Friday, September 02, 2005

The following is an email and my response to a former student. I am sharing it mainly because I do think too many people are so negative on things.

Original email (name removed)


It seems that things around the world are continually getting worse. And the more I read about the latest issues, the more shocked I become.

I’ve always been somewhat of a conspiracy theorist so it does not take much to get me to buy into things easily, however, after everything I have learned in school and experienced in life, there just seems to be many things that just don’t equate. Living through the DotCom bubble and seeing fortunes won and lost and investment banks floating some of the most questionable IPOs, watching wars planned and executed on the some of the thinnest justification, and watching our economy being run recklessly.

The list of issues and topics is extensive. Global economics, CEO pay, record low interest rates, housing prices, energy prices, etc. It’s difficult to put so many of these topics into context. It just seems that a group of wealthy & powerful people are playing Monopoly on a global scale and they are playing to win. The middle class is become extinct. Now we have energy prices skyrocketing. Is the government telling us everything they know about the energy situation? How will people afford to commute to work if gas goes up to $4/gallon? How can they move closer to the cities they work in if they can’t afford to live there?

Here are some doom and gloom web sites I’ve been reading lately. Have you read any of this? Is it plausible? Hope you are doing well

And my response:

Hey ______,

What a nice surprise. I have not heard from you in a long time. Thanks for the update. It sounds like things are going well for you.

As for your questions on the gloom and doom that you feel pervade the world. Please do not take this personally, but totally disagree. In fact that is why I waited a while before responding. I wanted to be sure I had read your mood correctly and not just reply off the cuff.

Writing this in the aftermath of Hurricane Katrina with its amazing suffering, destruction, egregious looting, and apparent lack of recovery planning, it is easy to get caught up in the idea that things are not good, that the world is doomed, and that people are inherently evil. I disagree. Of course things are not perfect, but they are much better for most people than they ever have been.

“Things” are by and large good. Indeed arguably things are better than they have ever been. Yes that is a massively large statement, but I do believe it to be true.

(Indeed, I would suggest that you read the first half (the second half of the book is very political IMO and not nearly as good) of The Progress Paradox by Gregg Easterbrook. In the book he brings up the very interesting point, if you could pick a time, ANY TIME, to go back in history on the condition you had to stay there for the rest of your live, would you? I would not. Sure we have problems, but so did everyone else who has ever lived.

If I could, I would like to address some of the points in your email:

DotCom bubble and accompanied market volatility: yes prices were too high and yes people lost millions of dollars. But I would add to this is not the first, and is unlikely to be the last, so-called bubble. In these bubbles, people lose money. It has happened going back to the time of the middle ages. That so many ordinary investor lost money in stocks this time is or of an indication that more were investing than ever before. Sad for the individuals (who should have been better diversified etc., but definitely not evidence of a conspiracy theory.)

In my classes we cover the bubble and subsequent corporate governance crisis in some detail. We go back and remind students that people are REMMs (see my site for description if you forget from class ;) ) and that they look out for their own best interests and respond to changes in the environment. During the period leading up to the governance crises (post bubble burst period where fraud and corruption were exposed at Enron, Adelphia, Tyco etc.), much in the environment changed. In sort of a “perfect storm” these changes allowed, and even encouraged, the problems of fraud and risk taking to occur. I think understanding how the problem developed is important to lower the fear that can accompany the volatility as well as to prevent future problems.

I will not deny that these were (and to some degree continue to be) problems, but they are not so severe as many believe. Moreover, a few “bad apples” does not mean that all (or even the majority) of apples are bad. In fact, that these events were news at all suggest that they are atypical.

On to another topic that you bring up: global economics. I do not know exactly what you mean in this regard. If you are suggesting that global economics is a bad thing, I again have to disagree. In fact, there may be nothing we can do to lift the world’s poor more than to engage in free trade. One needs only to look at the success of nations that embrace free trade to see that this does work. As some evidence I give you two Alan Greenspan speeches:

1. From November 14, 2000

2. From March 10, 2005

Note, this is not saying that there are not many very very very poor people in these developing countries, but it is to say there are fewer of the poor because of free trade than there would be in its absence.

Now free trade does lead to many changes and there are losers involved. However, these losses tend to be short-term and fairly isolated. A problem however is in what is isolated from a global economic perspective is very concentrated for those who are the losers. (indeed in The World is Flat Thomas Friedman writes something to the effect of “for the unemployed worker, the jobless rate is not 5%, but 100%).

