Trickle Down Economics

In my last blog, I mentioned the book “Aftershock - The Next Economy and America’s Future” by Robert Reich [Reviewed in NYT], in which he quoted some statistics revealing how income distribution was becoming more heavily weighted in favour of the top 1% of earners. The consequences are significant – as manifested by the widespread anger over the multi-million dollar salaries and bonuses bestowed on many people who are perceived to be the perpetrators of the economic meltdown.  Despite my comments in a previous blog advocating talking about books one hasn’t read, I have read most of Aftershock (it is short).

The Causes of the Meltdown

According to Reich, the root cause of the 2007-9 economic meltdown is simply stated: the majority of the consumers do not earn sufficient money to consume what the economy is capable of producing. Producers cannot sell their goods and therefore must lay off employees who become even less able to consume. This creates a downward spiral in the economy.

The majority of consumers in number and buying power are lower to middle income earners. Their real income has deteriorated over the past 30 years and far too much income has been appropriated by the top few % of earners.

This is a serious problem which has already dramatically affected most if not all of us and can only be solved by major political and economic changes. The effects include the erosion of savings, lack of opportunities for our children professionally and otherwise, unemployment, education costs, downward pressure on spending for infrastructure, education and medical care, etc.

In US (similar to Canada), the average lower-middle earners’ income has not increased for approximately 30 years (adjusted for inflation). People have used 3 means to “improve” their material living standards – more women have joined the workforce, people work more hours and families have borrowed to provide for their spending. In the long run, none of these are permanent solutions, at best they are temporary stop-gaps. By the end of 2007, many people had maximized their lines of credit and exceeded their ability even to pay interest on their credit cards and mortgages, let along paying off debt or saving for the future. This triggered the sub-prime mortgage mess.

Don’t Blame the Banks

According to Reich, blaming the banks for granting easy credit and the monetization of sub-prime mortgages as the problem (as egregious as such behaviour may be) ignores the real issue - that the wealthy have appropriated the discretionary income and simply don’t have the time or inclination to spend the money.

Having already acquired much of their material desires including their second homes and recreational properties, their yachts and sports cars and other toys, etc., they still have a lot of money and want to invest it. Because the investment opportunities are limited, this gives rise to speculation; investors accept higher risks for lower returns. That creates the second problem – the resulting speculative bubble which also in time must burst.

The Wealthy Must Pay Attention

Reich’s concludes that the wealthy and powerful had better start paying attention. It is in their best interests to level the playing field to some degree. In the golden years from 1946 –75, the top 1% of the income earners got about 9% of the income; in 2007, the top 1% got 23% of the income. If the top income earners continue to bleed off such a large percentage of the income (without needing it for current expenses or savings for future needs), therefore depriving the middle and lower earners of income they actually do need for current expenses, this may well lead to social unrest, even revolt. This would certainly not be good for the rich. Just look at what happened to Marie Antoinette (of - Let them eat cake fame).

Fix It With More Progressive Taxes?

There are those, primarily the upper income group, who will argue that taxing upper income earners reduces incentive [there is little evidence in support of this] and that they are few in number that even if you were to reduce taxes on the lower-middle income earners, this will produce very little benefits. Reich. always a pragmatist, argues that because the amount of wealth now diverted to the upper income earners is so vast, re-allocating it to those who will use it for consumption will have a major beneficial effect. Additionally, the re-allocation will diminish the demoralizing deprivation of hope and opportunity experienced by the middle class.

The Great Prosperity – 1947-1975 – and the Bargain

Reich also discusses why the income distribution was much fairer from the end of WWII until about 1975. He calls that period of time the “Great Prosperity”. It followed in the footsteps of the sacrifices of WWII at which time there was a general feeling that everyone was pulling together. Despite the McCarthy Era anti-communist craze, during the Great Prosperity the government in the US was very active in enforcing “the basis societal bargain – using Keynesian policy to achieve nearly full employment, giving ordinary workers more bargaining power, providing social insurance, and expanding public investment.” (page 49)

Why was the bargain abandoned? Reich attributes the first “cause” as the loss of high paying jobs to low paying jobs due to globalization and automation. He then points out that not only did the government fail to enforce the bargain but actually did the opposite from about 1975 onwards. It “deregulated and privatized. It increased the cost of public higher education, reduced job training, cut public transportation, allowed bridges, ports, and highways to corrode. It shredded safety nets – reducing aid to jobless families with children, and restricting those eligible for unemployment insurance…”. (Page 55) Yet at the same time it reduced taxes on the topmost 1.5% of earners and capital gains taxes and boosted sales and payroll taxes.

There are many reasons suggested for this movement to deregulation and lower taxes on the rich. We have heard them all. from the libertarians to the trickle down economists. However, Reich identifies the real reason as the concentration of income, wealth and power in fewer and fewer hands – an echo from Mariner Eccles,  head of the Federal Reserve Board in the mid-1930’s. This elite group protects their wealth and power, both as insiders in government (elected politicians and trusted advisors), and as lobbyists.

Coping with Real Income Decline

As the plight of the middle and lower income earners deteriorated, Reich points out that they coped using the 3 mechanisms mentioned above. They coped rather than revolting because they still held sacred their confidence and belief in the American Dream - the “rags to riches” myth - and a further belief that if you did not succeed, you were at fault rather than the cards being stacked against you. As people become disenfranchised and lose faith, and find their lives have changed for the worse despite their hard work and efforts and their kids have no opportunities because the public school system has been destroyed by under-funding and university has become unaffordable, they will begin looking for scapegoats.

Fundamental Values

Unfortunately, Reich does not question the fundamental values of a society which permits such gross distortions. For example, what are the values of a society that condones paying a school teacher $75,000 per year while bestowing $700,000,000 on the head of a failing merchant bank, or $100,000,000 on a hedge fund manager; or a company which pays a line worker $50,000 per year and the CEO $300,000,000.

Secondly what mechanisms are available to remedy this inequity? If the values held by those who have the political and economic power support the inequities, there will be no impetus to remedy them - except self-interest. Reich has no alternative but to make his pragmatic pitch because the wealthy and powerful are unlikely to give up their money and power voluntarily on the basis of compassion.

The Roadblocks to Reform

If we accept that the concentration of power and income will hinder any reasonable progress towards the required fair distribution of income which in turn will slowly end the recessionary cycle, that concentration must be diminished. This was done by government action during the trust busting era of Theordore Roosevelt circa 1900 and by the Franklin Roosevelt administration during the Great Depression circa 1936. The historical background to these government actions should be studied to determine if there is any possibility today’s governments in US or Canada are capable of passing legislation to curb or reverse the trends from 1980 to 2010. I am sceptical that government has the will or even the power to do so. If government cannot or will not act, is there some other work-around, perhaps as suggested by Reich voluntary action by those have power and economic clout in order to protect their interests?

