Sandford Borins

Sandford Borins, Ph.D.

Sandford Borins is a Professor of Management at the University of Toronto. He writes, blogs, and teaches about narrative, information technology, and innovation.

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Archive for the ‘Economics’ Category

March 23rd, 2011

Energy Choices after Fukushima

Economics

I have been thinking about energy policy – a field in which I claim no expertise – as the ongoing catastrophe unfolds at the Fukushima nuclear reactor. The quandary is that, as Jeff Sommer argues in an article in the New York Times on Sunday March 20 entitled “A Crisis that Markets Can’t Grasp,” markets have not succeeded in putting a price on the long-run costs associated with disposing of nuclear waste (the best case) or of dealing with nuclear disasters (the worst).

It is clear to me that the nuclear industry has underestimated the risks and, as a consequence, failed to invest sufficiently in risk mitigation. What would nuclear energy cost in Japan if its plants were built to a standard secure enough to resist a magnitude 9 earthquake and resulting tsunami? If plants had to be built to that standard, would Japan have invested very much, or even anything, in nuclear energy?

Similarly, the Times article referred to the $ 6 billion nuclear power plant built at Shoreham, Long Island, and decommissioned in 1989 before ever going into operation. The key argument in public opposition was the impossibility of evacuating populated areas of Long Island in the event of a nuclear disaster.

To make intelligent energy policy decisions, we need to compare alternative energy sources in terms of their capital cost, operating cost, ongoing environmental impact, and potential for, and impact of, catastrophes. Nuclear energy now looks much worse in terms of either the latter factor or the cost of mitigating it. The immediate reactions of newspaper columnists – the predictable first draft of history – do not in any quantitative sense deal with those complexities. As the Fukushima story plays out – and it will certainly be a long-running story – we’ll begin to get a sense of more realistic costs and tradeoffs than have been estimated in the past.

A personal note on the Japanese story. An article in the New York Times assessing the role of the Japanese government in reacting to the crisis quoted Masahiro Horie, a former senior government official who is now a dean at Japan’s National Graduate Institute for Policy Studies. The name seemed familiar, and indeed it turned out that I had interviewed Mr. Horie – then a budget examiner in the Ministry of Finance – twenty five years ago for an article I wrote about public management in Japan (“Management of the public sector in Japan: are there lessons to be learned,” in Canadian Public Administration, summer 1986, pp. 175-96). Mr. Horie was particularly forthcoming and helpful with my research then, and I vaguely recall not only an interview in his office, but also a restaurant lunch.

He and I re-established contact by email. In his view, the “strong social cohesion, solidarity, and mutual assistance” of the Japanese people will enable them to “overcome these difficult times and stand up again.” I certainly hope he’s right.

November 14th, 2010

Charles Ferguson’s Inside Job: The Treason of the Technicians

Economics, Narrative

Documentary film-maker Charles Ferguson is a bona fide scholar with a 1989 Ph D in Political Science from MIT and several books about the IT industry with respectable Google Scholar counts on his cv. He also cofounded a high-tech startup, Vermeer Technologies, which was sold to Microsoft in 1996 for $133 million.

He has in effect endowed the Charles Ferguson chair in public policy research at Charles Ferguson University and communicates his findings in film rather than print. (I’m reminded of an introduction political scientist Harvey Mansfield gave to Camille Paglia: noting that she is a faculty member at the unheralded University of the Arts in Philadelphia, he observed that “Camille Paglia teaches at the university Camille Paglia teaches at” and asked how many other people that could be said about.)

Inside Job is a well-crafted and thought-provoking documentary about the causes, major milestones, and consequences of the financial meltdown of 2008. At times it looks like a Powerpoint deck with slides depicting financial flows and leveraging of credit default swaps.

