Wednesday, April 1, 2009

How Does a Humanist Approach Economics?

Exactly what should a humanist think regarding the economic woes that we are suffering through in the US and around the world? What economic approach should a humanist embrace or are there a number of approaches that can be embraced?

There have been volumes written on the subject, of course, with points of view that are literally diametrically opposed to each other and everything in between. Ayn Rand, a non-theist, advocated unfettered capitalism; Karl Marx, another non-theist, advocated a communistic approach. Closer to the mainstream, Adam Smith, Milton Friedman and John Maynard Keynes have all exerted differing influences on economic thinkers and policies that have followed.

Indeed, if you enjoy contradiction and opposing opinions, listen to a number of different economists and economic forecasters explain what has happened and what is about to happen and you will undoubtedly hear everything ranging from a prediction of the next great depression to the next economic boom being just around the corner.

And this is the problem for the freethinking humanist; economics is most certainly still an inexact “science.” There are simply too many factors involved, not the least of which is almost completely factor of unpredictable human nature at play in the economies of an increasingly complex world. “Random” stimulus such as weather, war, corruption and good and bad luck conspire to make the future nearly totally unpredictable. Add human emotions such as fear and euphoria and it becomes clear that forecasting the economy requires more than complex math; it requires complex psychological analyses of masses of human beings as well!

That is why it is unwise, in this writer’s opinion, to have an unswerving approach to economics. The guidelines that we should respect in the economic field involve those common decencies that we revere in all areas of human endeavor, such as not causing unnecessary harm, enabling individual freedom to the degree that others are not harmed, honesty, responsibility, fairness and reasonableness.

This approach does not rule out many moderate economic approaches; it would rule out, for example, communism which promotes a dictatorship of a particular class and may disallow the individual right to be enterprising. A humanistic approach would also rule out a fascistic alliance of large businesses with government. These two approaches are not compatible with fairness or individual freedom, not to mention the fact that fanatical followers often will accept human suffering rather than sacrifice any aspect of their economic belief system.

What is left for us to decide as rational agents is to figure out in each economic situation, what approach harmonizes with the common decencies; what approach allows for individual freedom and, in addition, works well to raise our standard of living and mitigate human suffering! What may work for auto-making or banking may not be the right approach to a utility or other business involved with common areas of a nation, such as roads, police, the army or schools.

Should the goal be as little government taxing as possible, with its concordant fewer government services; or should we band to together via higher taxes to create a social safety net for those who may fall into need?

Would the low tax approach allow for more human suffering? Would the higher tax approach lead to sloth and “gaming the system” lowering everyone’s standard of living?

Should the market determine the price of a product; should a government or a bureaucrat?

Once again, we know that both approaches have problems and limitations. The market approach gave us Enron, Lehman Bros., AIG, Bear Stearns, the health care system we now have and the US auto industry. And, of course, the Great Depression and our current woes.

The Command Economy approach gave the world the disastrous economies of Russia and China for much of the last century. It has only been when both those countries abandoned those failed economic policies for freer markets that their economies grew tangibly improving the lives of many citizens. Even though their new economies have brought other problems to the fore, lives have improved. It is clear already that even in Russia and China, despite capitalism’s success in improving lives, this success is not unqualified.

Admittedly this is a frustrating and not totally satisfying way of approaching the topic of economics; it’s so uncertain and non-committal. It is much easier for those who crave certainty to be total and unblinking capitalists, libertarians, socialists or communists.

But no one said freethinking and humanism would lead to simplistic answers. In the category of economics there are none.

So when you read about the next “bailout” or “rescue” or “financial stimulus” plan, do not make up your mind so quickly; there is no guarantee that this idea is not either the best or worst idea to come down the pike. Each idea should be looked at in a non-dogmatic manner and assessed in as scientifically a manner as is possible. If our economy is anything, it is complex.

We do know that the previous administration proudly took the certain dogmatic approach: pure ideology ruled until disaster stared the administration in the face.