Suggestions for Action

Reich does propose some actions which are worth considering, however unlikely they are to occur: reverse income taxes by supplementing the wages of the middle class (see proposal for giving money to low income earners in the Saturday Focus section of the Globe); higher marginal tax rates on the wealthy, wage insurance; revising funding for higher education, infrastructure projects which benefit all such as public transportation and getting money out of politics. Most of us would agree that these proposals would face very strong opposition politically and from vested interests. However, given the deficit situation in the US and Canada, it seems that higher taxes are inevitable – whether they will be achieved by higher marginal rates on the wealthy or other means has yet to be seen.

As the economic situation deteriorated in the fall of 2008 and the stock market declined precipitously, I assumed that the establishment, government and big business would do whatever was necessary to protect their interests. This meant avoiding a full economic meltdown, no matter what the cost. The bail out focussed more on Wall Street using its many avenues of influence resulting in the injection of massive funds into banks, investment banks and AIG, with the politicians rationalizing that saving them would in effect save the economy as a whole. These institutions ultimately survived with the injection of massive amounts of government aid and went on, in some cases, notably Goldman Sachs, to make more money and pay more bonuses (after paying their fines which were no more than the cost of doing business), than before. But the plight of the borrowers under the subprime mortgages in default, the middle and lower income earners who were unemployed, the drastic decrease in house values, and general stagnation of the economy has not improved, certainly not by the widely touted trickle down effect.

I have no more insight into solutions than Reich does. The experience with the Obama administration does not lend much comfort that there are any easy answers.  Navel gazing about a misguided value system is not going to be a fix.

Future Blogs

For those who found “Pay More Taxes – Session 101” interesting, I did receive comments back from my friend Larry Wasserman, a mathematician at Carnegie Mellon and a devout libertarian. Needless to say, his Taxes 101 does not look anything like mine. I responded back to him with “scathing criticism” and then asked him if I was still welcome in his home in Italy. He replied: “I have lots of tax-loving liberals visit. The problem with being a libertarian is that it's lonely. The conservatives and the liberals both hate us.” More on this lively dialogue in the future.

Pay More Taxes - Session 101

A couple of weeks ago N. Gregory Mankiw wrote an article for the New York Sunday Times Business Section entitled “I Can Afford Higher Taxes. But They’ll Make Me Work Less”. This article which focused on Obama's intention to roll-back the Bush Administration tax decreases on people earning more than $250,000 per year annoyed me and I am curious if it has the same effect on others. More on this below, but I begin with my trip to the Vancouver International Film Festival to see “Inside Job”, a documentary about the 2007 – 10 financial crisis, how it began, evolved and the consequences.

Inside Job describes the meltdown of 2007 –2010 (not yet by any means over) in a raw and unvarnished perspective. Judging from the fact that the same cast of characters remain on the financial stage today in charge of the banks and as advisors to Obama, the problems are likely to be repeated. Most certainly we have failed to take advantage of the crisis to do some housecleaning. A great opportunity has been lost.

“Inside Job” informs us that amongst the perpetrators of this crisis include a small number of very influential economists who have advocated and lobbied for deregulation of the financial system. Several of them are professors at Harvard and other Ivey League universities who also consult to the US administration and various wall street banks, near banks and hedge funds. The Obama administration has retained in critical positions many of the economists and advisors who were responsible for, and in many cases profited from, the policies which led to this disaster.

Take for example, Larry Summers, ex-President of Harvard and also a professor in the School of Government (Harvard) who featured prominently in the film. He was an advisor to Bush and is currently an advisor to Obama. He resigned as president of Harvard after a vote of no-confidence by the faculty:

“that resulted in large part from Summers' conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a "different availability of aptitude at the high end," and less to patterns of discrimination and socialization. Summers has also been criticized for the economic policies he advocated as Treasury Secretary and in later writings. Since returning to government in the Obama administration, he has come under fire for his numerous financial ties to Wall Street.”

There are many others but I am limited by space and time. These economists, who are to say the least disingenuous, include Mankiw as demonstated by his article “I Can Afford Higher Taxes. But They’ll Make Me Work Less”.  In this article, Mankiw admits he is a professor at Harvard obviously to add some clout to his remarks. I thought I should look him up to see if he had any background on taxes or economics. Unfortunately (for him or me), anyone who writes a book titled “New Keynsian Economics: Imperfect Competition and Sticky Prices” is clearly an economist. Mankiw was also an advisor to Bush (Dubya).

Mankiw’s argument boils down to this. His income is more than $250,000 per year so he will have to pay more taxes if Obama rolls back the Bush tax reductions. He doesn’t have his own jet or Ferrari (allowing him to be piously self-righteous, even self-denying) so he can afford to pay the increased taxes. If requested to write an article for $1,000, he might not do it because the work would not be worth the pay (after tax). He provides some calculations - if there were no taxes, the $1,000 would be worth $10,000 in 30 years; with Obama’s planned roll-back and his kids would get $1,000 (after tax) in 30 years; and lastly in the current regime [assuming lower income taxes, lower medicare taxes, no deduction phaseout (whatever that is) and no estate tax], his kids would get $2,000. Conclusion – he would have twice the incentive to keep working. He says:

“Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.”

Judging from this article, Mankiw is one of the entitled libertarians who figures that the emergence of Wall Street as the economic engine of the country and the simultaneous decline of the production of real things which show a much lower rate of return is progress.

No wonder we don’t trust economists. Let’s hypothesize for a moment that the additional taxes raised from people like Mankiw who, by their own admission, can afford to pay them, will be used to provide more education so we will have more doctors or orthodontists who will provide more services.

Furthermore, who are the people going to concerts, reading books and spending money on goods and services – the 1% of people who earn more than $250,000 or the 99% of people who earn less?

Where are these studies showing higher taxes will result in less productivity? Especially if lower taxes result in cuts to education and create more social conflict.

And of course, there is much more to economics than number crunching. Some economists are even paying attention to human behaviour. According to a more recent article in the NYT by David Segal (also an economist) (which refers to Mankiw):

“… a certain amount of psychological guesswork is part of an economist’s job, which accounts for the rise in popularity of behavioral economics, an effort to account for the slippery, indefinite nexus of money and humans. ‘The entire question of how emotion will change people’s behavior is pretty much outside the standard model of economics,’ said Dan Ariely, a professor at Duke University and author of “The Upside of Irrationality.””

It seems Mankiw is prepared to ignore this and cite his own preferences and anecdotal evidence plus ignoring his own bias to advocate that tax reductions should not be rolled back .

In the past few years, millions of people have lost jobs, life savings and their homes while the rich get richer – and this is no myth or whine – Robert Reich, one of the less conservative crowd advising Obama – in his new book “Aftershock: The Next Economy And America's Future” – points out that 1% of people own 23% of the wealth in US. The gap between the median income and the top 1% is growing as well, and the proportions have never been so high since 1928. The wrath of the American public is simmering and may soon boil over.

And there is the deficit or doesn’t anyone care about it anymore? More taxes could even be used to reduce it. Or is the US so far gone that there seems no point even trying to reduce the deficit?