As for your next topic, energy prices, sure they are rising, but until this week most of the rise seems to be demand driven. A relatively simple rule of thumb is that when economies pick up, so too does energy demand. Yes there is talk of “peak oil” and at some point we will run out of oil. But whether that is now or 100 years from now we really do not know. However, that said, the best way to prepare for that eventuality is to allow market forces to work. As the price of energy rises, more and more so-called alternative energies will be developed.

If we were to somehow keep prices low (be it through caps, subsidies to producers, etc), then we would fail to develop the alternative energies needed. Indeed, a few years ago, the Saudi oil officials argued that high prices were a threat to the oil business for exactly this reason.

Again the rising costs of energy do cause problems and are inconvenient, but in the big picture, these costs and inconveniences are that not necessarily that harrowing. Moreover, imagine a previous age where people had to reply on wood for power. Not only was this MUCH more expensive, but the energy produced was both dirtier and less powerful. It is likely that at some point in the future humans look back and laugh at our use of oil and gas.

To your question of how people can afford to commute if prices continue to rise, it is likely that this is one of the “inconveniences” I mentioned above. It might mean they need to take mass transit or car pool, or work from home, or maybe it means they live in a smaller home nearer to work (thus slowing suburban sprawl). However, it is worthy to point out that most of these are longer term fixes. As the tried and true economics’ adage holds that things tend to be fixed in the short term but variable in the longer term.

Your email reminds me of missionary who came to the door shortly after 9-11. She claimed that we lived in the most violent time ever. I am sure she meant well, but I refused to believe her argument. Instead I explained to her that that while every violent death is one too many, the number of people dying violently today is arguably much lower than at any point in our history and definitely so if you measure it on a per capita basis. What is different is that technology now allows us to experience the violence: we see the explosions, we hear the cries, we see the bodies. That is vastly different than in previous ages where thousands, indeed millions, of people could be killed without the world knowing about it for years.

In finance classes we often discuss the idea that transparency is good. The same can be said about this technological change that has increased transparency in all aspects of life. This transparency can help prevent crimes from occurring. (One exception of course is terrorism, the advocates of which crave the attention.) However, this transparency comes with a cost: it plays on the mental health of all.

To make matters worse for our mental sanity, bad news sells better than good news. When was the last time you heard about the person who did not get robbed? The house that did not burn? Or even in the current case of Iraq we do not hear of what is working but only the problems. We rarely hear of the hospital being built, the school that is now open, or the new businesses starting. We hear about the bombings, the violence, the deaths.

This is almost always the case. For instance, currently I am watching TV on the aftermath of Katrina. The VAST majority of stories are on looting, fires, and suffering. Not about how a neighbor helped someone, or the strangers who are sharing what little food they have.

Thus, we are constantly hit with bad news. It makes it seem like things are really bad elsewhere. Indeed, I thought it interesting that you say you are doing well but are worried about others suffering in the economy. Your concern for others is natural but many of those you are worrying about would say that they are doing fine but that they are worried about you.

The websites you mention are a by product of this. Indeed they are part of a larger attempt by certain people to convince others of the “gloom and doom” facing the world. This message is not new. It has been around for hundreds (and probably thousands) of years. Indeed, Economics has gotten the nickname of the “Dismal Science” for that reason.

Added to the mix is the fact that we do live in a time where change is occurring at a faster rate than ever before. And since change is always scary, the times have leant themselves to many fear-mongers who want to stop change or to revert back to some supposed idyllic past era. These proponents live in all areas, across all time periods, and hold many beliefs. And to make matters worse, they generally mean well and almost always have convinced themselves and their followers that they are doing the right thing. However, I feel they are merely making themselves, their followers, and others miserable.

What they are missing is that things are good and getting better. The average standard of living is higher than it has ever been, people are living longer than ever, and people are healthier than ever. This is true not only in the US, but in most of the world.

So to wrap up, I would say that Chicken Little has it wrong, the sky is not falling, in fact it looks mostly sunny!

I realize this answer was way too long, but the tone of your email sounded so negative and so many people have the same view (you are the third person this week who has mentioned a similar sentiment to me) that I felt that a thorough response was necessary.

keep in touch,


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