If you doubt the role of chaos in this world, read this Washington Post story about how the Berlin wall fell.

Talk about a butterfly’s wings causing a tornado!

A decent provision for the poor is the true test of civilization.

—Samuel Johnson, lexicographer (1709-1784)

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November Fifth is known in Great Britain as “Guy Fawkes Day,” named in honor of the man who was caught trying to execute a plot to blow up the English Parliament in 1605.

American legislators sometimes neglect to do things so blindingly obvious that Guy Fawkes almost becomes a sympathetic figure!

This year’s candidate for the first Annual Guy Fawkes Award for Legislative Obtuseness (the “AGFALO”) goes to the Maryland Legislature, which just now is considering increasing Maryland’s state guidelines for child support payments – for the first time in twenty years!

According to the story in the Washington Post, Maryland (a) has the highest per capita income in the United States, (b) is forty-first in what parents pay for child support, and (c) obviously has no sense of shame). This affects half a million children in the state. Half a million!

The good news is that they’re considering raising the support payment guidelines; the bad news is that the legislation also contains a provision lowering the support payments for lower income parents!

But the issue is not whether Maryland should raise the payment levels, or should have done so in 2007 when the District of Columbia did. Or whether Virginia “does a better job” since theirs were raised in 1995.

The issue is far simpler than that: Should the vagaries of the legislative calendar and the shifting winds of politics determine whether kids in broken homes get fed? Viewed in this light, it becomes a design of government issue!

What does Maryland have that’s more precious than its children? How will Maryland take care of people who grow up in homes that can’t afford to feed and clothe them, or help them focus on education for the jobs of tomorrow?

Wouldn’t it also help keep families together, and keep the kids on track, if the parents knew in advance  that they faced stiff child support payments?  Those payments must have been a joke for the past ten years!

Now, what could be simpler than INDEXING the guidelines to the Consumer Price Index?  Or some other index that accounts for inflation? Is this so hard? It seems to work well for Social Security, and I bet it works well for the pensions of Maryland’s legislators and staff!

Given that the US Congress has somehow neglected to index the minimum wage, even though some foreign countries and even some of the states have done so, I sometimes wonder. (see this blog, page 33)

Are all legislators both (a) so comfortable within their work lives and (b) so worried about possibly getting divorced that they can’t see the damage they are doing to our image of effective government, much less the harm that’s done to poor individuals and the future of America?

For he’s a jolly AGFALO; For he’s a jolly AGFALO; For he’s a jolly AGFALO — Which nobody can deny!

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[BTW, enforcing the child support payments is also a major problem that is not addressed here, nor is it addressed well in Maryland or elsewhere.]

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ADDENDUM: I attended a public meeting about the proposed child support guideline revisions, and was subsequently quoted in the Annapolis Capitol newspaper.

You may know that the Washington Post is holding a contest for their next Post Pundit. Here are the first round winners.

Yes, I applied. No, I wasn’t chosen. Of course, I’m a “one-trick pony,” so I wasn’t too surprised. And if you’re reading this, you already know the trick…

They asked for a 400 word essay and a 100 word statement of why you should be chosen. See below. I’ve put links into the essay, and expanded the statement slightly.

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How Well Is Our Government Designed?

Did Congressman Elton Gallegly (D, CA) ever think that his “Crush Video” law, protecting kittens and mice, would cause the stampede of elephants to the Supreme Court in United States v. Stevens? The elephants, from the New York Times and National Public Radio to the National Rifle Association, have paid lawyers handsomely. Would opening draft legislation to public comment via the Internet help prevent such unintentional consequences?

The government spent this spring “adjusting” the analog-to-digital TV transition process, addressing delays, communication problems, underfunding, and finally oversubscription. The program had trouble reaching poor, elderly, rural, and non-English-speaking citizens – those who really need emergency warnings. Did anyone know about Everett Rogers’ work on the communication of innovations?