Sure, if you are a narcissist earning $250,000, as Mankiw admits, you may be better off personally if your taxes are not raised. But I am confident that it is a lot worse for the rest of us. And eventually, the mess with catch up with Mankiw’s kids who will have to contend with a society deprived of its middle class and suffering the social strife that goes along with this. Their extra $1,000 is going to look like peanuts.

I am curious why the New York Times gives credibility or coverage to Mankiw. It is rumoured that Mankiw quit his post with the Times because the Times only pays $650 per article and that is just not enough to justify his effort if the tax cuts are not extended. I have to say, I think in the case of Mankiw, the NYT has overpaid.

Don't Read Books!

I took the summer off from blogging and lost my little “ideas” notebook so I have to start from scratch. Losing my notebook was almost as devastating as losing my diary, though my diary from age 8 to 10 contained only one line.

This week in The New York Times Review of Books, Kwayme Appiah reviews “The Moral Landscape – How Science Can Determine Human Values” by Sam Harris. According to the review, “Harris heads the youth wing of the New Atheists”.

Stephen Jay Gould, the evolutionary biologist, has received a lot of attention over the past several years for his books and articles denying the existence of God. 
I had heard of Gould and even read about ½ of one of his books, still in my modest science library which I bought this during my “you should learn more than physics” stage of life. Gould too is an atheist but says of science and religion – never the twain shall meet. Harris attempts to demonstrate, from the review unsuccessfully, that the facts about the well-being of conscious creatures can be derived from science, especially neuroscience. 

 The reference to Gould in the NYT Review of  Books and the review of Harris' Moral Landscape gave me pause for thought.  I thought do I really need to read either Harris or Gould?

Being a person of limited time and resources, I have often wondered whether it is better to read the reviews of books by these authors, than reading the books themselves. This likely applies more to non-fiction than to fiction. After all, reading a review of “The Girl Who Played with Fire” (originally “Men who hate Women”), is hardly the experience of reading the book – or seeing the movie (I recommend both).

I retrieved from my library - which admittedly consists of only a few selected books as most have been in storage for at least 10 years - a book by Pierre Bayard titled “How to Talk About Books You HaveN’T Read.” I noted the bookmark was inserted at page 48 whereas the book has about 150 pages; I obviously took the author to heart. Nonetheless, I recall enjoying the first few chapters.

The preface begins with:

“Born into a milieu where reading was rare, deriving little pleasure from the activity, and lacking in any case the time to devote myself to it, I have often found myself in the delicate situation of having to express my thoughts on books I haven’t read.


Because I teach literature at the university level, there is, in fact, no way to avoid commenting on books that most of time I haven’t even opened. It’s true that this also the case for the majority of my students, but if even one of them has read the text I’m discussing, there is a risk that at any moment my class will be disrupted and I will find myself humiliated.”

Would I be stretching the truth to say few of us want to be humiliated but most of us want to be interesting and well-read. At least to page 48, Bayard’s book is very amusing and I probably skimmed the chapter titles of the rest of the book Fortunately each chapter has a little key idiom beneath the chapter title, almost eliminating the need to read the text.

From a brief review of Bayard’s book:

“A must-read for anyone who cares about books.”

I feel I let the reviewer down, but not Bayard.

Book reviews are extremely useful, however, for a variety of reasons: (a) they can be interesting; (b) they serve the purpose of allowing one to talk knowledgably about a book without struggling through it; (c) if the review is bad you can avoid buying the book [after all, you have already paid for the Globe or the NYT Review of Books] and you can impress your acquaintances by telling them not to buy the book; (d) etc.

In the review of “The Moral Landscape”, I learned about Sam Harris’ 2 previous books on the same topic so no longer need to read them and also learned about Gould, so no longer need to read him either (saving at least $75 plus tax and much space in my already cluttered attic office). In fact the reviewer’s comments about the new book and the 2 previous ones are as follows:

“I found myself wishing for less of the polemic against religion, which recurs often and takes up one entire chapter — he has had two bites of that apple already, and will soon be reduced to gnawing at the core — and I wanted more of the illumination that comes from our increasing understanding of neuroscience.”

I think I will leave gnawing at the core to those with more time and reach American Science for information on neuroscience.

How is this for a page turner – “The Shadow Market – How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World”. A catchy title but a smidge too long; one wonders whether you need the rest of the book: From the review this week in the NYT:

“The trouble is the delivery. A sober book like “The Shadow Market” is never going to read like a Crichton potboiler, but it veers too far in the other direction, often sounding like a report for the Council on Foreign Relations. There is too much survey and not enough analysis.”

I think I will take a pass on this one, but good cocktail conversation depending on the crowd.

Let me be perfectly frank here. I often do not agree with positive and glowing reviews of books or movies. My friends know me as a sceptic. For example, I thought it might be fun to see what reviewers have to say about the book “A Beautiful Mind” a biography of John Nash, the mathematician who made advances in game theory, suffered a breakdown and then got the Nobel Prize. The 457 pages of the softcover version tell us much, much too much, about every minor detail of Nash’s life. I did not leave a bookmark in this book. The movie was Hollywood entertainment. From the Boston Globe:

“Superbly written and eminently fascinating.”

One review which I dug up on a google search says:

"The New York Times book review says A Beautiful Mind "reads like a fine novel." Except, a fine novel doesn't have endnotes plaguing the entire text. Sylvia Nasar must be German. If not at the end of every sentence, at least at the end of every line of thought, there lies an endnote. (The Germans are famous for documenting everything to distraction; this is not a stereotype.) The book is ridiculously over-documented. (For example, Chapter 1 alone, which is only 15 pages long, has 63 endnotes!) This is terribly distracting for me as the reader, especially considering that hardly any of the notes actually elucidates anything; just documents, documents, documents, as if it were a college thesis."

You can imagine which review I preferred. If anyone cares to borrow A Beautiful Mind, please email me.

By the way, if you are not satisfied with the short, but sweet, reviews in the NYT, you can go for the more intellectual and far, far longer reviews in the New Yorker.  Not sure if anything of interest emanates from west of the Rockies.

Enough of this – if have you read Bayard’s book, you will unlikely have gotten this far in my own too fully documented blog.

Back to serious stuff next time.

Government Debt – Out of Control and What It Means to You

This seems like a very esoteric subject for a blog, but the beauty of blogs is that you can write about whatever interests you.

I have been fascinated by increases in government spending, reduction of taxes and the excess consumption in North America for quite a while. Maybe since university Economics 101 where I first learned that if you don’t balance your budget, you will eventually run into serious trouble. Although the blog focusses on the United States, as the expression goes, make no mistake about it - the same applies to Canada.

In the mid 1970’s New York City was bankrupt and Richard Ravitch was appointed to fix things. He did through serious budget cutting and raising taxes, plus short term borrowing. By the mid 1990’s NYC was thriving. As Lieutenant Governor of New York State, he was asked to do the same thing recently for the State – the finances of NYS are in a shambles but he was stymied. Things have changed. Listen to him on This American Life podcast June 18 2010.

