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Context Magazine has an interview with science fiction writers Bruce Sterling and David Brin. Brin, the deeply insightful author of The Transparent Society, tosses off this hypothesis.

Someone once said there are two ways of dealing with the future: anticipation and resiliency...

In the East, customers are mainly made up of government and commercial banks. Software companies must anticipate problems before they release a product because they don’t want ATMs spitting money out on the street. So they try to anticipate all the bugs before they ship software to their clients. The attitude in Silicon Valley, on the other hand, is, “What a cool idea! Let’s do an experiment and have customers tell us why it doesn’t work!” That’s the resiliency approach, which depends on a rapid and agile response to cope with disaster.

It turns out that any reasonable approach for dealing with the future needs generous dollops of both anticipation and resiliency.

Given the events of the last few months, I expect we’ll see a change in how business thinks about the future. There was a long period during the 1990s when people almost deliberately stopped thinking about the long term. The sentiment was: “Just give me the demo.” Or “Build it and they will come.” I believe that epoch has ended.

We’re now in for an era of a global civil society, which will involve more anticipation and control. The idea of tossing out innovations and letting the devil take them where he may is probably gone. Because we do have a devil.

I tend to disagree with Sterling. I believe that trial-and-error learning still is faster and more effective than bureaucratic filtering. However, there a plenty of people in Sterling's camp, who believe that control is now "in." Apparently, the World Economic Forum (Davos) elite that attended the recent conference thinks that way. For example, Brad DeLong says that

It is more clear today than before that an undirected market cannot be expected to provide what Joseph Stiglitz calls "global public goods"--global environmental control, global macroeconomic stability, improvements in the world distribution of income, research into important but underfunded health issues like tropical diseases, and others that can only be provided not just by governments but by large coalitions of governments.

...During the next twenty years, as the pendulum will swing back to the "government" side, the principal task will be... to keep the expanding sizes and roles of government from creating too much red tape or causing too much bureaucratic inertia.

Again, I do not agree that because of September 11 and Enron we need to throw out trial-and-error learning and embrace planning and bureaucracy. But that point of view certainly is out there.

Discussion Question. Which responses to terrorism and which responses to Enron reflect resilience? Which responses represent attempts at planning and control?

Japan is high on the international worry list. For instance, this article in Forbes says,

[The ratio of debt to GDP is] being made worse month by month, year by year, by deflation, which at perhaps 4% annually in Japan (measured in consumer prices) is the most pronounced in the world.

In the National Review online, David Malpass says that

Japan is already awash in liquidity. But this liquidity would allow the country's economy to grow fast if the central bank committed to a new course and broke the deflation expectations.

Paul Krugman, the economist (not to be confused with Paul Krugman, the N.Y. Times columnist), wrote years ago, and no doubt would still say,

the natural answer to Japan's liquidity trap is a deliberate, announced policy of moderate inflation... Instead conventional "canons of soundness" - a continuing commitment to stable prices and to a strong or at least not too weak yen - have thus far prevailed.

Krugman, a liberal, would like to see monetary ease to the point where there is some inflation in Japan. Malpass, a conservative, would be happy just to see an end to deflation. But both see the Japanese monetary authorities as obstinately refusing to expand the money supply sufficiently.

Discussion Question. If Japan continues to experience deflation, to what extent will this deflation be "exported" to other countries?

Nicholas Eberstadt argues that the official poverty index overstates the extent of poverty in the United States.

The U.S. poverty rate, however, is based exclusively on income data. Income numbers can only hint at actual consumption patterns...

For the bottom fifth of households sampled, expenditures typically exceed income by more than 100 percent. In the latest survey, for every dollar of reported pre-tax income, the poorest fifth of American households reported spending $2.31!

A more extensive discussion of this issue is given by W. Michael Cox and Richard Alm in their book Myths of Rich & Poor. They cite a study by economist Daniel Slesnick that measures the poverty rate based on consumer spending rather than income. By that measure, the poverty rate at the end of the 1980's was down to 2 percent, compared with an official measure of 11 percent.

Consumption tends to be high relative to income among people with low incomes, for various reasons.

