Category: Political Science & Economics

Are you Missing the Unintended Consequences?

Category : Political Science & Economics
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I attended a talk by Michael Pollan, the author of The Omnivore’s Dilemma and In Defense of Food, last night at the Kohl Center in Madison.  Pollan is one of my favorite writers and thinkers because he almost always has a new take on old problems that bring new and interesting points to the debate.  Pollan is most famous for In Defense of Food, an “eater’s manifesto” on how to eat well and forsake the “western diet” of processed foods and refined carbohydrates.  His book is interesting on many levels, but what struck me during the talk was how many of the problems that Americans have relating to their diet are unintended consequences of well-intentioned policies crafted by nutritionists, nutritional scientists, government bureaucrats and health-conscience consumers.

For example, Pollan talks about how throughout American history, there have been “blessed” and “evil” nutrients.  In the 1800s, protein was evil and John Harvey Kellogg led the charge against this scorage, leading many Americans to give up their traditional eggs, bacon, sausage and pancakes for boxed cereal, with the blessed carbohydrates.  Later, it was fat, leading to the creation of margarine and transfat to replace real butter and animal fat.  The Atkins phenomenon brought protein back because carbs were supposedly bad.  There have been many other examples of this throughout American history, but these are the easiest ones to see.  Each of these movements were started by people with good intentions who wanted to make Americans healthier.  At best, they did not work.  At worst, they made things worse.

The margarine and other plant fats that scientists created ended up being worse than the fats that they were replacing.  Pollan claimed that this switch led to hundreds of thousands of premature deaths from heart disease and other preventable diseases.  These deaths were an unintended consequence of food scientists and the government’s good intentions to help American live healthier lives.

Pollan’s talk led me to start thinking about other unintended consequences and how many people miss their impact in everyday life. I found some relating to our food, including some potential ones relating to Pollan’s “eater’s manifesto.”  Subsidizing the corn and soybean market after the USSR’s wheat crop failed in order to ensure that we never went hungry led to monocultures and a crash in farm prices, which led to fewer family farms.  It has led to America’s overproduction of cheap corn, which made high fructose corn syrup the cheapest and easiest sweetener to work with, leading to cheaper manufactured food and fatter, less healthy Americans.  Cheap subsidized corn and soybeans make it tough for farmers in Africa to compete and pull themselves out of poverty.  Now I don’t believe that each of these are straight cause and effect relationships, but its clear that these unintended consequences of trying to make sure that America’s food supply is secure have continued to ripple across the world since the 1970s.

Pollan’s manifesto advocates that we eat food, not too much, mostly plants and move away from packaged, processed “food like substances.”  This is a good goal, but he also advocates moving away from monoculture and large industrial farms.  The thinking is that we we have healthier plants, animals and humans if we diversify our food supply and stop growing huge amounts of corn and soybeans for use in just about everything.  Pollan believes that these types of changes could help solve global warming, the healthcare crisis and  potentially the current economic crisis.  It is clearly a noble goal, but what about the unintended consequences?

If farmers move away from high yielding monocultures, might we be at a larger risk of famine in the future as populations rise?  Could we lose jobs in the current food industry?  Could lower yields lead to higher food costs, much like how increased demand for corn based ethanol raised food prices worldwide, with most of the increased hurting the world’s poor?  Are there some other unintended consequences that Pollan’s way of thinking might bring about, much like the other big changes to our food supply brought to America’s dinner tables?

Personally, I think it is worth experimenting with Pollan’s ideas because I’m not sure we can do much worse than we are doing now, but it would be foolish to simply accept them and begin to implement them immediately.  I don’t believe that Pollan is calling for this, but I have not seen much research into the potential unintended consequences of his ideas. It reminds me a story I just came across the other day about tuna fishing.

In the early 1990s, groups like Greenpeace were outraged that tuna fishing companies were killing hundreds of dolphins with each catch.  Here’s how tuna fishing works

The main way that tuna is caught is through purse seines in the Eastern Tropical Pacific. Basically, after a large group of tuna is located, a miles-across purse seine net is closed around them via a group of small boats associated with a large factory ship.  It’s an effective way to catch large amounts of fish for not a lot of money.

This technique is pretty standard- the main variation lies in how the large group of tuna is located. There are basically three ways to do this.

1) Get lucky and happen to stumble across a large group of tuna visible from the surface in the middle of an enormous ocean. Obviously, this isn’t terribly practical.

2) Attract tuna using floating objects.  Stay tuned, we’ll come back to #2.

3) Follow dolphins, because dolphins in the Eastern Tropical Pacific are often associated with large schools of tuna. Dolphins are easy to follow because, unlike tuna, they have to come up for air.