About 6 years ago I was in Los Angeles in a bar talking to my nephew and his lawyer buddies, all about 30 years old. I had just finished reading a full length article in Atlantic Magazine on the American balance of trade deficit. My nephew's group expressed virtually no concern about the deficit or what impact it could have on the US dollar, almost as though they were living in isolation from the rest of the world. And this discussion was only the balance of trade deficit, not the budget deficit.

There has been an endless amount written about deficit financing. I took a look at the Atlantic Maganzine website and found numerous articles, for example – Feb. 1989 –  “Is the Deficit so Bad” by Jonathan Rauch, and Jan. 2008 - “The $1.4 Trillion Question” by James Fallows. The focus of the articles is on the balance of trade deficit but, as we can see from the plight of NYC and NYS, budget deficits present their own difficulties.

The balance of trade deficit and the budget deficit are different. The first represents the net outflow of capital from USA over the course of a year. The second is the amount by which the expenditure by government exceeds its revenues.

The balance of trade deficit results from Americans buying and consuming more foreign products than they export to other countries. The greatest part of that deficit comes from purchasing Chinese goods at a price which is much lower than they could ever be produced in the US. China has intentionally kept its currenty, the RMB, pegged low so that American consumers can afford all those Chinese made goods. Oddly, the Chinese government is saving its US dollars by buying US treasury bonds rather than spending its US dollars or investing them in infrastructure at home,  All this seems like a great deal for the US until you realize that you have to pay interest to the Chinese on those treasuries and if the Chinese government ever decided it no longer wanted the greenback, the $US would suddenly collapse in value. This is not good in the long run, though US consumers are undoubtedly enjoying it in the short run. Their kids are not going to be happy campers when payback day arrives.

The budget deficit is just as bad. Governments simply don’t seem to be able to control their spending, nor are they willing to increase taxes to balance their budgets. Taxpayers refuse to elect politicians who are going to raise taxes or take away their entitlements. Greece is a perfect example of this, where in the past few months people rioted in the streets against lowering wages and reducing benefits of government workers.  [More on this generally in the episode of This American Life - see above.]

The balance of trade deficit and the budget deficit have something in common. They effectively are borrowing against the future.

So everyone pretty much agrees that deficits are bad though some say "Don't Balance the Budget" - you can keep on increasing the deficit lock-step with the Gross National Product (“GNP”). That assumes your starting point is a reasonable and sustainable deficit and that you will reduce your deficit if there is a dip in the GNP or increase in interest rates (both of which are highly dubious).

The foreign holders of $US eventually have to do something with their money beside buying US Treasury Bills. The Chinese recently bought a few billion dollars of Blackstone, a US Hedge Fund, and lost much of it. [See $1.4 Trillion Question for more on this.] At a an investment seminar I attended recently, the presenter predicted foreign creditors will buy up massive amounts of property and businesses in the US, effectively triggering one of the greatest transfers of ownership of capital goods in history. The transfer would allow aging boomers to support their lifestyles, much like the reverse mortgages which give the elderly income while transferring their equity in their homes to the lender. Depending on the amounts involved, US may become more like a 19th century colony. Foreign owners will dictate how the businesses operate, what investment decisions are made and what will be produced. As the dollar drops in value, US citizens will have even less say about what happens in their own country, particularly about assets then owned by foreigners.

At least noone will be able to demonize the US as a colonial oppressor any more.

How does this apply to us as individuals. Does it have any significance? For starters, our kids may be the next generation’s second class citizens. Instead of having the highest living standard in the world, they are going to be moving down relative to people in other countries who have been more prudent about their finances and consumption. This is a different paradigm from the North America which has been the envy of the world economically and politically. Some of the dangers are that when hope and prospects fade, democracy is threatened. The tendency for men (who still dominate politics and probably will for a while yet) is towards anger and blame and this leads to conflict.

Now for the question. What are we going to do personally,  apart from voting for higher taxes and fewer services and reducing purchases of HD TV’s, digital cameras, computers, appliances, BMW’s and just about everything else which is manufactured outside North America (that is just about everything because not much is manufactured in North America any more), and donating to democratic watchdogs.

Middle and upper class people are likely in denial or just not thinking about how this all applies to them. They may believe that education and their current asset base can protect them. Even today in the US, the middle class is struggling to pay for services, education and health care. They are also concerned about job security and pensions, and rightly so. According to the OECD, Education is a great investment, but protecting your asset base and the purchasing power and amount of your pension fund is more difficult.

So, going back to my previous blog, I think I got the question right but haven’t come up with any answers. I am spending my kid’s inheritance to send them to university. Like most boomers, I am working longer. I could also spend less (unlikely) or die sooner. How to invest is a problem when you live in a country which is likely to experience a decline in currency value relative to countries that are producing the goods you want and gobs of money are competing for low risk investments. I could invest in RMB (Chinese money) but China seems to be on the verge of its own bubble bursting. Real estate may be a good investment depending on rental rates, interest rates and vacancy rates, but it is too expensive and sellers are greedy. Certainly those foreign investors with all the $US and $CDN love real estate, but many of them could care less about return. The stock market has been relatively steady over the past 400 years (so say the pundits) but will the future be like the past?

My answer – build a house near the beach in the Baja, Mexico [architect's rendering - not yet reality]. I don’t have to worry about what to do with my available cash – just dump it into pesos. Then I will enjoy it with my family and friends and hope climate change doesn’t make it too hot for comfort.

Asking the Right Questions

Richard Feynman was a major icon in physics for over 6 decades. This is almost an unheard of feat primarily because the careers of most physicists, even the great ones, are winding down when they are in their 40’s.

Feynman told stories – making a lot of them up - about many things and one, about his father, concerned the name of a particular bird, the Spencer’s Warbler. When he and his father saw this bird, his father named the bird in a variety of languages, then said:

“You can know the name of that bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird. You’ll only know about humans in different places , and what they call the bird. So let’s stop looking at the bird and see what it’s doing – that’s what counts.”

Feynman learned to ask questions about everything; he deconstructed physics; he re-worked all propositions from their beginnings and took nothing for granted. This took time and effort but was well worth it.

In 1956, experimental physics had shown there was a serious discrepancy with theoretical physics. Theoretical physicists cherished the idea of parity conservation, in simple terms that the universe was neither right or left handed. Experimental results on a particular sub-atomic particle (Tau Lepton) could not be explained. Feynman had the imagination and courage to ask “What would be the consequences if the parity rule was wrong.” He simply asked the right question. Perhaps you had to be there, but this was a turning point in science.