The small staff at Commerce’s National Telecommunications and Information Administration (NTIA) gives tiny grants and focuses on policy and research. No surprise that the surge in coupon applications “crashed” their program. And so no surprise when the “Cash for Clunkers” surge crashed at another small agency, Transportation’s National Highway Traffic Safety Administration (NHTSA).

Memo to the Congress: Don’t give any shipbuilding contracts to Seven-Eleven.

The computer model for costing health insurance proposals at the Congressional Budget Office gets no third-party review of its assumptions or internal workings, according to a story in the Washington Post. CBO’s report to Chairman Baucus on its latest results has no confidence intervals, either. “Your mileage may vary,” as Phil Ellis says, but CBO is not estimating by how much.

Has the health insurance industry got better computer models that can second- (or third-) guess CBO’s? The better their models, the better their negotiating strategies.

Phil Angelides’ Financial Crisis Inquiry Commission faces far more difficult challenges than the Pecora Commission of 1933.  Computers and telecommunications have made the world’s financial system far more complex and more interrelated. And the financial industry has long been able to afford excellent computer modeling. If the Angelides Commission is to dredge its recommendations for loopholes and unintended consequences, it must have access to even better models. Otherwise, the industry will out-game the Commission every time.

Keeping the global financial system “between the ditches” throughout this century will require more than modeling. The Commission needs expertise in several post-WWII disciplines, including game theory, chaos theory, and complexity itself.

‘Intelligent design’ deserves a seat at the table in Washington. The private sector is ahead of us again. See Business Week’s Special Report on Design Thinking.

As Jimmy Carter learned to ask, “Why not the best?”

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My unique policy perspective: Thirty years a Fed, nineteen as a Senior Executive. Served in seven Cabinet departments, five agencies, and the White House under both Ford and Clinton.

I first wrote about ‘designing government’ during the Carter Administration in a paper now on my blog.

As a Deputy Director of Al Gore’s National Performance Review, I learned that private sector innovation must be continually infused into government.

Sadly, the Federal government only looked to the private sector for inspiration in an organized way four times during the 20^th century: the Brownlow Committee (1937) the Hoover Commissions (1947 & 1953), the Grace Commission in 1982, and Vice President Gore’s National Performance Review (1993).

While with Gore I oversaw another report on program design. Same problems, twenty years later.

Harvard’62, Georgetown Law’72

Who’s Who in America (first listed in 1984)

Kennedy School’s Innovation Awards Program judge

Full resume here.

The $8,000 First-time Homebuyer Credit program has been riddled with fraud and abuse, in ways the IRS didn’t foresee or try to control. Here’s the story, and a handful of ways they could have sought out such “unintended consequences.”

A recent Washington Post story outlines how hundreds of millions may have already been paid out to people who fraudulently or mistakenly took advantage of the first-time homebuyers’ $8,000 tax credit funded under the American Recovery and Reinvestment Act of 2009:
• 19,300 people claimed $139m on their 2008 tax returns
• 74,000 people claimed nearly $500m for unqualifying purchases
• 580 people under 18 – including 4 year olds – claimed $4m

Of course this is small potatoes – perhaps 1.4m households have claimed almost $10B in tax credits. And the Congress is rushing to extend the tax credit provision, proving again that “fraud, waste, and abuse” are in the eye of the beholder.

But the IRS has identified 160 potential tax credit schemes and selected 107,000 claims for reexamination. So they’re looking at 7.6% of those claiming the credit! What a waste of resources, if these problems could have been headed off at the pass!

[NB: Our concern here is the mechanics of program design, not (a) whether the program was a good idea, or (b) whether it has jumpstarted the housing market.]

The Post story and the House hearing it reported on were based on a report by the Treasury Department’s Inspector General for Tax Administration. The Inspector General asked the usual questions: (a) What happened, and (b) What can be done about it?