For a long time, #3 was the most common way of catching tuna. The problem with this method was that by definition, dolphins are right there- and they get caught in the net as well. Despite the honest effort of many sailors to free dolphins (there is a long maritime tradition of respecting dolphins), by some estimates, around 500,000 dolphins a year were killed as a result of bycatch.

Sounds terrible, right?  500,000 dolphins EACH YEAR were killed as a result of this tuna fishing.  Groups like Greenpeace and others marshaled public support and got the rules changed, making dolphin following illegal.  People could not fish for tuna by following dolphins to big groups of tuna.  So what happened?

Tuna fishing fleets rapidly switched over to method #2, attracting tuna using floating objects.  If you put a log in the middle of the ocean, within hours it will be surrounded by fish. It may have something to do with the fact that many open ocean fish can go their entire lives without encountering a hard surface.

The floating objects now used by tuna fishing fleets are quite high tech- they have sonar and video cameras that allow the flagship to detect how many fish are near that object. Once there are enough, the purse seine comes and scoops them all up- and the floating object is redeployed.

The big problem with this method is that floating objects don’t only attract tuna. EVERYTHING is attracted to floating objects, including sea turtles, sharks, seabirds, billfish, and, yes, dolphins!

Well-intentioned groups like Greenpeace and others tried to help the dolphins by making fishing for tuna by using dolphins illegal, but the unintended consequences of their actions have created “The Ecological Disaster that is Dolphin Safe Tuna.” Here are some stats comparing the bycatch of both methods of fishing.  First, the floating log method, then the old, dolphin method:

Ten thousand sets of purse seine nets around immature tuna swimming under logs and other debris will cause the deaths of 25 dolphins; 130 million small tunas; 513,870 mahi mahi; 139,580 sharks; 118,660 wahoo; 30,050 rainbow runners; 12,680 other small fish; 6540 billfish; 2980 yellowtail; 200 other large fish; 1020 sea turtles; and 50 triggerfish.

By trying to help dolphins, groups like Greenpeace caused one of the worst marine ecological disasters of all time. Few other fisheries are as bad for groups like sharks and sea turtles as the purse seine fishery, and none are as large in scale.

“Ten thousand sets of purse seine nets around mature yellowfin swimming in association with dolphins, will cause the deaths of 4000 dolphins (0.04 percent of a population that replenishes itself at the rate of two to six percent per year); 70,000 small tunas; 100 mahi mahi; 3 other small fish; 520 billfish; 30 other large fish; and 100 sea turtles. No sharks, no wahoo, no rainbow runners, no yellowtail, and no triggerfish and dramatic reductions in all other species but dolphins.”

In other words… the only species that “dolphin safe” tuna is good for is dolphins!  The bycatch rate for EVERY OTHER species is lower when fishing dolphin-associated tuna vs. floating object associated tuna! The reason for this is obvious- floating objects attract everything nearby, while dolphins following tuna doesn’t attract any other species.

If you work out the math on this, you find that 1 dolphin saved costs 382 mahi-mahi, 188 wahoo, 82 yellowtail and other large fish, 27 sharks, and almost 1,200 small fish.

“Dolphin Safe Tuna” is one of the most egregious examples of unintended consequences that I have heard about in a long time.  I wonder if we may repeat similar mistakes with global warming (now called climate change), health care, taxes, the bank bailouts and our monsterous national debt.  We should at least try to look at the potential downsides and unintended consequences of our larger decision in all aspects of our lives – political, business and personal – so that we do not make another mistake like margarine or dolphin safe tuna.

An Antipoverty Nudge

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A charity in New York City is trying an innovative approach to helping people below the poverty line.  Modeled after a program in Mexico that pays poor people to do things like immunize their kids, send them to school and make healthy food, Groundwork brings a similar approach to New York’s poverty stricken communities.  Here’s how the program works:

This modest community-based nonprofit is one of six neighborhood partners in the experimental Opportunity NYC program, which pays poor people — mostly single moms — for a broad range of health, education, and work-related activities, everything from taking their kids to the dentist to getting a new job to attending parent-teacher conferences.

Since its September 2007 launch, the New York initiative has paid $10 million to 2,400 families living at or beneath 130 percent of the poverty line — about $22,000 for a family of three. The typical participating family earned just under $3,000 during Opportunity NYC’s first year.

I’ve been interested in nudges, small behavioral changes that can create big changes in society, since I read Nudge by Richard Thaler and Cass Sunstein.  I love learning about these nudges, whether its ways to increase the tips that tour guides receive or ways to help students retain more information over summer vacation, so this program caught my attention.  I think its an interesting experiment that could be very successful with enough testing.  Currently, the program has spent over $25mm on 2,400 families, which doesn’t seem like that great of a return.  I’d like to see the program focus on 2-3 of the most important tasks that people were being paid to do and expand the program to more people.  If they could show that going to parent teacher conferences, taking your kid to the doctor for a checkup and cooking a healthy home cooked meal once per week had the most impact, the program could invest in the tasks that had the highest benefit with the lowest cost, all the while helping more people.