In making the documentary, Ferguson attempted to interview a large cross-section of financial sector players, academic experts, and public officials. Ferguson’s style of presenting his interviews is similar to Errol Morris’s, but without the Interratron technology. We hear Ferguson’s voice, but we never see him in conversation with his interviewees. The camera focuses directly on the face of the interviewee and, for some, this turned out to be an unnerving if not excruciating confrontation.

Ferguson had the most expansive co-operation from the analysts, for example Nouriel Roubini, who saw the meltdown coming and were most critical of the financial deregulation that caused it. He also had access to senior overseas officials such as French Finance Minister Christine Lagarde and IMF Managing Director Dominique Strauss-Kahn.

But he was virtually shut out when he attempted to talk to senior officials from the Bush or Obama administrations or to anyone in the finance sector. It appears that the word quickly got out that Ferguson was asking uncomfortable questions on camera, and players, likely advised by counsel, refused to speak to him.

But before the door slammed shut, he managed to interview a handful of leading economics and finance academics who served as both policy-makers at the Fed and Council of Economic Advisers, as well as directors and consultants to the financial sector firms. The most notable were Martin Feldstein and John Campbell of the Harvard Economics Department and Columbia Business School Dean Glenn Hubbard and Finance Professor Frederic Mishkin.

Ferguson zeroed in on two questionable practices, writing consulting reports arriving at conclusions the financial sector wanted to hear (“deregulation is good and we need more of it”) and serving as directors of financial sector firms. Ferguson unearthed a study lauding Icelandic financial deregulation for which Mishkin was paid $125,000. Feldstein was a long-time director of the insurer AIG until its collapse in 2008. When asked about the Iceland study, Mishkin squirmed, and when asked about AIG, Feldstein smilingly refused to say anything.

Campbell began his interview cheerfully enough, but when Ferguson suggested that consulting reports like Mishkin’s are comparable to medical research supported by the drug companies, he was at a loss for words. And Hubbard finally told Ferguson the interview was not a deposition, regretted speaking to him, and – on camera – gave him three minutes before booting him out.

(Hubbard’s previous claim to fame was as one of those short-listed for the chairmanship of the Fed in 2006. A group of Columbia Business School students made a satirical YouTube video with a viewcount now approaching 1.7 million – titled Glenn Hubbard every breath you take – depicting his assumed envy towards Ben Bernanke.)

In my view, when academics do consulting, they should be attempting to speak truth to power, that is, giving their best professional judgment, as opposed to telling clients what they want to hear. This should mean seeking out views that the client likely doesn’t want to hear, and seriously discussing them. When academics serve as directors, they should be adding value to the deliberations by bringing an outside and skeptical perspective to corporate decision-making.

The big challenge to acting with integrity is corporate money. $125K is a very rich consulting contract. Ferguson tells us that corporate directorships like AIG and the major US banks pay $250 – $300K, which is the equivalent of a handsome salary in academe. That kind of money seduces otherwise smart and skeptical people into saying what the client wants to hear. In addition, there is always the fear that if you don’t say what the client wants you to say, someone else can readily be found who will.

Ferguson’s film is an attempt to hold bankers, financial regulators, and finance academics accountable. It’s one thing to be held accountable in the court of public opinion, another in the court of law, and Ferguson is skeptical that the latter will ever happen. Whether or not the US ever develops a better way of regulating the financial sector is another matter. The issues are complicated and the government is now divided. Still, Ferguson deserves acclaim for his efforts to incite the moral outrage in civil society that might lead to better governance of the financial sector. I consider his film a must-see.

August 10th, 2010

Neil Reynolds: Not Ready for Prime Time

Economics

For some time Neil Reynolds published his op-ed pieces in The Globe and Mail’s Report on Business, where they generally escaped readers’ attention. Now that he’s been moved to the op-ed page, he’s getting lots of attention.

Reynolds’s take is what might be called Tea Party Canadian-style. For Reynolds, government is always parasitic and the private sector is always innovative, so that we should have less of the former and more of the latter. His second main concern is energy and the environment, and his message is that global warming and peak oil are myths, which leads to the policy prescription: drill, baby, drill. Reynolds’s Wikipedia article says that he was a Libertarian Party candidate in a 1982 by-election, and it’s clear from his columns that a Libertarian he remains.