In a perfect world, every assumption should be examined no matter how much time and effort it takes. In computer jargon with wrong assumptions you get “garbage in – garbage out”. Let’s look at a few examples:

Ø does electronic messaging really have value rather than just making it simpler or faster

Ø tenure in education (what purpose does it serve now)

Ø assumed probability of unusual or rare events (calculated without sufficient information)

Ø economic theories based on people acting logically (they do not)

There are an infinite number of these. Great historical figures are no longer relevant today because they made wrong assumptions. Marx and and to a lesser extent Freud are good examples.

The problem is that most of us do not have the desire, the ability or the time to research every subject, figure out if there are assumptions and then determine the validity of the assumptions. Nor to affect outcomes if we discover the assumptions don’t make sense.

Look at this example for digital cameras – there has been a continual and inexorable increase in megapixiels. Megapixels sell cameras. But if you increase in number of megapixels without increasing in the size of the card capturing the image, you get a noise problem which is detrimental to picture quality ie you have not improved anything. Instead, why not look at how to make better use of the light which enters the lens but is lost due to inefficiency. The same applies to solar panels where approximately 80% of the energy is wasted. Scientists and engineers are looking at both of these problems. They are related but I’m not sure the engineers have realized this just yet.

Looking at assumptions is fertile ground for litigation lawyers and expert witnesses. Expert reports, appraisals, business plans, and many other documents we rely on are based on assumptions. Being a critical reader and open to changes and alternatives and always questioning is the hallmark for intelligent examination of issues and will facilitate a better outcome. Like democracy, questioning and deconstructing is messy and time consuming, but there is no better system.

I confess that I have not always questioned nearly enough. Often it is only in hindsight that I realize this failure. I suppose I will have to try harder.

Blow-Outs - Deja Vu

Man-made disasters never fail to fascinate us.

In the autumn of 1982 near Drayton Valley, Alberta, a town about 140 Km south west of Edmonton, Amoco Oil was drilling a sour gas well. Sour gas contains hydrogen sulphide (H2S), a very corrosive gas which combines with water to form sulphuric acid. In low concentrations H2S smells like rotten eggs. In high concentrations, humans are unable to smell it and it is deadly. Amoco had experienced a serious blow-out in the same gas field five years earlier. You can find out more about Amoco’s history of disasters on-line.

Early in the morning, troubles began at the well-head and within hours the well was out of control spewing H2S in vast quantities.  This blow-out was known as the Lodgepole blow-out and was the worst blow-out in Alberta's long history of oil and gas exploration. On some days, the rotten-egg odour could be smelled as far away as Winnipeg, nearly 1,500 kilometres distant. Needless to say Edmonton and other communities in the vicinity of the blowout were in a state of serious anxiety.

Sour gas flowed at an estimated rate of 150 million cubic feet (4,200,000 m3) per day.

The H2S content of the gas was 28 per cent, and the well also produced 20,000 barrels per day (3,200 m3/d) of sulfur-contaminated, orange-coloured condensate which was emitted into the atmosphere deposited around the well-site. The well was out of control for 68 days, during 23 of which the well was not ignited. During that time H2S from the blow-out took the lives of two blow-out specialists and sent another 16 people to hospital.

In early 1983 I received a call from the Energy Resources Conservation Board, the oil and gas regulatory authority for Alberta, asking me to act as inquiry counsel for an inquiry the Board was convening to investigate the blow-out. The job entailed reviewing the events leading up to and following the blow-out, gathering evidence from Amoco, contractors on site, government departments who were responsible for disaster planning and public protection, municipalities and environmental groups. I had to cross-examine all of the people involved. I accepted and began a task that took my full time for 1 ½ years and continued until early 1984. I learned a lot about blow-outs, the oil industry and government.

I was given a relatively free hand to investigate the causes of the blow-out and the response of Government to it, the environmental damages, and ultimately to assist the Board in determining how the industry should be regulated in the future. It is ironic to note that in 1998 Amoco merged with BP.

This is obviously timely because of the current situation BP is experiencing with the blow-out of their Deepwater Horizon Well in the Gulf of Mexico. A few examples may serve to illustrate how little certain players in the oil industry, have learned about drilling and safety.

There is a lengthy front page article in the Sunday New York Times which outlines the “hodgepodge of oversight agencies that grated exceptions to the rules, allowed risks to accumulate and made a disaster more likely.”

Later in the same article:

“As early as June 2009, BP engineers had expressed concerns in internal documents about using certain casings for the well because they violated [BP’s] safety and design guidelines. There were kicks in the well more than 5 weeks before the disaster and a pipe was stuck in the well. The blow-out preventer, when tested on at least three occasions was leaking fluids."

As the headline of the article states, it was not clear who was in charge. BP could make more money by completing its drilling job quickly because it was paying a leasing fee to the rig owner, Transocean, thus creating a natural conflict of interest. The desire to cut corners and save money is not uncommon in industry. Especially when there is a perception of low risk of an event occurring without proper consideration of the consequences if the event actually happens.

As is the case in most complex industrial accidents, there are many events leading up  and contributing to to the incident.  The headlines and articles from Lodgepole will sound familiar to those of you who are following the Gulf blow-out:  Here are extracts from some of them [I acutally got them out from storage!]

"Was Blowout Avoidable - repair equipment for the Amoco well was ordered seven hours before it blew wild...But the equipment did not arrive on time.."

"Foreman battled runaway well alone for 17 hours..."

"Mud study warned Amoco of sour gas dangers..."  "Mud used before blowout less than recommended..."

"Safety tests unrecorded..."  "Amoco records: vital tests not done..."

"Blowout problems minimized by firm..."

"Amoco production manager...told the inquiry the company was aware some possibility of striking sour gas existed, but reluctantly admitted no probability assessment of hitting the gas was conducted or asked for..."

"Tests not done before blowout...Amoco..records indicate that crucial safety drills and function tests were not performed in the days immediately prior to the blowout..."

"It's our secret: Amoco" - headline in reference to Amoco's refusal to disclose its emergency response plan.

Let's use the blow-out preventer (BOP) as an example in the BP blowout.  The BOP is the device which is perched on top of the well head and is supposed to shut down the well if problems are encountered. In the BP case, the BOP was inaccessible, at great depth and subject to tons per square inch of pressure. It could obviously not be inspected visually.

Apart from fluid leaks in the BOP, BP chief operating officer Doug Suttles said interviews with Transocean [the owner of the rig] workers on the rig revealed crewmembers tried to activate the BOP from the rig's bridge before the fire forced them to evacuate, but the BOP did not close off the well.

Suttles also revealed that BP remotely-operated vehicles (ROVs) had hit "subsea access points" that should close the BOP, but that they also failed to trigger the mechanism to shut.

"We don't know why the BOP failed to stop the flow," he said. "Ultimately we will recover the BOP, get it to the surface and find out."