Some anti-poverty workers are not a fan of the this program.  One worker said thinks the program is almost offensive:

Opportunity NYC borders on offensive — the idea that a person can be bribed into doing better in school or being a better parent,” says Mark Winston Griffith, executive director of the Drum Major Institute for Public Policy in New York City. “It sort of suggests that poverty is a lifestyle choice, that somehow if we’re just given a nudge, that we can choose not to be in this condition, or choose for our children to do better in school, or choose as parents to provide better child care. It comes out of the idea that poor people are almost sort of culturally and inherently dysfunctional. Not because of structural circumstances but because of their own personal failings.”

David Jones, the President of the Community Service Society in NYC, is not a fan because he thinks the project it too small to combat the huge problem that is poverty in NYC.

“In New York City, almost 50 percent of African American men are not currently employed. We have nearly 200,000 young people who are neither working nor in school,” he says. “Those numbers can’t be addressed with incremental incentive programs. Not because the ideas are bad but because the scale of the problems is huge.”

While I understand where both of these critics are coming from, I can’t agree with their thinking.  We know that the current anti-poverty programs are not working very well, so we might as well try something new.  Just because a problem is huge does not mean that a small solution can’t be successful.  In the startup world, many small solutions have solved huge problems, even when the founders were simply trying to change a small part of the big problem.  If the program doesn’t work, then end the program, but if it does work to make people’s lives better, then by all means continue it.  I’d love to see more innovation and entrepreneurial thinking in the charity space.  I think there is probably room for a great deal of innovation and improvement.

Nobody Voted for President Pelosi

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That is a subheading from the August 1st Economist article called Crunch Time: A difficult Summer for the White House and it sums up how I feel about the Obama Administration so far.  I did not vote for him (or McCain), but I had hoped that he would live up to his “post-partisan” rhetoric during his campaign and rise above the political fray.  I thought there was a chance that he would be able to stop the “gotcha political culture” and really focus on big problems.  So far, the Democrats’ plans have not lived up to their billing.  The Economist explains it well:

Worse, the plans have usually ended up running away from tough decisions. With the stimulus bill the flaws were forgivable: there was an urgent need to give the economy a boost. But the House of Representatives has produced a cap-and-trade bill that is protectionist, riddled with exemptions and which gives away the permits that are supposed to force carbon-emitters to change their ways. There is a growing danger that this bill will not be passed through the Senate and reconciled with the House version in time for the Copenhagen summit on climate change in December.

With health care, Mr Obama’s preference for vague statements of principle rather than detailed specification has led to a House proposal that loads taxes onto the rich, sets up a state-run insurance scheme that many fear will put private-sector providers out of business and fails to contain, let alone reverse, the escalating costs of treatment while adding an expensive requirement that everyone have health insurance, with large subsidies where needed. Barely any Republicans could support this proposal as it stands. Frantic efforts to save the reform effort are under way in the Senate, but it is distinctly odd to note that the president’s signature policy is now being devised for him by a gang of six senators. Financial regulation is also stuck.

President Obama has allowed the Democrats in Congress, especially the House, to run the country, outsourcing the details, and arguably the Presidency, to Nancy Pelosi and Harry Reid.  This is not what most centrists and even some Democrats voted for.  Right now, Obama is risking his Presidency by allowing the rest of his party to trot him out to support poorly thought out, unpopular legislation.

On health care, Obama has allowed the Democrats in Congress to take the easy way out (and protect their supporters): soaking the rich, refusing to touch tort reform (trial lawyers) and ruling out taxing health benefits (unions).  He has made deals with Big Pharma and the insurance companies that do not address the rising costs of health care.  These plans only try to bring the uninsured into the current system.  While a noble goal, it could well bankrupt the country.  Instead of truly trying to rise above partisan politics and making touch decisions to both cover all Americans and stem the rising costs of health care, Obama has outsourced his responsibilities and is risking his presidency.  Until yesterday, Obama was silent when Democrats bashed real concerns about the competing plans voiced by Americans, causing his approval ratings to sink.

The Republicans are no better and possibly worse.  Instead of trying to reach across the aisle or propose any solutions of their own, they are simply saying “no.”  Its almost like the end of Rome when out of touch, rich, elites did everything they could to stay in power at the expense of the rest of the population.  Both sides seem out of touch and angry whenever there is disagreement.  Obama would be well served to tell Pelosi and Reid who’s boss and come forward with a detail oriented, innovative plan that cuts across constituencies and addresses both cutting costs and covering everyone.