Reynolds’s modus operandi is to find some academic research out there – often on the web sites of American Conservative think tanks – that he claims supports the policy positions he advocates. In my view, his arguments are often specious. I will cite three instances, and then connect the dots.

His column of April 17, 2010 argued that the average Canadian household spent almost $15,000 on personal income taxes and the average American household about $2000. This claim was carefully analyzed by Steelworkers’ economist Erin Weir on the Progressive Economics Forum (www.progressive-economics.ca), who showed that when appropriate data were used per capita income taxes were almost equivalent.

His column of July 26, 2010 on the census repeated the claim that the Nordic countries have eliminated their censuses, but without the qualification – made clear by his fellow Globe and Mail journalists – that this was because they use many other data sources. He also repeated the conservative economist Hayek’s argument that the prices produced by the market are society’s most important statistic. Students in first-year economics courses should be familiar with that argument. Students in upper-level economics courses learn that, if there are market imperfections such as pollution, congestion, monopolies, or subsidies, prices provide misleading information.

In his column of August 9, 2010, Reynolds argued that people will adapt to global warming because they have in the past adapted to heat waves. The evidence he gave was an article by economists Olivier Deschenes and Michael Greenstone claiming that the increase from the US annual mortality rate due to global warming by the end of this century would be statistically indistinguishable from zero. He claimed that the paper was “published three years ago by the Massachusetts Institute of Technology.”

I looked the paper up on Google Scholar. The abstract notes that the predicted mortality rate increases for some subpopulations, notably infants, would be statistically significant, and that annual resident energy consumption would increase by a statistically significant 15 to 30%.

What concerns me more, however, was that the article was not published three years ago by MIT. It was and remains a National Bureau of Economics Research Working paper. Working papers, as the NBER website makes clear, and any academic knows, have not passed peer review. Furthermore, a working paper that has remained in working paper form and hasn’t made it into a journal for 3 years is encountering difficulties in the reviewing process. It should be quoted, if at all, with caveats, and not referred to as published.

Okay, let’s connect the dots. We see a pattern of citing supposedly impeccable sources that, upon examination, doesn’t withstand scrutiny. Reynolds’s Wikipedia entry mentions a long and distinguished career in journalism but makes no mention of any university education. People generally ensure that their Wikipedia entries are accurate. My conclusion is that Reynolds either has had no university education or thinks it isn’t important enough to mention. For me, this is highly problematic for a columnist who relies so heavily on academic research. What he appears to me to be doing is citing research that seems to support his positions without much understanding of the research process. Not only is it important to distinguish between working papers and refereed work, but it is important to look at an overall body of research – the work of numerous scholars – to see if there is any consensus.

The Globe and Mail is English Canada’s newspaper of record. Its columnists should be the best in the country. The Globe is printing Reynolds because he represents the “right wing ideologue” position, just as it prints Rick Salutin (but only on Fridays) who represents the “left wing ideologue” position. I am not claiming that the Globe shouldn’t have a right wing ideologue columnist, but if it wants to have one, it can certainly do better than Neil Reynolds.

This post should in no way be considered an attack on Reynolds’s freedom of speech. He may say whatever he wants to say on his own blog or in whatever organ (perhaps the proposed Fox North channel) will publish him. But, if the Globe and Mail represents prime time in Canadian journalism, then my considered opinion is that he isn’t ready.

October 27th, 2008

How to Get the Banks to Lend, and the Mea Culpa Tour Hits Toronto

Economics, Government

The double-barreled title deals with two aspects of the credit crisis, the uncertainty over whether banks will start lending out the billions governments have been giving them, and Allan Greenspan’s agonizing reappraisal of his personal role in the credit crisis.

