Money and Human Nature
If you want to get a sense of how serious the current recession threatens to get, all you have to do is take the Holland Tunnel to New Jersey. When you pass the dock facilities at Elizabeth compare to last year's pile the number of empty shipping containers now mounted up with nothing to do. n The difference is altogether striking. There is a rapidly growing mountain of containers there. First there was a hill, and within a month half an Annapurna. Economists and people who write about the economy are fond of the term "leading indicators." These are unexpectedly realistic, if seemingly minor, economic items that nevertheless suggest major changes in the broad economy.
For example, when interior decorators to the rich begin to hurt for work, it is reasonable to assume that not too many months down the line there will be a decline in the numbers purchased of drapes, etched-glass screens, paint jobs, porch jobs and professional-grade kitchens in the homes of people always on a diet and always in restaurants. Certainly the unemployment of these containers should be a bold-faced clue to future unemployment of the people and enterprises involved with the products the containers shift around the country and the world.
Each container when full holds goods ranging in value from denim to heroin to gearshifts to cartons of clementines to boomboxes to Marc Rich's newly repatriated furniture. Each full container represents a large array of decisions to buy, decisions to sell, decisions to produce and decisions to consume. Since much of the traffic involves overseas trade, there is a clear indication of a large-scale winding-down there as well as here. When the containers are doing nothing, so are a lot of people. There is mute eloquence in the empty steel boxes.
This connects to the career of recently deceased Herbert Simon. He received a Nobel Prize in economics for suggesting that perhaps investors and consumers were not as exquisitely rational as economists claimed. Instead, he announced that they engaged in what he called "bounded rationality." This was just a polite and rather inadequate term for poor rationality. And he didn't go anywhere far enough in contemplating the emotionality of economies and markets. Now at last there is the beginning of some professional understanding among economists that the brain evolved not to think but to act. Soon enough they will have to identify the enormous importance of group pressure and social flow in defining how they will act.
The brain bobs in a stew of roiling emotional and social tides. The Sunday New York Times business section on Feb. 11 finally ran a large essay on how some economists begin to factor emotionality into economic decisions. About time. Those of us working in this area have known for more than 30 years that the genome affects behavior as much or more as it affects hair color. Neglect of what we might call the human nature factor reflects an astonishingly poor performance by the economics and business faculties of the world. Since the mid-20th century they largely employed as their working tool a picture of the brain that is simply wrong, or at least is so limited as to remain a treachery.
And the amount of research by economists of day-to-day economic life remains relatively negligible. About 15 years ago, in a famous letter to Science, the NYU economist Wassily Leontieff (also a Nobelist?and a graceful dancer) noted that in the preceding 10 years of publication of the major economics journal in America only 2 percent of the articles used original data. The remainder were mathematical manipulations of other manipulations of various data sets, and were essentially based on the notion that economic decisions were made with fine rationality and with attention to all relevant information.
In that event, how do we explain that countless research reports on companies and industries by brokers, banks, mutual funds and other agencies have consistently recommended purchasing securities both while they were going up and going down? Virtually no analysts said "sell"?until it was too late. There is excellent reason, based on facts and knowledge of the human heart, to presume that banks and brokers would not comment negatively on the stocks of companies with whom they did lucrative business. Floyd Norris of the New York Times business section has notably exposed this now-customary dishonesty, and has served his readers well. Whatever the mumbo-jumbo numbers said about the dotcom souffles, the fact was that for many outfits, the more business they did the more money they lost?a headline of Feb. 13 that is all too typical reads "Lastminute.com Loss Doubles, But Sales Increase Fourfold." Of course the travel agency stock is down more than 80 percent from the point at which the privileged smart money bought it when it was first released in London.
The same kind of wishful thinking underlies some of the arguments about the proposed tax cut. For example, a favorite cutter theme is that shaving or abolishing the capital gains tax will mean that people will be more likely to buy stocks. This will drive their prices up and help the market return to its former levels. That sure sounds rational.
But enter real behavior. The market soared precisely when there was a capital gains tax! You can even argue that the existence of the tax makes people hold on to stocks longer so they rise more, precisely to pay the tax. That's kind of rational, too. It's also kind of rational to say that if people have to pay a lot of taxes, they will work harder to have enough money left over after the government extracts its share. It's also kind of rational to legislate high capital gains taxes that decrease the longer the stocks are owned. The intent here would be to turn investors into long-term savers, not day-trading gamblers.
But Messrs. Merrill, Lynch, Morgan, Stanley and Schwab will certainly lose business, and in any event, the smell of political blood?lowering taxes?forestalls any subtle moves when a crude ax-hit will do. And as corporate lobbyists swarm the capital to beg for tax breaks for their clients, the vaunted and somewhat rhetorical surplus will ebb like beach sand during a wild storm.
These are not comments on the tax proposals themselves, only on the relatively clumsy and questionable economic analyses that are claimed to support them. It may make more sense to abandon the pretense that thoughtful economics governs this process, and acknowledge that the issues essentially revolve around gleeful greed on one hand and ethics on the other.
For example, we have been treated to an historical astonishment?the announcement by 120 or so of the wealthiest Americans, such as Rockefeller, Soros and Buffett, that they oppose abolition of the estate tax because it violates the equal opportunity ethic of America. Who knows better than its most successful collectors the power of money to create inequality? It is merely a comedy to claim that removing the estate tax will stimulate economic growth, especially since it will curtail deductible contributions to precisely those faith-based and other points of light that appear to loom so large in White House plans for future alleviation of the growing economic gap.
Meanwhile the containers pile up in New Jersey. Just as "irrational exuberance" fueled investments and expenditures that were rationally insupportable, the equivalent negative emotion kicks in at the other swing of the pendulum. There's a physiological analogue to the danger the economy confronts. When people go on fairly severe diets, the inner systems of the body appear to recognize that food is scarce, and so it slows down its metabolism. It needs and uses fewer calories?an adaptation very useful to a hunter-gatherer dependent on unreliable food supplies. It is likely that the same kind of mechanism affects economic behavior too, though for psychological reasons. People move into the scarcity mode, hence the container pile. All the nonsense-talk about "a soft landing" misses the point that what is needed is a discernible stirring of the consumption gland. And that probably depends on potential consumers deciding they live in a reliable, fair and manageable world.
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George Stubbs’ Horse Sense