The first page of the IG report notes that “the President’s mandate with regard to stimulus payments is to prevent fraud, and not simply minimize it or address it after it has occurred.” Prevention is a hallmark of Inspectors General; it even appears on their website, sponsored by the unfortunately named Council of the Inspectors General on Integrity and Efficiency (CIGIE calls up “ciggies” — where was The Acronym Control Team?}

It was only 100 years ago that philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.” We also need to understand the past. This leads to two more questions: (c) How did it happen, and (d) How can we prevent similar problems in the future?

The problem, simply stated, is that Treasury is offering substantial sums to countless potential takers without finding ways either (a) to prevent fraud or error, (b) to discourage it, or (c) to make it easily discoverable after the fact.

This has had the effect of increasing both fraud and abuse, and also increasing substantially the efforts that the IRS must undertake subsequent to the claims being filed. It is worth noting that Ashby’s Law clearly applies here: the taxpayers outnumber the IRS, so prevention will be much, much easier than remediation.

The IRS did develop a special form (Form 5405) to catch claims in excess of that allowed and claims by those with adjusted gross incomes above the set limits, as well as claims without Form 5405 attached (Duh!). The IRS, however, did not use the Form 5405 to verify eligibility and no proof of a home purchase was required, such as the ubiquitous HUD-1. Both had been recommended by the Inspector General.

So that’s WHAT happened. But HOW did it happen? As it is, we have no idea whether anyone tried to think through the likely results of their program design, or cast about looking for unintended consequences. Appendix I of the report is silent on any inquiry into the thought processes of the IRS staff who designed the tax credit program, and unless the redacted portion of Page 5 hides some names, we have no idea who was involved in the decisions.

Of course, the Inspector General could assign pseudonyms to the actors in this horror story; perhaps “Mary Shelley” as an Assistant Commissioner, “Edgar Poe” as a career staffer, “Sarah Langan” as the staff director of the relevant congressional committee, and “Bram Stoker” as an Associate General Counsel. Then their deliberations could be revealed while safeguarding their identities.

But if anyone HAD BEEN looking for ways to search out unintended consequences, here are a few ways they could have done so, ranging from the obvious to the quite innovative:

1. Ask those directly involved to think of possible unintended consequences over the weekend and come to a meeting on Monday to address that subject only.

2. Assign a small staff group to collect and present possible problems in a meeting with program advocates, with the political appointee acting as “referee,” not as advocate for any one view. This is a variant of “redteaming,” as practiced at the Pentagon or even in theory at the Federal Aviation Administration (example).

3. Ask staff at “the point of the lance” what could go wrong. Field staff have a different perspective on what can happen in “practice” versus in the “theory” as developed by headquarters.

4. Assemble the Senior Executives from across Treasury who have received Distinguished Rank Awards. (See note) This group has more years in the pay line than the immediate office has in the chow line, and can bring that experience to the problem at hand.

5. Email a description of the proposed program for comment to a handful of members of the relevant “policy communities” around Washington, whether the Brookings/Cato/AEI group or the Booz/IBM/Deloitte group, or both.

6. Post the description on an open internet site, asking for insights from the world at large. Let anyone comment, or even become Facebook “fans” of Tax-Breaks-For-First-Time-Homeowners.

In all likelihood, “None of the above” was the option chosen.

BTW, my preferred solution would have been (a) to have the buyers execute a form before a Notary Public swearing to the facts entitling them to the tax credit, and (b) to have that form registered along with the new deed and mortgage at the county land office.

I’d guess that far better solutions would have arisen from almost any of the methods outlined above.

PS: A friend suggests that the IRS check the claimant’s recent filings to see if mortgage deductions were taken during past years. That would certainly help!

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Note: Distinguished Rank Awards. There are about two million career civil servants. About six thousand of these (0.3%) have been promoted, based on merit, to become members of the Senior Executive Service. About sixty members of the SES (thus only 0.003% of the two million) are given Distinguished Rank Awards each year, based on nominations by their departments and agencies. Few groups know more about the federal government, and few are less often asked for their opinions of how to improve it.

