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.
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.
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.
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.
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.
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.
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.