We can safely say that the dogmatic and ideological approach has failed.

Good riddance.

On a note of hope, the approach of the new administration of President Obama, has been, on the surface, open-minded. It remains to be seen if they can truly think “outside the box,” and govern in that manner as well, but that is the image they are trying to convey. We hope that they succeed in being innovative, creative and freethinking in their economic approach and do not succumb to political pressures, from the right or left that would promote an unthinking ideology.

We shall soon find out.

With all this said I can now offer my opinion on what the approach should be going forward, in the full knowledge that even the best of all possible plans has only a certain percentage change of succeeding as intended, and that even a bad plan might work - with luck.

It is obvious that the current problem has its roots in the abuse of credit by both business and consumers. Businesses borrowed too much, relying on continued growth in the economy to enable them to pay back their loans as they expanded. Consumers borrowed heavily on both the housing front and the credit card front in the expectation that their home’s value would always rise and if they were unable to pay the exorbitant mortgage, they could simply sell their house – at a profit.

The disaster began when so many persons could not pay their mortgages at the same time that home values started to decline because of the glut of homes for sale by distressed sellers.

The situation began to snowball – if sellers could not pay their mortgages and home prices dropped, banks that lent them money had to repossess home that were now worth less than the loans that were owed. It did not help that many mortgages were fraudulently issued without proper credit checks or home appraisals – many of these are the “sub-prime loans” that were the first to go bad.

As more and more persons defaulted, and banks lost more and more money on those loans, and houses became less and less valuable, those financial entities that had bought securities based on home mortgages came to realize that those securities were becoming less valuable. In fact, the value of securities backed by mortgages declined so badly that financial institutions soon had less overall capital or value in relation to deposits and other liabilities as required by both law and common sense.

So some stopped lending, especially to each other, and others went bankrupt.

When banks stop lending, it becomes difficult to buy a house, further driving down home prices, or even buy a car.

If you’re a business, it becomes hard to refinance as you had previously. Good luck to the firm that has a loan due to be paid or refinanced!

When consumers began to realize that their homes were declining in value, and they could no longer be used to finance other purchases they did in fact do the logical thing: they stopped making purchases.

Businesses started to realize that consumers had reached their credit limits and were not buying their products anymore – so they began to lay off workers and lessen inventories.
So this is what you get when consumers have little available credit, and banks have little to lend; a huge and sudden recession.

This is a negative feedback loop if there ever was one and there are many contributing factors. Last year, crude oil soared to $147 per barrel in price; at that moment the credit related bubble began to burst in earnest. Since then practically ALL commodities declined in value, including oil, metals, real estate and even gold. With billions and trillions of dollars in “paper” wealth gone, primarily due to the decline in real estate values, stocks and mutual funds, there was less cash in existence to chase commodities and who needs commodities when you’re not making stuff anyway?

This is called “deflation” and it is deadly to the economy. Why buy something now when it will cost less later? Another negative feedback loop!

Obviously, it’s not as if people do not want to buy stuff and banks do not want to lend their money. Both borrowers and lenders are afraid to do their thing.

Businesses know this and retreat to a protective position.

But consider this; the recession is essentially the result of future expectations which right now are extremely bad. In other words, there is great fear and it is fear that prevents consumers from buying, lenders from lending and businesses from expanding.

Remove or reverse or moderate the fear and the recession can be ended.

What would reduce the level of fear?

The key items must be jobs and job security and the banking system’s viability. If you are secure in your existing job, you will spend normally. Obviously if you are now unemployed and then find a job, your spending should only increase. When businesses see this happening, they will expand further.

If banks are not worried about being paid back because people will not be losing their jobs, they will lend - that is unless they are too bankrupt or deficient in reserves to lend.

So it would seem the task at hand for our government is to foster jobs creation and ensure bank viability.