Disclaimer: I received one of the awards in 1996.

The Big Idea behind this blog, perhaps not always apparent, is that (a) given government’s role in tipping the scales of society more toward life, liberty, and the pursuit of happiness, and (b) the apparent and undoubted increases in the nature and complexity of the challenges of the 21st century, then (c) government should take full advantage of ALL of the science and technology available when intervening in society’s workings.

My hope here is to light the occasional candle, even if that means cursing the darkness. I bring a passing acquaintance with the new sciences and technology, as well as a broader exposure to the Federal government than anyone living. See the “About” section above.

Of the sciences overlooked, first and foremost are the sciences of complexity and the systems sciences developed around the time of WWII. Norbert Weiner and cybernetics come immediately to mind. There are many others, from game theory to highly reliable organizations. As historian William H. MacNeill observes in The Pursuit of Power, science and technology always advance in time of war. The casual reader of this blog and observer of the US Congress will note that our legislative process is several wars behind.

The philosopher George Santayana famously said in 1905, “Those who do not learn from history are doomed to repeat it.” Given just the threats to the world economy from unstable economic systems and the threat to the planet from global climate change, ‘repeating history’ is totally UNSAT.

As Justice Oliver Wendell Holmes, Jr., (1841 – 1935) once remarked, “In the law, an ounce of history is worth a pound of logic.” In lawmaking, the ounce of history is often diluted, and a pound of logic is insufficient to foresee the unintended consequences of legislation in an increasingly complex society. Jay Forrester devoted a chapter of his 1969 book, Urban Dynamics, to the ‘counterintuitive behavior of social systems’, which is also the title of a paper he wrote in 1971, based on testimony to the Congress in 1970 – almost forty years ago.

A recent article in the Economist points out that India’s monsoon rains are becoming “even more compacted and unpredictable,” leading both to drought and flooding. At the same time, groundwater extraction, subsidized by free and below-cost electricity to farmers and city dwellers alike, is already curtailing agriculture: “The World Bank reckons that 15% of India’s food is produced by “mining”—or unrenewable extraction of—groundwater, including in 18 of Punjab’s 20 districts.” Some politicians have been punished for proposing charging for electricity, and others have learned their lesson.

India invested in big dams and canal projects in the 1950s – 1970s, thus “paving the way” for India’s Green Revolution. Sadly, little to no resources are spent on maintenance. According to the article, India’s primary response to the water problems is to build more large dams (390 are under construction), rather than repair the existing infrastructure or reform its use. There’s no mention of money for maintaining the new dams, either.

If this sounds familiar, it is. America is also keen on building infrastructure, but not as ready to maintain it. There are few photo opportunities for road repair projects. The American Society of Civil Engineers publishes an annual Infrastructure Report Card that this year gives America a grade of D and estimates that our five year investment need stands at $2.2 trillion. This year’s stimulus bill is, so to speak, a drop in the bucket.

Even though the Dow passed 10,000 this week, no one seems to think that the American economy is out of the woods, or much less that we’ve learned enough or taken action to prevent the Wall Street wolves from getting Little Red Ridinghood again. The fabled “stress tests” on the 19 “systemically important” institutions were done assuming an unemployment rate of just 8.5%, and we’re now at 9.8% — and aiming for at least 10%.

So we’re still in uncharted territory. Might the new sciences provide us a GPS (Growth Producing System) or at least be our Mapquest out of the woods??

Two recent articles in the Economist, “Rearranging the Towers of Gold” and “Unnatural Selection” do an excellent job of describing the problem(s), but are not as clear about how to address the (hopefully) unintended consequence of the tax-payer-funded “recovery” — that the institutions “too big to fail” last year are even bigger now!

After the Great Depression, the eponymous Pecora Commission proposed legislation, including the Glass-Steagall Act, and the Securities Exchange Act of 1934, that created the Securities and Exchange Commission. Together they led us down a sometimes rocky road, but one without landslides.