What do you think?  Do you agree that Obama has outsourced the tough decision to Congress?  Should he confront Pelosi/Reid?

It’s the Leverage, Stupid!

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With the stock market looking toppy and the unemployment rate still on the rise, the “green shoots” are starting to look rather brown (or more like a mirage) and some are calling for a second stimulus.  For now, leave the ridiculous fact that only a tiny percentage of first stimulus has been spent so far and let’s look at the facts.  The economic crisis was caused by excess leverage, first by consumers, then by companies, now by the government.  Is a second stimulus with more leverage what we really need?  If it is, will the Obama administration make a case for it that doesn’t use phony statistics like “jobs saved or created?”

To borrow from Bill Clinton’s first presidential campaign, Its the Leverage, Stupid!  Consumers borrowed huge amounts of money to live lavish lifestyles or to just keep up with the monthly bills.  The consumer savings rate peaked in the 1970s around 15%, but declined consistantly during the 80s and 90s.  It even went negative in 2007, right before the financial crisis.  This meant that consumers were, on average, spending more than they made.  Consumers resorted to using their homes as ATMs, borrowing vast amounts of money to keep the party going.  Clearly it was not sustainable.

Banks and non-bank banks stoked the flames and let the party rage on.  Banks offered mortgages to people who shouldn’t have had them, manufactured huge bets on CDOs and made billions moving money around.  After the government removed many of the leverage regulations, banks continued to go wild.  Other companies and hedge funds joined the fray, borrowing billions of dollars  for leveraged buyouts that left balance sheets riddled with debt.

When the economy started to slow down and the stock market fell out of bed, companies and consumers who were strapped with debt and little savings faced the brunt of the downturn.  Companies began to deleverage, cuting costs and jobs to be able to stay in business.  US consumers, scared by huge declines in net worth stemming from the stock market collapse and the real estate downturn, started to save, bringing the savings rate up to around 7%.  

The US government, which had started to run larger deficits during the Bush years, stepped in to fill the void.  The Bush administration pushed the first bailouts through and the Obama administration passed even more bailouts and a huge stimulus package.  The $740bn+ stimulus package pushed much of the spending two to three years down the road, funding tons of pork-laden projects that are probably unnecessary and have nothing to do with stimulus.  These programs saddle the government with even more debt at a time when the rest of the world is concerned about the value of the dollar.  The government should have advocated for $200-300b of immediate spending, or better yet, returned money to the people so that they could pay down their own debts.  Instead, we have record amounts of debt and even more leverage, not even taking into consideration the unfunded liabilities of Medicare and Social Security that will require even more leverage.

Now, as the stock market and the economy as a whole are showing signs of getting worse, there are calls for a second stimulus.  I fear that Congress will pass another massive bill, but most of the money won’t be spent fast enough and there will be even more waste.  I’m worried that many of the projects will be useless and ineffective at turning the economy around.

The only way to fix the problem and get through the bear market is to deleverage.  We need to squeeze the leverage out of the system, stop the insanity and go back to more rational debt levels.  With another round of mortgage resets set to take place late this summer, we are likely to have many more foreclosures in the next year.  Instead of spending money on projects in the future, the government should have made it easy for mortgage holders to renegotiate their mortgages in exchange for the bank having the rights to some of the upside of the house when the market turns.  This type of solution removes debt (leverage) from the consumers and bad debt (leverage) from the financial institution and saves consumers money right away, with a lower mortgage payment.  The government will have to spend a little more money, but it would be rational, compared to the huge stimulus package and bail outs that we have seen so far.

The government should be helping (forcing) companies to convert debt to equity in institutions that have bad balance sheets.  Instead of bailing out investors and companies who made bad decisions, the government should be converting debt to equity to shore up balance sheets and make the companies deleverage.

I think we are on the verge of another downturn in the stock market and rising unemployment.  The press seems to think (or hope) that the worst is behind us.  Most people are turing bullish and many Americans have come back into the market.  I fear that we face a repeat of the stock market’s performance during the Great Depression, where there was a prolonged bear market rally and then a second crash that wiped out more market value than the initial crash.

China and the rest of the world are already starting to pick at the reserve status of the dollar.  If the US keeps leveraging and then decides to inflate away the problem, the US dollar may lose its reserve status.  The government must make sure they do not make the crisis worse than it is.  Its not a Republican or Democrat issue. Its an American issue.  I am not confident that the government will make the right decisions.  With GoldmanSachs alums holding many key government jobs, I fear that they will do what they know best: continue to leverage and try to pick up the pieces later.  If you want to go farther, read Matt Taibi’s blog and latest piece in Rolling Stone.

I hope I am wrong, but I don’t see the US coming out of this without lots more pain.  What do you think?