In the Lodgepole situation, the BOP was supposed to close after the drill pipe was removed. [Some undersea BOP’s have a cutting edge which is supposed to cut the pipe when the BOP closes.]
As with BP, Amoco estimated the amount of gas flowing from the well head. As with BP, Amoco’s original estimates were low. This is not surprising as the higher the estimate of the flow, the more dangerous the situation would appear to the public and regulatory authorities. As with BP, it turned out the flow was considerably higher than originally anticipated. This had dramatic consequences for Lodgepole. The Amoco engineers decided they could control the blow-out by opening the BOP, letting the drill stem drop into the drill hole, then close the BOP. They predicted the pipe would drop into the drill hole based on their estimate of upwards pressure from the flow. Needless to say they were astonished that when the BOP was opened, the drill stem shot 100’s of feet in the air, striking the rig and igniting the gas into a fiery inferno which totally destroyed the rig.

The saving grace was that when the blow-out ignited, the H2S was consumed by the fire so there was no further threat to people from breathing it. However, then the threat to the environment from the resulting emissions continued unabated. 

The fire destroyed the Nabors 14E rig (worth about $8 million) in nine minutes; it also scorched 400 acres (1.6 km2) of forest. Amoco's direct costs to bring the well under control were approximately $20 million. Huge amounts of natural gas, natural gas liquids and sulfur were wasted through the disaster. Apart from the environmental and health concerns, this meant energy lost to consumers, revenues lost to Amoco, and royalties and taxes lost to government. According to a Panel’s report from the Inquiry, these and other direct costs totalled about $200 million.

In my view in the case of Lodgepole, the government and regulatory authorities acted reasonably competently.  From the media reports, that does not appear to be the case before and immediately following the BP blow-out.  It is perhaps easy in hindsight to characterize activity around a well-site as without direction or chaotic.  There are always many participants - drillers, managers, representatives of the owner (BP), drilling mud specialists, pipe specialists, people taking out and reviewing core samples, etc.  But lack of planning for a serious incident, lack of concern as the well began showing signs of trouble, inadequate disaster planning, confusion and lack of direction from management and lack of coordination amongst the various people on and off site all would clearly contribute to a blow-out. The failure to stop the blowout and deal with envirnomental and other problems following the blow-out are another story.

From the editorial questions in the New York Times:

THE RESPONSE The questions about whether BP and the government responded quickly enough, and with the right weapons, could fill a book — and probably will. Both parties seem to have underestimated the size of the spill, and neither had a coherent underwater response plan in place. Though the oil industry had experienced blowouts at shallower depths, BP’s disjointed response suggested it had given little thought to the possibility of a blowout at 5,000 feet.

In my view, the BP blow-out manifests systematic problems permitting the human failures which possibly caused and undoubtedly contributed to the consequences.

Part 1 of the Lodgepole Inquiry dealt with events and responses. Part 2 dealt with what the industry and the Board should do to prevent another disaster.  In the case of Lodgepole, the inquiry spawned a generation of safety regulations that require the industry to designate hazardous drilling targets as "critical wells" and to use elaborate safety precautions at the drill site. The new regulations imposed much more stringent drilling procedures at critical wells, required specialized safety features on drilling and other equipment, and forced companies to develop detailed emergency response plans before beginning to drill.

While acting as Inquiry Counsel, I observed the vast resources the Oil and Gas Industry could bring to its operations and to its legal problems. Many commentators recognize that regulatory authorities and industry cooperate and have a “cosy” relationship which can result in compromises and tacit agreements on procedures and safety. Undoubtedly many heads will roll over the BP disaster placing the blame on those supposedly responsible for approving actions which were in accordance with accepted practice and policies and essentially condoned.

There are good players and bad players in every industry. The BP blow-out will obviously result in changes to off-shore drilling. It will cost the industry dearly – and not just the bad players. Let’s hope the changes will make drilling safer rather than merely give us the impression of safety as is the case with many of the measures implemented after 9/11 by Homeland Security.

I also believe that the good players have a corporate culture which engenders prudent, safe practices and honest open dialogue among team members and the bad players emphasize savings and cutting corners, disregard or underestimate risk and stifle dissenting opinions. It would be interesting to be a fly on the wall in the boardrooms of the major oil companies to hear their opinions on the BP blow-out and on the cost to them in the future.  It is reminiscent of the Canadian Government and banks opposing the proposed international bank levy, saying why should we pay when we acted properly and in fact already paid by foregoing risky subprime mortgages and hedges.

As a personal aside, the Pembina Institute, one of the leading environmental activist NGO's in Canada was created following the Lodgepole Blowout by Rob McIntosh who was the organizer of the Drayton Valley Community in its participation in the Inquiry.  Mark Lowey, a journalist who covered the Blowout, continued his career as an environmental writer and today publishes a respected news journal on environmental issues.

I was usurped by the New York Times Sunday Magazine on another aspect of this story which I was thinking about yesterday. The article entitled “Underestimating Risk – What the oil spill and the financial crisis have in common” discusses the human tendency to underestimate risk and the comparisons between the blow-out and the financial crisis - but that is to be continued.

Lawyers Jokes

The devil visited a lawyer's office and made him an offer. "Here’s the deal" the devil said. "I'll increase your income five-fold. Your partners will love you; your clients will respect you; you will have a passionate affair with an associate and your wife will never find out, you'll have four months of vacation each year and live to be a hundred. All I want in return is that your wife's soul, your children's souls, and their children's souls rot in hell for eternity."



The lawyer thought for a moment. "So what's the catch?" he asked

You have probably heard this joke and variations on it. As Charles Dickens’ wrote in his famous diatribe against lawyers in Bleak House:

“The one great principle of the English law is to make business for itself. There is no other principle distinctly, certainly, and consistently maintained through all its narrow turnings.”

Although many lawyer jokes are about fees, many also convey the message that lawyers are unscrupulous, will do anything for money and have no real code of ethics.

Do lawyers really deserve to be the object of this type of ridicule? I recently published an article in our provincial lawyers publication, the Advocate, - “The Art of Reneging on a Merger”.

In my article I focus on a hedge fund, Apollo which owned a major chemical company, Hexion. Apollo wanted to buy Huntsman Chemical to merge it with Hexion. Huntsman was a family controlled publicly traded chemical company. When the fund made the offer in 2008, the deal looked rosy but soon after market conditions deteriorated and the hedge fund wanted to exit the deal. Literally billions of dollars were at stake,

By way of background, Jon Huntsman is the founder and chairman of Huntsman Chemical. He created Huntsman in 1970 and by 2000 it had become the world’s largest privately held chemical company with more than $12 Billion in revenue. Jon Huntsman is an old style businessman whose “word is his bond”. He gives generously to charity and to his community.

Hedge funds are not usually noted for their interest in anything but profit for their investors.

When Mr. Huntsman negotiated his deal with Apollo, he expected Apollo would complete. Apollo apparently thought they could get out of the deal but they underestimated Mr. Huntsman. Jon Huntsman sued Apollo, Hexion and Apollo’s bank [see my article for the full story - link above].