Many are now calling for the reinstatement of the Glass-Steagall Act, repealed in 1999 in an effort led by Senator Phil Gramm (R, TX), now a Vice President of the Investment Bank division of UBS AG. Although at first glance separating the investment and commercial bank interests in the industry would seem necessary, it may be far from sufficient to avoid another meltdown like this one. The world – especially the world of finance – has gotten much more complex and interdependent in the years since 1932. We’ve added computers with worldwide telecommunication, f’rinstance. Faster feedback loops are not always better.

Our jigger of history has brought us the Financial Crisis Inquiry Commission, headed by Phil Angelides, a former California state treasurer. As expected, neither Common Dreams’ comments nor those of the Huffington Post hold out much hope for this panel. Sadly even the New York Times, in a recent editorial, offers at best faint praise.

My concern is that in hearkening back to the Pecora Commission, even friends of the “Angelides Commission” (which already has “about 1800 hits” on Google) are taking aim at the problems of the 1930’s. I see nothing in Mr. Angelides’ bio that gives me confidence that he knows much about the counterintuitive behavior of social systems, cybernetic feedback, system dynamics, high reliability organizations, game theory, chaos theory, or the new discipline of complexity, to name just a few of the disciplines needed for diagnosing, much less prescribing for, our ailing financial system. A quick look at the other members does not offer much hope, either. And we know little about the commission’s staffing.

The new commission would be miles ahead by convening a few of the people that I know, such as George Richardson and Paul Pangaro. Just these two, and their immediate contacts, would be able to frame a 21st century conversation bringing new insights to a search for how to stabilize our economy. There are many other knowledgeable people out there, in business, in universities, and in associations such as the American Society for Cybernetics and the System Dynamics Society. We need their help to do even half as well as the Pecora Commission.

Or, we can do as the Egyptian government did recently – take action even after being told what the unintended consequences would likely be. As recounted in the New York Times, Cairo ordered the slaughter of all the pigs in the city, even after being told that (a) it would have no effect on “swine flu,” and (b) the pigs were responsible for eating tons of the organic waste discarded in the streets by its residents. So now Cairo’s streets are worse than ever.

From the Times: “The state is troubled; as a result the system of decision making is disintegrating,” said Galal Amin, an economist, writer and social critic. “They are ill-considered decisions taken in a bit of a hurry, either because you’re trying to please the president or because you are a weak government that is anxious to please somebody.”

Let’s hope the Angelides Commission can do better.

It IS “rocket surgery,” but it’s not impossible.

David A. Moss, Harvard’s McLean Professor of Business Administration, has written an excellent article on what the federal government must do [to try] to prevent another explosion of systemic risk in the financial sector. He argues that those banks that are too big to fail must be separately, and transparently, regulated. This would, among its other benefits, reduce the incentive for banks to grow ever larger! The article should be ‘required reading’ for all those interested in keeping the economy between the ditches.

I’m as much a fan of the Kennedy family as anyone – I keep telling folks at Harvard’s Kennedy School that I once shook hands with Jack Kennedy, and I remember just where I was when I learned that Bobby had been shot.

So when Teddy died, and I read all about his causes through the decades, I wondered whether he’d ever tried to index the minimum wage. You know, if the minimum wage is a part of the social safety net, like Medicaid, Medicare, and Social Security, then shouldn’t it be indexed to the cost of living?

(Troglodytes worried about businesses passing on the increased costs of an increasing minimum wage might reflect on the costs of the already existing safety net programs, not to mention the social costs of desperate, hungry people and undereducated children. And note that in 2004 even Business Week supported indexing.)

Googling “indexing the minimum wage” brought up nine good sites, including this extended statement from the Center for Economic and Policy Research. I found a website devoted solely to the minimum wage (Internet wonders will never cease) with many more references to indexing.