Joe Nocera, in last Saturday’s New York Times raised the key question of whether the US banks that have been receiving billions of funding under the bailout package will hoard it, use it to acquire other banks, or actually lend it out. As can be expected of a Republican administration that is still philosophically non-interventionist, there is little desire to get involved in managing how banks run their business. Nocera notes that, in contrast, the British government is requiring that recipient banks resume lending.

Starting from first principles, there is a good case for government to seek commitments that banks will expand lending. First, if the banking system has now become, in essence, a public utility, then the government, as representative of the public, should have enhanced decision rights. Second, we’ve learned that a key reason that the stock market crash of 1929 evolved to the Great Depression of the Thirties is that governments permitted credit, aka among economists as the money supply, to collapse.

Looking ahead to the Obama Administration (and back to the Clinton Administration), here is a suggestion. The Clinton Administration had several successes in inducing high profile organizational commitments to actions in the public interest. Two that come to mind are Labor Secretary Reich’s initiative to get brand-name clothing lines to commit to a rejection of sweatshop production and procurement administrator Steve Kelman’s initiative to get government agencies to commit to the principles of procurement reform. These cases are obviously much less complex than the credit crisis, but I think the approach is transferable. Summon the bankers to the White House to a public conference to get some sort of commitment to principles regarding the expansion of credit.

In Canada one similar issue that has arisen was whether banks would reduce their lending rates commensurate with reductions in the government lending rate. The banks’ initial reluctance to follow led to public criticism which led to the banks to pass on the entire rate cut to borrowers. The overarching issue is similar: economic instability has necessarily made bankers’ decisions a public policy issue.

Finally, Allan Greenspan will be bringing his “mea culpa tour” to Toronto on Friday November 7, for an event billed as “an afternoon with Allan Greenspan.” I detect a few ironies. The “afternoon” is scheduled for noon to 2 p.m., ending early so the audience can return to their trading desks to close out the week. The sponsor is TD Canada Trust, which has distinguished itself for its shrewd avoidance of subprime loans. Finally, the ticket price is $325 or $450. Given that he has now recognized the error of his ways, it seems only appropriate that Greenspan do the right thing and donate the entire speaker’s fee to the United Way of Greater Cleveland or some similar organization helping repair the devastating economic and personal damage his decisions have unleashed.

October 9th, 2008

The Campaign Promise that Must be Broken

Economics, Federal Election

Breaking a campaign promise at the start of a mandate can lead to heavy and long-lived criticism. Just ask Dalton McGuinty, who, facing a large and unexpected deficit, broke his promise not to raise taxes when he took office in 2003.

Whoever becomes prime minister after the October 14 election will immediately be confronted with the question of whether to honour the promise, made by all party leaders, not to run a deficit. The economic rationale for a deficit now is clearcut: when a recession hits the private sector, government can and must take up the slack and stimulate demand.

Even if the government doesn’t change its policies, we are likely headed for a deficit, because tax revenues will go down and transfer payments such as employment insurance will go up. To raise taxes or cut spending to avoid this automatic deficit will make the recession worse.

If the new government decides to run a deficit, there are two ways to do it. One would be to cut taxes, thereby putting money in consumers’ pockets. This is what the Conservatives did when they cut the GST earlier in the year, and what the US government did when it gave taxpayers tax rebates totally roughly $150 billion.

The second alternative would be to spend the money directly. A fiscal stimulus package could be built around the idea of rebuilding Canada’s infrastructure, with investments in areas such as health, the knowledge economy, and transportation. I prefer the infrastructure approach because I think it has a bigger immediate impact and puts in place investments (for example hospitals, research infrastructure, public transit) that will strengthen our economic performance in the future.

Given Canada’s strong federal finances, we can afford some short term deficit spending to stimulate the economy. The challenge will be to structure the program and define its terms, for example its duration, carefully. So we need both quick action and careful thinking. Let’s hope that our professional public service is hard at work on planning an economic recovery program, so they can hand it to the new prime minister as soon as the votes are counted.