TED Five: Crackonomics

I'm going to post this now to try and stay ahead of the power outages and such that are almost certainly on their way in the next couple of hours. Little bit of a different post today; I'd add to the below that you should now keep Fed Chairman Bernanke's statement from yesterday in mind as well, though he was a teensy-weensy bit stronger in his indictment of Washington than has been the case previously. Finally, if you've some extra time on this hurricane Saturday morning, I'd encourage you to read two op-eds from today's NYT. As much as I bash the NYT for not having the whole story, Charles Blow tells us why it's vital that we inject some sanity into this country's policies, and Roger Cohen warns of the dangers of nimbyism in Britain (the greatest threat to the best intentions). If you have to pick just one, please read Blow. And now, back to TED...

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Today, Freakonomics co-author Steven Levitt is going to talk to you about the economics of crack. As with the book, the talk presents an interesting take on a topic that engenders a lot of prejudice and pre-conceived notions in the minds of us Acela corridor Volvo drivers. It's kind of a fun talk, full of social injustice and academic derring-do. I won't introduce it further so I can save the fireworks for after...

OK, I know what you're thinking: Kind of interesting, but what does this have to do with the week's themes? Two things: 1) go over the talk again in your mind, replacing the word "crack" with the words "financial derivatives" and "dealers" with "traders/CEOs/politicians." 2) Internalize the "weak and shit" hypothesis right alongside your new Darwinism.

Let's take these things one at a time. Though the talk was filmed in 2004, Levitt starts to draw the crack dealer/CEO parallel in the last minutes of his presentation anyway. It gets a lot of laughs then, but it hits a little closer to home now, doesn't it? To flesh out my parallel, think of the crack economy as a microcosm of the derivative economy that dragged us into the current economic crisis. Just as cocaine dealing was moving along but wasn't really as lucrative as it could be until crack was invented, so financial trading (over a much longer time span) has evolved from a fairly low-margin building-and-loan enterprise to the days of NINJA loans, mortgage-backed securities and "quants." In terms of both economic profitability and social destruction, I think there's a case to be made that exotic financial instruments were like crack. By the same token, the traders and -- even more so -- the CEOs and their pet politicians who happened to be around for the invention of the financial "crack" suddenly saw a dizzying increase in their wealth and power that mirrored that of the first generation of crack bosses. Sure enough, the captains of finance likewise consolidated their positions and enriched themselves as much as possible while keeping nay-sayers (young gang members?) out of the loop.

While that parallel is a little out of left field, I don't think it's too big of a stretch. Whether or not it is, though, the last 90 seconds of Levitt's talk are pure gold, and they are worth watching as many times as it takes to memorize and internalize what he's saying. It's extra-convenient that he explicitly notes that CEOs follow the gang leaders' strategy of paying themselves even in bad times, but it's his off-the-cuff sociological insights that should really shake us. First, he notes that economists aren't usually trained or prepared to see the fear of appearing "weak and shit" to the people below you as a personal motivation. Second, he acknowledges that it is, in fact, a very powerful motivator indeed: gang leaders want their Cadillacs and bling, CEOs want their bonuses and golden parachutes -- and they're going to get 'em, no matter what the little people of Main Street think.

The "weak and shit" hypothesis is the foundation of the social injustices and misunderstandings (a mis-understatement if ever there was) between the haves and have-nots in today's America (and world). The haves -- overwhelmingly the Conservative White Males that have been the subject of a pretty lively internet debate over the past month or so (Google it), and particularly the 400 people in this country that control more of the wealth than all of the rest of us together -- are pretty obviously worried that admitting things like climate change, financial system failures, the wrongness of WSJ economic policy prescriptions, etc would make them appear "weak and shit" in the eyes of the rest of us (heaven forbid!). The new know-nothingism, whether it's willed in the case of the CWM's or more or less received in the case of the FOX News crowd, is essentially predicated on the twin fears of being wrong and being removed from long-held positions of power and influence as a result of being found out to be so wrong. It's also why conservative economists refuse to recognize or react to the liquidity trap we're actually in and keep banging on about self-inflicted austerity (what Krugman calls the "Pain Caucus") and the "bond vigilantes" who have yet to appear (kind of like crippling inflation). What seems equally obvious is that we little people are going to just keep getting screwed by The (Conservative White) Man until we figure out how to break the power of his "weak and shit" fear-mongering.

Now, speaking of know-nothingism, check this out: a short talk from the director of NPR on what exactly we Americans hear about when we read/watch/hear the "news of the world." And this relates most of all to us in the Northeast -- imagine how skewed these graphs would be if we just examined FOX...

Alisa Miller: "The News About the News"

And that's why, even if you read the Times and listen to NPR, you need to expand your horizons. Otherwise, your grasp of what's going on in this world that we're trying so hard to fix will be, you know, weak and shit!