I also discovered that Washington State, Oregon, Florida (!), and San Francisco index their minimum wages, as do Great Britain and Australia. New Jersey’s legislature, ever alert for job opportunities for the politically connected, created a Minimum Wage Advisory Commission to do an annual review and adjustment rather than an automatic indexing.

And wonder of wonders, this year Representative Al Green (D, TX) introduced the Living American Wage (LAW) Act to index the federal minimum wage to the federal poverty threshold! Here’s his press release.

But all the obituaries and this quick analysis revealed no evidence that Ted Kennedy ever proposed indexing the federal minimum wage. I’d love to know whether he didn’t consider it, didn’t think it possible in the US Senate of his day, or whether he did but the story is lost in the machinations of our legislature. Maybe history will tell us.

Meanwhile, three cheers for Rep. Al Green, for proposing what should be an obvious improvement in the design of government! I may send him a campaign contribution.

I hadn’t decided whether to bring “the design of government” to health care reform, but at the request of Anna D. (“Thanks, Anna!”) and having seen this WaPo article on Dr. Avarice J. Greed, M.D., P.C., and his confreres, and having received a long email from my sister, a retired nurse (see below), I think I’ll give it a shot.

Over the next few posts, I’ll comment on several issues:

1. Supply. The AMA (American Medical Association) closed half the medical schools in America about the turn of the last century. And, ever heard of “barefoot doctors”?

2. Demand. How much of obesity is due to low incomes? The Danes have a saying, “You have to be rich to be thin.” Would encouraging unions reduce obesity more than education? The GINI Index again.

3. System inefficiencies. Two flavors: Opportunities for information sharing and insurance company profits.

4. Medical mal-avarice. See below for starters.

My sister was first in her class in nursing school, and is now retired and raising show quality dogs. So she’s experienced hospital pricing from the inside and vet pricing from the outside. Her observations:

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I never had a job in any “company.” Obviously hospitals try to make money, and particularly in Union [SC] they invited the head RN’s to the top staff meetings. Such things as the base room rate being as low as possible-around $105 a day at that time — 1990 — because they said people call around if a procedure is non-emergency, and what they ask is the base rate. So then you just add higher prices for everything else, and I do mean everything.

At that time, a bag of IV fluid cost the hospital $1.00, we charged the patient $10.00. A foley catheter cost us $5.00, the patient paid $57.00. But then of course, they added for 1-1 RN care, etc.

Same basic thing at my previous job in Psych at MUSC, [Medical University of South Carolina, in Charleston] the base room rate was low, but they had at least 5 therapies for each patient, and I mean the group ones like physical therapy, music therapy, this isn’t counting the medical student seeing the patient, the intern, the resident, the MD, the staffing, etc, etc.

But what got me the most was in Union. I worked there about the time Office Max and that type of store opened. Of course they sent catalogs to everyone. I knew the prices we paid in Central Supply for packs of 3 x 5 cards, pens, all sorts of stuff, and of course there are hundreds if not thousands of those things. Some of the prices that hospital paid for office supplies were 10X what Office Max charged. So I went to the head of that department with the catalog in hand, marked, but he said they liked to order everything from one supplier, so paid whatever that supplier charged.

The darn vets are the same now. If I buy a bag of IV fluids from my vets, it is $35.00. They are exactly, and I mean brand, label, everything, the same as we used in Union, and every other job I have had. IV fluids are considered a prescription drug, whereas the tubing and the needles are not. I can get the identical fluids for $3.99 a bag from KV vet but the Vet has to call or fax the prescription in. They do allow for the vet to tell them what you can have in a year, and you can order it however you want. Of course the shipping is fairly high, so I order maybe 12 at a time, which that lasts me usually a year. And I can buy if from a site that is supposed to be for vets, but I have a password, every breeder I know uses it, for $4.99. The same stuff, Propofol, that Michael Jackson used IV, it is on that site.