In 2009 Jon Huntsman wrote a book entitled “Winners Never Cheat – (even in difficult times)”. He does not mince words about lawyers in his book (p. 80):

“Shakespeare didn’t literally mean it when he said that the first thing we must do is kill all the lawyers, but you can forgive folks for smiling at the thought, given that the legal profession, collectively and with our complicity, is stripping America of personal accountability and trust. All of us, in ways large and small, partially are responsible for this erosion of integrity, but I place the greatest culpability, with notable exceptions, on attorneys – especially corporate lawyers.”

My interest in the Hexion/Huntsman situation was at first aroused by the legal strategies used by the Apollo to get out of the deal – strategies which were creative to say the least but doomed to failure. However, I soon began to wonder about the consequences of these strategies on innocent bystanders and whether lawyers should or are even entitled to take such consequences into account, or are accountable for the consequences.

The point I wish to make is that the actions of the lawyers on behalf of their clients in situations such as this can have far reaching consequences. While the lawyers for Apollo were trying to undo the Huntsman deal, management of Huntsman were undoubtedly going through hell. They had announced to their thousands of employees that Huntsman would merge with Hexion and everyone was waiting for the outcome. These Hunstman employees, watching the legal battle unfold, had no idea what the future held for them and had to live in uncertainty for the many months while the action wound its way through the courts. What if these employees had invested their pension monies and savings in their 401K’s in stock of Huntsman – and then watched as the stock price plummeted? What about the customers of Huntsman who expected the merger to occur but found their supplier deep in litigation with Apollo and Hexion. What about the damage done to business generally when parties to a contract simply refuse to comply with their obligations.

Suppose despite the action, the deal had completed (it did not). What impact would this have had on the employees of Huntsman and their attitude to their new employer?

Who should be thinking about these issues? What is the role for lawyers?

John C. Coffee Jr., a professor of law at Columbia University recently wrote a book titled “Gatekeepers – the Professions and Corporate Governance”. In the chapter entitled “Corporate Attorneys as Gatekeepers”, he reviews the history of the American Bar Association (ABA) code of ethics and the debate between academics who place justice as the first priority of the lawyer and the practitioners who place duty to client first.

Coffee describes the resistance of the ABA to creation of a code of ethics which has some moral content to it and the unflagging efforts of the ABA to resist changes to the code when events bringing lawyers into disrepute inflamed public opinion against lawyers. The ABA has been especially vocal about changes proposed by the SEC which would create any watchdog element for lawyers.

The first attempt to create a code of legal ethics in Canada came in approximately 1920. The deplorable record of law societies to create norms for lawyers’ actions and to deal with the public disenchantment (to put it mildly) with the profession especially over the last decade climaxing in the “anni horribilus” is described in a recent article by Adam Dodeck.  The anni horribilus, 2006-7, included the Wirick fraud, Tory Tory lawyers dealing with the Conrad Black situation, the Lawyers are Rats article in McLeans, etc.  It is interesting to note that Dodeck is somewhat optomistic about the future and is of the opinion that we are making some headway.

In my view, there are no facile or simple solutions to these moral and ethical questions. But it seems to me that if the academics are losing ground in their quest for justice, this can make the lawyers really facilitators and certainly not moral leaders. In other words, with reference to the jokes, many a truth may be spoken in jest.

Our Beloved Euro

The world seems to be lurching from crisis to crisis. For those old enough to remember, we had the misery of Black Monday in 1987 when the Dow dropped almost 23%. (It fully recovered in about 6 months to the chagrin of those who sold as the market plummeted.)

In the late 1990’s, Long Term Capital Management, a hedge fund whose board included two Nobel Prize winners in economics, had to be bailed out by the US government. The fund lost $4.6 Billion after betting on the Russian ruble just before the Russian financial crisis erupted. The fund was considered to be too large to fail. Some pundits opposed the bail out because bail-outs just encourage institutions to make risky decisions in the hope they will be rescued by government. (That sounds vaguely familiar.)

Then in 2000 everyone expounded at cocktail parties about the increasing value of their stock portfolios; no one could lose money on the market. The dot-com bubble then burst.

At the height of the bubble, Nasdaq peaked at 5132; today it is at 2346. Fortunately the general market has fared somewhat better than the technology stocks, most of which were trading on future promise rather than current performance. (I exclude Nortel which taught me a painful lesson as I held all the way down, being a loyal Canadian.)

With short memories and awash with cash, by mid 2008 investors scoured the world for opportunities. “Lazy money” was attracted, like moths to the fire, to any investment that would yield 7 - 10% and was rated relatively safe by rating agencies such as Moodys or DBRS. Lazy money is money owned by people who don’t want to do their homework by analyzing the risk and security of the investments they are purchasing. There were a lot of banks, pension companies and institutions who ended up with CDO’s and subprime mortgage portfolios that became illiquid and ultimately worth only a fraction of what they cost.

Today you can invest in the Euro and Greek bonds. Is Greece too big to fail. What is the credit rating for Greek bonds. Will Germany and France save Greece, then Portugal and Spain? What about all those rioters in Athens who think they will be entitled to their benefits forever regardless whether their government can afford to pay them. What happened to the rating agencies and the EU regulatory authorities when Greece issued bonds in 2008.

The headline reads:

“Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.”

And in the Saturday Globe and Mail, Business Section, May 15, Derek deCloet reflects on investors who are prepared to lend money to Britain (a holdout from the Euro) for 10 years at 3.74% or even worse for 30 years at about 4% simply because the rating agencies call their bonds “Triple A”. He writes:

“The biggest problem is that lazy money depends on rating agencies,” says one of the smartest debt investors I know. They shouldn’t, this person says: Rating agency analysts are typically underpaid, overworked, and the good ones are inevitably picked off by Bay Street or Wall Street firms that will pay them a lot more.

Here’s a modest prediction: Some time in the next several years, the rating agencies will be exposed again, this time by underestimating the risk in the government debt of some major economy. And, just as in the crisis of 2008-09, the investors who make the big money will be the ones who ignore credit ratings altogether and do their own homework.

I agree that we have to do our own homework, but I am really not sure how reliable my homework or my conclusions are. I predicted years ago the $US would fall because of the continuing deficit and balance of payment problems and increases, also the lack of political will to deal with entitlements. I even bought a hedge. I was right, but my timing was off. The hedge expired before I was in the money.

In 1979 the Hunt Brothers out of Texas cornered the silver market. Silver skyrocketed in price from about $5 to $50 per ounce in a year.  When silver was $45 I went to the only bank selling silver intending to buy some. I needed a bank draft which I did not have at the time. There were 30 or more people, some with paper bags full of cash, patiently waiting to trade it in for silver. I thought to myself, this is probably not a good idea. And I was right for once. One lesson I have learned is that investors generally like company – if lots of other people are buying something, it must be good. With the silver play, I was a contrarian.

I am not sure how to do my homework, but it is fun speculating! In the meanwhile, my daughter is going to school in Ireland which, unlike England, uses the Euro. So I did buy some Euro’s on Thursday. But I am going to stay clear of UK Bonds.

