establish a comprehensive accountability mechanism anchored in the public finance system for water sector financing from all sources.
  • Engage with ministries of finance, audit institutions and parliamentarians to make water and sanitation a priority and increase their understanding of the sector.

Chapter 4: From Planning to Implementation
  • Strengthen control mechanisms for projects.
  • Build an effective relationship with stakeholders to ensure the fair and sustainable implementation of projects.

Chapter 5: How to Enhance Integrity: Strategies, Tools and Approaches
  • Develop targeted water integrity advocacy at multiple levels.
  • Develop capacity-building initiatives within comprehensive frameworks for action.
  • Adapt tools to local contexts and combine them in broader strategies.

Chapter 6: What Counts? Monitoring and Evaluation
  • Monitor and evaluate the quality and sustainability of water services in order to assess the impact of projects and enhance service accountability.
  • Enable and encourage independent monitoring of activities by the media, nongovernmental institutions and civil society.
A charitable reader might interpret "stakeholder," "fair," "participation," and other mom-and-apple-pie words as providing an appropriate plan to tackling corruption in the water sector, but I am more critical. Take "develop and enforce water policies... in accordance with the obligations of the human rights to water and sanitation." I've done some research on that topic [paper, shorter version] and come to the conclusion that it's really hard to enforce human rights to water when the enforcement authority is itself corrupt. Rather than conclude with wishful thinking ("developed policies will be enforced"), I thought of ways for the poor to benefit from competition for their water (via property rights) or money (via new vendors).

The discussion of competition and markets in the WIGO report is, sadly, mostly about the problems with such mechanisms rather than how they improve incentives in response to customer (not stakeholder) demands. This WIGO report, therefore, misses a major tool for improving water management (customer power) at the same time as it recommends a tried-and-often-failed "solution" of omniscient direction by some magical stakeholder-driven-bureaucratic process.

Bottom Line: I give this report FOUR STARS for its review of issues related to corruption in the water sector, but recommend that readers bring a skeptical eye to some of its empty recommendations. Instead think of escapes for those suffering from corruption, neglect and incompetence. Escape can occur via cooperative water users associations, citizen-regulators, competition for the right to deliver water, or anything else that works. We know how to combine money and technology to bring safe water to anyone's tap. Now we need to hold managers accountable for failure to execute.

* And I've written in those topics: "Time to make the bureaucrats accountable," "Unfair water rates hurt the poor," "Worried about the drought? Let farmers buy and sell water," "Performance insurance: rewarding managers for better service" [pdf], "Save the poor, shoot some bankers," "The end of abundance: How water bureaucrats created and destroyed the southern California oasis," and so on (read chapter 6 of Living with Water Scarcity for a concise summary).

Addendum: Wow, check out this post on NGO's fear of actual evaluation of their project performance! (H/T to EB)

17 October 2016

Monday funnies

Note that these scams combine market (asymmetric information) and government (subsidies) failure:

(... and the maybe-joke ending reflects the even dumber way that these operations, like spam, exist merely to take money)

14 October 2016

Friday party!

I sure hope these guys are friendly in a few years...

11 October 2016

The big danger of big data algorithms

I just listened to an Econtalk podcast with Cathy O'Neil on Weapons of Math Destruction, and I recommend her perspective on why biased algorithms are dangerous (e.g., putting people in prison or denying them a job). You'd have to listen to the podcast to get the exact context of my comment here, but perhaps you can see the gravity of the threat:
I'm surprised to see so many comments proclaiming that markets will solve the issues Cathy raises. In the podcast, I thought that Russ was not looking too deeply into what she was saying on the danger of asymmetric incentives being magnified by datamining.

Her example of payday loans or ripoff universities [using data to take advantage of the poor] was on the money. Russ's reply that "better lenders could set up a charity to solicit funds to compete for ad space" was about the longest struggle against reality that I've heard for awhile. OBVIOUSLY, as I learned from Russ's Econ 1 class in 1989, demand [for ads] depend on the profits to be made. Her objections against such a tilted playing field with respect to "vulnerable" consumers is about as controversial to me as advertising to children. Anyone who's been paying attention to the results in behavioral economics knows that advertising and deception work -- and work better (for the advertiser) when the target is vulnerable. I'll stop.

Anyway, this was a brilliant episode, as this problem is indeed way bigger than people imagine. I work with data and saw the dangers of the subprime crisis.* The dangers here are indeed of the same magnitude -- and far more devastating to our lives and welfare.

* David Zetland August 13, 2007 at 5:36 pm
The subprime thing IS big because it’s the canary for the HUGE raft of Collateralized debt obligations (CDOs) that are a web of unknowns (and unknowables). A lot of hedge funds are going to see their “equity” evaporate when CDOs are marked-to-market. (They are avoiding liquidation now to keep their fantasy prices intact.)

This may be a good post to save when you need humility in the future šŸ™‚