A stimulus package not focused on job creation may be worthless. Simply sending out tax rebates, for example, will NOT ELIMINATE FEAR! Only a secure job will do this, in my opinion, and to avoid wasting taxpayer money, the job created should be a useful and necessary endeavor, not a time waster such as digging and filling in ditches.

“Fortunately,” over the decades, we have neglected many necessary tasks, such as improving our infrastructure and making our nation energy independent. Building schools, hospitals, repairing crumbling bridges or creating an improved electrical grid or funding advanced technological research would lead to further economic expansion, keeping the economy growing even after the stimulus has run its course. Our quality of life would improve.

Fixing the financial system may be the tougher task. The Federal Government has some choices; buying preferred stock, common stock or nationalizing certain banks. Or, if a price can be calculated, perhaps purchasing the non-liquid assets (e.g.: bad loans) of banks would be the right move; or facilitating a market or exchange where this junk could be sold in an orderly and transparent manner. The choice is complex but the goals are ensuring viability while keeping the expense to taxpayers to a minimum. Letting them go bankrupt is really not a choice – see the mess the bankruptcy of Lehman Bros. has caused. It could take years to sort it all out! Imagine the mess if a Citibank were to fail!

Allowing banks to remain “too big to fail” in the future should not be a choice either. Going back to their core business of lending to consumers for more than they pay out for deposits may be boring but it has worked for centuries. Exotic financial instruments such as derivatives, credit default swaps and triple short ETFs should be regulated if not eliminated. There is much to do.
But why did banks (and other companies) get in the position they are in? They were not required to make bad loans or bad business decisions, were they? After all, not all companies made those bad decisions!

As the system now works, the CEOs of banks (and other corporations) do not necessarily have their company’s interest in mind as they drive them to bankruptcy – why should they? If a policy is likely to benefit the CEO and other higher officers of the corporation, rather than the bank or corporation, what do you think will happen – or has happened?

A $100,000,000 bonus is a difficult thing to forsake for the good of a corporation!

Here is the conflict – a corporation, if it was a sentient entity, would have a goal of surviving well, like any other sentient entity. Unfortunately, running a corporation are numerous other sentient entities – officers, directors, and laborers, all with conflicting goals. The corporation thus suffers – you wind up with Enron, Citibank and General Motors.

Therefore corporate governance, in order to protect stockholders and employees in particular, must be codified and made into enforceable law or otherwise a company is at the mercy of sentient beings with conflicting goals. Simply requiring an officer to have a fiduciary responsibility has not worked particularly when corporate boards who oversee the executives consist of the corporate officer’s “pals” who are corporate officers elsewhere. (Note: I’m available for Board of Director work.) This is simply not working in too many situations.

Ethical and responsible captaincy of a corporation has long been neglected and too many in the corporate world accept the myth that humongous corporate bonuses are “necessary” to preserve “talent” within a company.

I don’t think so. In fact it may be that the larger the bonus, the worse a corporation is run.

Limiting bonuses to executives to stock in the company, with the size of the bonus tied to size of the executive’s salary, and then not redeemable for at least 5 to 7 years so that the current stock price cannot be manipulated is a simple solution.

Consider that Major League Baseball, an industry where performance can easily be measured, mostly bans bonuses – even based on performance. Why should they do this; wouldn’t it motivate players? Their answer is actually logical.

Major League Baseball limits bonuses because they do not want players to “game” the system and go for homeruns, strikeouts and other milestones that do not 100% correlate to winning baseball. Corporations similarly should NOT want executives that game the system in order to achieve bonuses in ways that could hurt the company.

What is the most an employee/executive should be paid? If Alex Rodriguez can get by on about 30,000,000 per year, and is obviously good (though not perfect) at his job, that should be about enough for most anyone else. But of course, I could be wrong or unlucky about all of this.

We would love to hear from readers how their humanism informs their take on the current economic crisis.

(Gerry Dantone has an M.B.A. in finance from St. John’s Univ. and was elected to their chapter of the International Honor Society for Economics - )

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