1. People who are retired may have low incomes, but they have savings.
2. Income tends to vary from year to year. People who have low incomes one year often have had higher incomes in the past and/or expect higher incomes in the future. This allows them to draw down assets or borrow against future income.
3. Unreported income earned informally in the so-called "underground economy."
4. Government transfer payments, such as food stamps.
5. Support from parents, children, and other relatives.

Discussion Question. How does your assessment of the official poverty measure depend on which factor accounts for the ability of low-income households to consume more than their reported income? If government transfers and family support were the main factors, would the official poverty measure be more reasonable than if the other factors were predominant?

In my latest essay, I conclude

Our economic system is called capitalism, which suggests that capital accumulation is what is important. However, in many contexts, it seems that this physical component of wealth is not as important as the mental component that is represented by knowledge and cultural adaptability to change. As a rule of thumb, the game is 75 percent mental.

Discussion Question. Apart from education, what are the components of the "mental" aspect of economic success?

Morgan Stanley's Joachim Fels minces no words in his claim that the dollar is overvalued (if you follow the link, scroll down on the page to find Fels' commentary).

In my view, the US dollar has entered the last stage of its multi-year bull-run. Like equities in early 2000, it is overvalued and everybody knows it. The key question is not if, but when the greenback bubble will burst...

Europe has almost all it takes to outdo growth expectations in the next few years...First, product market deregulation and reductions in personal and corporate income tax rates over the past few years have created the incentives and the leeway for more private and entrepreneurial activity in the next few years. Second, the rising share of temporary and part-time jobs has made Europe's labour markets less sclerotic...And third, Europe still has to close the technology gap with the US, which is likely to lead to higher investment spending in the years to come and, eventually, to a pickup in productivity growth.

I tend to agree with the view that the world's love affair with U.S. assets, which helps to drive up the value of our stock market and our currency, seems to be excessive. One can make a case that the U.S. is better suited to the information age than other countries, because of the fluidity of our society, which reduces our resistance to change. However, once the asset markets have taken this fact into account, there is no reason for our assets to continue to appreciate relative to those of other countries.

James Glassman says that the Bush Administration's environmental proposals are too strong.

Now, don't get me wrong. If the goal is to limit the emission of carbon dioxide, trading permits is a far better approach than command-and-control decrees from Washington...

Starry-eyed over the beauty of trading, the administration's economists have lost sight of the justification for the mechanisms in the first place...

The truth is that, right now, we just don't know enough -- which is why it's smart to commit billions of dollars more to research. In the future, we may find that warming is real and that a cost-benefit analysis shows it is worth fixing. The worst-case scenarios show we will still have lots of time to mitigate.

Paul Krugman thinks that the proposals are too weak.

What is this thing called greenhouse gas intensity? It is the volume of greenhouse gas emissions divided by gross domestic product. The administration says that it will reduce this ratio by 18 percent over the next decade. But since most forecasts call for G.D.P. to expand 30 percent or more over the same period, this is actually a proposal to allow a substantial increase in emissions.

Guess which critic calls the Bush policy "a disingenuous attempt to appear concerned about the environment"? (answer below)

an 18 percent decline in greenhouse gas intensity over 10 years implies a 4.5 percent reduction in annual greenhouse gas emissions, relative to what they would be if we moved ahead according to current forecasts...

President Bush's plan makes sense: focus on a reasonable approach to slow, stop and then reverse growth in greenhouse gas emissions; don't wreck the economy in the process; and adjust future policy in response to scientific and technical progress. He has added a fresh, reasoned voice to the debate.

I tend to agree with Hubbard. Where feasible, the Administration is proposing a market-based system of pollution controls that is advocated by economists of every stripe. The case is made eloquently by Democrat Alan Blinder in his book Hard Heads, Soft Hearts, and it is made also in this year's Economic Report of the President, chapter 6.

Discussion Question. Some of the worst pollution exists in other countries. Does this suggest that the most cost-effective environmental policies for the United States might involve subsidies to foreign entities for emissions reduction?