The lady that is the financial head of my Vets’ 2 offices, told me the same identical thing, they want to order everything from one place. I have a catalog that the medicine for preventing the dog version of Alzheimer’s, called Old Dog Encephalitis, Selegiline, 5 mg twice a day, costs $5.99 for 500 tablets. The first time I had Huey, Andrew’s father, to the vet for confusion, maybe 2 years ago, the vet told me she had read it helped, but had offered it to 3 clients, but the $200 a month caused them not to get it. I had her write down the name and dose, (just so I could remember it) — the dose is the same for people – and when I went to Wal-Mart it was $46.00; I called Pet Care RX, it was $26.00. Then I saw it in a catalog for vets for $5.99 for a huge size. I can order anything from that catalog except for prescriptions. I got a box the size that a pair of high top sneakers would be shipped in, absolutely stuffed with IV tubings, for $4.99 the other day, 100 of them.

Would it not pay a hospital or a busy vets’ office, really 2 offices with 7 vets, one full time person’s pay to check prices and order things from different suppliers? In IV fluids alone they could pay that person a week’s salary a month. They even order packages of sweetener and sugar and instant coffee from the same place!

 How do things like this fit into the direction of having a great company? And of course I only see a few things!

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And all I’ll add is that (a) if you can pass on all your costs to the patients (customers) AND add a percentage for profit, who cares what things cost? And that (b) when your customers or patients have no idea of your costs, you can charge them whatever you like!

When I worked for DOD, back in the 1960’s, we had both “cost-plus contracts” and “contractor-furnished lunches.” I loved CFLs – can you guess who paid? It was you, the American taxpayer!

Both are now outlawed in DOD – now how about health care? Duh!

Do you think that our current economic mess is more like the age of the Robber Barons of the late 1800s, the Great Depression of 1929, or the nuclear power plant accident at Three Mile Island on March 28th, 1979?

Regardless of YOUR opinion, don’t you think that the government’s response(s) to the crisis should be based on thorough analysis? The best theories available? Diagnosis before prescription?

I. Let’s look first at the oligopoly thesis.

The theory here is that market concentration often generates behavior that’s at odds with the general welfare. Does the name OPEC ring a bell? Worldwide, the four firm concentration ratio defines “oligopoly” as existing when four firms have more than 60% of their market. The Big Four banks in America are the Bank of America, JP Morgan Chase, Citigroup, and Wells Fargo. Does anyone know of any other banks? Of course, the big investment banks like Goldman, Sachs have had their rivals, like Bear, Stearns just “disappeared” by the Federal government. Can it be long before there’s just one brokerage, following the path shown by Morgan Stanley Smith Barney?

In the olden days, the Federal Justice Department had an Anti-Trust Division that was charged with policing anti-competitive behavior, and indeed breaking up firms with undue market concentration. That was long ago, before economic theory (especially the Chicago School) bowed to industry practice. The ideological shift happened between the 1982 breakup of AT&T and the 1999 settlement allowing Microsoft to continue as one firm.

It would appear obvious on its face that the salaries and bonuses paid on Wall Street demonstrate oligopolistic profits. The “value-added” simply isn’t there. In 1979 Ezra Vogel published his book “Japan as Number One: Lessons for America” which notes that at that time Japanese CEOs took home salaries only ten times those of their shop floor workers. Can you imagine?

An argument can be made that the societal concern about the increasing concentration of Wall Street’s financial institutions is not their unwarranted profits, but the systemic risk associated with having so few firms. That is, if we had more firms, we could allow a few to fail without inviting disaster. This in turn could reduce the moral hazard associated with the Federal government backstopping them.

So, if you believe that today’s problems are due at least in part to oligopolistic behavior or its associated risks, you might recommend breaking up the large (and growing larger) financial institutions on Wall Street.

II. A Reprise of the Great Depression?

If upon reviewing the history of the years after the Great Depression, in which the business cycles were substantially dampened, you might (A) associate those successes with the government policies responsible, and (B) wish those policies to be continued in the future. Most economists DO associate the dampened business cycles with government policies.

