Economists, Carts and Horses

In the two weeks since my last post, I’ve learned a couple of things.  Someone in Serbia likes my blog.  It’s been viewed recently in the Netherlands and Bulgaria (I think it was Bulgaria – calling my Cyrillic rusty would be an insult to rust).  Also, someone  found me by searching Google for “surplus hip waders.”  I hope it wasn’t the same person who found me by searching for images of medieval, cast-iron virtue-preservation devices because the thought of those articles occupying the same space is enough to curl my fingernails.  (If that reference seems obscure, please scroll back to “Living My Pledge.”)

I also got three pictures, all on the same day, that will make my Best-Pictures-of-the-Year post a few months from now.

And I experienced some serious stuff as well.

Two weeks ago, I got to hear Michael Porter, the Harvard Business School’s strategy guru, opine on the state of US competitiveness.  The bottom line:  It’s bad and getting worse for all the reasons you might imagine, and it’s fixable.  A classic strategy consultant’s answer.  Along the way, he slipped in an interesting observation.  The relative decline in the quality of US public education, he said, coincides with the expansion of career choices for women.  The implication is that for decades we engaged in huge social arbitrage by underpaying for the skills of highly qualified women whose career options largely were limited to teaching and nursing.  I hadn’t thought of that, but it makes sense.

And last week, I was privileged to hear a University of Chicago economist give a talk that had something to do with bank regulation.  I say “something to do with” because his talk was almost completely opaque to me.  I suspect and sincerely hope that’s because it was way over my head.

Some of his logic was based on hypothetical conditions that I’m pretty sure don’t exist.  For example, he began with this:  “Suppose you’re an entrepreneur starting a new venture; you have to decide whether to sell debt or equity.”   The entrepreneurs I work with do not understand the concept of “selling debt.”  They do understand the concept of “borrowing money,” but none of them can do it because banks don’t lend to new ventures.  (I verified this by passing a note to the woman sitting next to me , who happened to be a bank president:  “Do you lend to entrepreneurs who are starting new ventures?”  She quietly shook her head.)

The economist said one thing that was very clear:  “Deflation causes recessions.”  Call me crazy, but I really thought it was the other way around.  Carts and horses.  Of course, when economists draw graphs, they often put the independent variable on the y-axis, which is the opposite of what the rest of us are taught to do.  Or perhaps it’s like my friend Bruce Onsager, a brilliant strategist, says:  “It’s only what we think is the independent variable.  Maybe they may know something the rest of us don’t.” Or perhaps its just a secret handshake.

Many heads nodded sagely throughout the economist’s talk, which either means that he was being very smart or that no one wanted to tell the emperor he was, if not naked, perhaps just wearing jeans and geeky t-shirt.  (Not wanting to plagiarize, I owe credit for that one to my son.)

Underneath all of this, there turned out to be an interesting issue, which is whether we regulate banks in ways that are intended to reduce risk but actually cause them to make riskier decisions.  I’m confident that was the issue, but I have no idea what the answer was (or is).  The main thing I took away was a realization that this is how economists, who have influence (Ben Bernanke’s name came up a few times as a leader in the kind of research being presented), actually talk to one another.   I genuinely, truly hope it’s because they are really smart gals and guys, and not emperors who buy their clothes from Threadless.  I’m not smart enough to tell the difference.