(The "disingenuous" quote comes from Glassman, although Krugman expresses the same sentiments)

The United States economy has grown more than that of other industrialized economies, and Paul Kennedy traces out the implications of this for military power.

by the late 1980s [the U.S.] may have possessed only about 22 per cent of global gross domestic product...right now, it contains about 30 per cent of to tal world product [sic. gross domestic product is something you produce annually--it is not something you possess or contain]

...By 1998, defence spending's share of GDP was down to 3.2 per cent, and today it is not much greater. Being Number One at great cost is one thing; being the world's single superpower on the cheap is astonishing...

A full 45 per cent of all internet traffic takes place in this one country. About 75 per cent of the Nobel laureates in the sciences, economics and medicine in recent decades do their research and reside in America. A group of 12 to 15 US research universities have, through vast financing, moved into a new superleague of world universities that is leaving everyone else - the Sorbonne, Toyko, Munich, Oxford, Cambridge - in the dust, especially in the experimental sciences.

Discussion Question. This vast increase in U.S. wealth and power came during a period of rapid immigration. Does this affect your view of the debate (post 74) over the pros and cons of immigration?

Hal Varian makes a case for government restrictions on individual choice in pension investments, based on patterns of irrational behavior on the part of investors.

The tendency in the last several years has been to offer employees more choice of retirement options. But if individuals do not make good choices when left to their own devices, this may not be appropriate.

... Even extreme libertarians may be willing to face some restrictions on their retirement choices, so long as they won't be required to bail out fellow retirees who make excessively risky choices.

If nothing else, Varian's article is worth reading for its description of "self-regarding attribution bias," which is academic jargon for an egomaniac. Apparently, this is more prevalent among men than women, which gives men a higher propensity to gamble.

I disagree with Varian. I would like consumers to be able to make their own investment choices. The most that I am willing to concede is that the government could publish guidelines for safe investing, and people who choose riskier strategies can be informed that their savings plans fall outside those guidelines.

One problem with implementing my proposal is deciding on the guidelines. For example, although both would favor diversification, bullish James Glassman probably would advocate stocks more heavily than bearish Robert Shiller. Whose advice would be enshrined in the government recommendations?

Of course, the issue of what are the correct guidelines would become even more pronounced if the guidelines were hard-coded as requirements. Then the government not only would be giving investment advice but forcing people to take it.

Discussion Question. Do you think that individual investors take bad risks more out of ignorance or out of a desire to gamble? How might one's answer to this question affect your view about what policy interventions are appropriate?

This article in Business Week Online explains the weak performance of the high tech sector.

...corporate customers account for 84% of tech spending. And businesses have yet to pry open their wallets.

...overall information-technology spending by business is 11% below year-ago levels.

Often, the business press is focused almost entirely on what consumers are doing. However, business investment can be the most significant cyclical component in the economy.

I believe that James Tobin's "q-theory" explains investment very well. Tobin says that when the ratio of the market value of corporate assets to their replacement cost is high, firms try to add to their assets by increasing investment.

Tobin's q is the ratio of market value to replacement cost. Stock market valuation is in the numerator, and the cost of capital goods is in the denominator. (I'm leaving out some other elements.)

I believe that a major channel by which the stock market affects the economy is through Tobin's q and its impact on business investment. For example, during the Internet bubble, q was particularly high for companies in the dotcom and telecommunications industries, leading to heavy investment in computers and communications equipment. Since then, q has plummeted in those sectors, driving investment way down.

Discussion Question. Brad DeLong recently told me that he left Tobin's q out of his Macroeconomics textbook because he thinks that it is too complicated a concept. Is q beyond comprehension for a student of introductory economics?

Although the Congressional hearings on Enron are being panned in some quarters as publicity stunts, they are producing some interesting testimony from academics. For example, accounting professor Roman L. Weil says,

In the current environment, it's heresy to suggest that we do not need to forbid auditors from also providing consulting services. Despite this pressure, I suggest to the Committee that mandatory auditor rotation, with auditors chosen and beholden to the audit committee, will solve the conflict of interest problem.

What he is saying is that auditors need to (a) be chosen by the audit committee, which represents shareholders, rather than by management; and (b) be rotated every five years, so that they know that their actions will be scrutizined by another pair of eyes.

Discussion Question. Of the various ideas that have been proposed to prevent future Enrons, which ones do you think would be most effective while costing the least to implement?