Sadly, much of the Federal government’s economic policy was degraded over time, due perhaps to people saying “Look, we haven’t had more economic crises, so we don’t need those policies!” Doesn’t there seem to be a logical fallacy in there somewhere?

A good start towards reimposing controls on the markets would be to reinstate the Glass-Stegall Act and reinstitute serious margin requirements, among other actions. After all, “If you want to keep the economy between the ditches, you may have to impose some speed limits.” Been there, done that. Worked for three generations.

III. Or Is Wall Street really like Three Mile Island?

Wikipedia has a good account of the Three Mile Island (TMI) accident. In part, it states:

“The Three Mile Island accident of 1979 was a partial core meltdown in Unit 2 of the Three Mile Island Nuclear Generating Station in Pennsylvania. It was the most significant accident in the history of the American commercial nuclear power generating industry.
“The accident began on March 28, 1979, with failures in the non-nuclear secondary system, followed by a stuck-open pilot-operated relief valve (PORV) in the primary system, which allowed large amounts of reactor coolant to escape. The mechanical failures were compounded by the initial failure of plant operators to recognize the situation as a loss of coolant accident due to inadequate training and ambiguous control room indicators.
“The scope and complexity of the accident became clear over the course of five days, as various officials tried to understand the problem, communicate the situation to the press and local community, decide whether the accident required an emergency evacuation, and ultimately end the crisis.
“In the end, the reactor was brought under control, although full details of the accident were not discovered until much later, following extensive investigations by both a presidential commission and the NRC. The accident was followed by essentially a complete cessation of the start of new nuclear plant construction in the US.” [as abbreviated]

In fact, the “scope and complexity” were not so clear. Charles Perrow, now an emeritus professor at Yale, spent years researching the TMI accident, and created a theory about highly complex and interrelated entities or systems.

His book, Normal Accidents, was published five years after TMI. His conclusion was that if a system’s components are both highly complex and tightly interrelated, failure is inevitable. That is, a system’s structure and design determine whether it will (not whether it may!) fail.

Most recently, Perrow wrote an Op-Ed for the Washington Post about the system failures involved in the fatal Metro crash in June, 2009.

Perrow has also contributed to the study (and theory!) of High Reliability Organizations (or HROs). HROs have both a wikipedia entry and a website.

HROs have things in common, per the Wikipedia entry: “There are 5 characteristics of High Reliability Organizations that have been identified as responsible for the “mindfulness” that keeps them working well when facing unexpected situations:
– Preoccupation with failure
– Reluctance to simplify interpretations
– Sensitivity to operations
– Commitment to resilience
– Deference to expertise

Does “mindfulness” sound like Wall Street to you? Not to me! And what’s sauce for stand-alone organizations must be sauce for tightly coupled groups of organizations – as in a 21st century financial system, with information and money sloshing around at the speed of light!

So if the structure and design of the financial system will determine whether it will (not whether it may!) fail, and if failures of the financial system cause major societal crises, then either (A) those in the financial system must show the rest of us that their system is a highly reliable system, or (B) the government must assure that the financial system is so designed and operated.

We now have the government involved in redesigning the financial system and its controls. What troubles me is that there has been NO discussion of the theory and practice of designing High Reliability Organizations in the public discourse, and I’m not convinced that it’s being discussed in private either!

So as far as the design of the Federal government’s response to the financial crisis is concerned, what we’re seeing is not transparency as promised, but “translucency.” Translucent means “permitting light to pass through but diffusing it so that persons, objects, etc., on the opposite side are not clearly visible.”

And given the influence of Wall Street veterans in the governmental design process, I’m worried that not only are ‘persons and objects not clearly visible,’ but that they’re really ‘on the opposite side’ – from the rest of us.

(I am indebted to The Teaching Company and Michael Roberto’s magnificent course, The Art of Critical Decision Making for introducing me to Charles Perrow and High Reliability Organizations)