Flatter is Better

Thomas Friedman is the author of “The World is Flat” (see below) which deals with the subject of the flattening of the globe and what it means to how we perceive the world and behave in it.

The concept of “flattening” applies to organizations too.

I am generally not in favour of hierarchal systems although dictatorship in a business organization does have its advantages in terms of quick decision making and implementing those decisions. It also seems logical that the entrepreneur who is taking the risk should have the right to make decisions and impose them on others who depend on him/her.

The Sunday New York Times Business Section has a weekly column “Corner Office” in which CEO’s are interviewed about aspects of their companies and their personal development and leadership strategies. They talk about delegation, hiring, qualities which make great employees, how to get the best out of their team, etc.

In late January, Corner Office did an interview with Cristobal Conde, CEO of a software and IT Services company.

The interview begins with a question and answer:

“Q. What are your thoughts on collaborative versus top-down management?


A. Collaboration is one of the most difficult challenges in management. I think top-down organizations got started because the bosses either knew more or they had access to more information. None of that applies now. Everybody has access to identical amounts of information.”

Collaboration flattens the organization and flattening leads to collaboration. If you think collaboration is good, and I do for a variety of reasons, how do you promote it.

Though the inteview is short, Conde makes a couple of comments that, in my opinion, are relevant to managing a vibran, creative organization. He first mentions his twitter-like system which he calls Yammer, an intranet communication link which allows people to share what others are doing, share information, brag about successes – “that is what flattens the organization”.

He also describes how and why he moved from command-and-control management to delegation which involves choosing the right people, delegating to them and holding them accountable. I would add mentoring and fostering creativity as factors as well.  The interview continues with:

Q. Besides the endless travel of that year, was there something else that made you shift styles [from command and control to collaboration and delegation] ?

A. Yes, it was a huge disagreement with somebody who worked for me directly, and he ended up quitting shortly thereafter. And it wasn’t that the decision that we disagreed on was so big. It was more that, to him, it just wasn’t as much fun anymore. He felt he could do more, and I was in his way. I was chasing away somebody extremely valuable, and that is when I realized I never would have put up with that myself. If you start micromanaging people, then the very best ones leave.


If the very best people leave, then the people you’ve got left actually require more micromanagement. Eventually, they get chased away, and then you’ve got to invest in a whole apparatus of micromanagement. Pretty soon, you’re running a police state. So micromanagement doesn’t scale because it spirals down, and you end up with below-average employees in terms of motivation and ability.

Conde says, his new way of management is the way to “Get world class people and keep them.”

In a business environment and world in which people change jobs, homes, careers many times in their lifetime, it seems to make good sense to try to mould your organization to do just this.

I will be travelling over the next few weeks so am posting early.

Lawyers and Anthropologists - Something in Common?

I recently travelled to Merida, Mexico, to attend the annual meeting of the Society for Applied Anthropology at which my sister, Jean (Jay) Schensul, received the Malinowsky Award for lifetime achievement for her contributions to applied anthropology in writing, community activism, health initiatives, etc. Among her many achievements, Jay founded the Institute for Community Research (ICR), a non-profit society based in Hartford, Conn. Hartford has many diverse ethnic and cultural groups. ICR's mission is to collaborate on research projects with other community groups. The goal is to understand community issues and promote justice and equity in Hartford and elsewhere. Although the goal may seems ambitious, the projects are focussed, targeting very specific problems.

Over the years, Jay obtained grants for research projects on many primarily health related issues for projects in Mexico, Peru, Sri Lanka and India. Through her work, she changed the landscape of applied anthropology in the Western hemisphere. She was and continues to be a “maverick” (not quite like Sarah Palin).

While listening to Jay’s keynote address, what impressed me was her commitment to change and her insight into the systemic problems retarding change. My interpretation was that anthropologists have many skills but must learn to use them in a different way in order to effect change and stay relevant in a milieu where many disciplines compete for resources.

Staying relevant and effecting change are of universal application. Throughout my career I have frequently thought about the relevance of my work and the legal system generally and struggled to find some deeper meaning. But if you are a lawyer, until you determine the role law should play, it is difficult to determine your own part. Visionaries, like Jay, force their peers to confront the larger picture.

In her presentation, Jay pointed out the strengths of trained anthropologists, the systematic weaknesses preventing those in the field from utilizing their skills and abilities, and then described how to use technology to harness those skills and bring about change.

She started with the benefits anthropologists [for almost all you can substitute “lawyer”, “doctor” or “educator” for anthropologist] can offer, for example:
- anthropologists work locally and globally
- Many anthropologists are motivated by social justice concerns.
- Some are artist/scholars
- Anthropology is interdisciplinary
- anthropologists see things as a whole

The systemic roadblocks which prevent real and effective changes to applied anthropology [again many of these all inhibit change to other professions] include:
- archaic rules governing promotion and tenure
- funders, policy makers and schools of public health do not institute training or encourage peer review opportunities for innovative products
- lack of cooperative research efforts between schools of public health and community organizations
- failure to support Community Based Research Organizations (CBRO) or link them to universities
- disinclination to publish innovative community-useful research methods and results which are meaningful but may not meet the standards of university peer-reviewed publications

According to Jay:
“In sum, the message for anthropologists is direct: further engaged action research from university bases, advance infrastructural changes, facilitate the development of CBROs and other forms of community competence in research with social justice objectives; join academy and CBRO forces with community voices to forge and to use new knowledge that makes a difference in reducing inequities and specific disparities in health education, culture and environment; and link with local, national and global networks.

We need to join forces with the action researchers of the north and the south, the sociologists, psychologists, feminists, disability researchers, and community based participatory research for health movement. By reclaiming action research, we forge alliances with researchers all over the globe in emerging networks … concerned with critiquing science, and with producing new community based knowledge in partnership with the communities who most need it.”

She suggests utilizing electronic tools such a national network of researchers linked through a wiki, communicating about their methods and results.

“Imagine a network of activist oriented applied researchers … among them anthropologists, communicating at any point in time and from any position on the globe about inequitable situations on the ground and steps required or taken to remedy them. This is now a technically achievable fundable vision.”

Jay is saying to her cohort group that to remain relevant, to contribute, to make impacts and to preserve their professional status, they must move beyond the confines of their particular expertise and make connections with other disciplines. This requires respect for others and intellectual curiosity. One has to be able to embrace new ideas, rather than be intimidated by them. Jay challenges us to act, seek, explore, understand and progress.

How does this apply to law? Lawyers by nature are drawn to and are comfortable in a world governed by rules (and frequently resist change). We are inundated with seminars and professional literature on how to use technology for the practice of law, research, accounting, billing etc., but are frequently too busy with the day-to-day applications of the law to examine the systemic issues in the law itself and the institutions of law. The universities, law societies and the law firm models that have been around for many decades and are, by and large, accepted but are becoming outmoded and may soon be obsolete. The power of technology is largely ignored as an instrument for the advancement justice in an active participatory manner.

I hope Jay’s work is of interest to a broader audience.