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Thursday, December 15, 2011

"Practical" and "Fair" may be like Apples and Oranges

My apologies again, readers, both for my long absence and for this really long Post.  I can't help it.  I just do not feel comfortable sharing thoughts that could be sound bites or bumper stickers.  A friend recently accused me of being "overly attached to nuance"
Often, I will, after considerable thought, develop an idea that I share with my wife.  Most of the time, her response is the equivalent of "well, duh".

When I read my first draft of this Post, my immediate thought was that it was a pointless thing to write. My observations (such as they are) seemed obvious.  Yet they were not initially obvious to me.  I had to think about this stuff to come up the ideas.  Now, one possibility is that I'm just not too bright, but, even if that is the case, I don't really believe that is why I had to think.  Rather, I believe most of us simply do not slow down and think things through.  Rather, we come to conclusions based on unarticulated assumptions.  Heck, we have to, or we'd never make it out of bed in the morning; we'd lie there, contemplating our respective navels and thoroughly examining the existential reasons why we had to get up and do something.  Yet when it comes to political ideas, I believe we need to think more about those assumptions or axioms or whatever you want to call them.  What I like to do when I have an opinion on a complicated issue is to take my immediate reaction, then ask myself "why", then take that answer, and ask "why" again (like a reluctant 3 year old using "why" as an offensive weapon against a parent), until I come to, well, something I think is more "basic".  All modesty aside, while I'm not stupid, I'm "slower" than a lot of people.  I have to think things through to understand them, and I know it.  My real advantage is that I don't mind looking stupid a lot of the time.  In any event, whether this point (and this entire Post) is already obvious to the reader, I would recommend examining political assumptions as at least an interesting and useful exercise. 

The incorrect assumption that "fair" and "practical" go hand-in-hand, particularly when looking at some sort of economic "redistribution".

Political/economic discussions often make little progress because opposing sides do not actually listen to each other.  Right now, a number of widely diverse political/economic debates seem to be even more a series of non-sequiters (or "comparing apples with oranges") than usual,  as differing viewpoints may arise largely out of unarticulated assumptions about what values are important in determining public policy.  More specifically, some (perhaps most) positions rest on the idea that what is important is to be “fair”; others are perhaps more concerned with what may be “practical” (or “smart” or even “necessary”.)  Few if any leaders publicly acknowledge these different assumptions, perhaps because doing so might involve acknowledging that courses of action that seem “practical” may not be “fair” and vice-versa, which, in turn, would force leaders and journalists to be more nuanced and less “sound bite friendly.  As a ratings or vote-getting move, this avoidance may make sense.  In terms of a reasoned and honest public debate, and the public interest, it does not.

A common characteristic of several such discussions is that they involve what might be considered “bailouts” or “redistributions” from those who appear deserving to those who do not.  Specific examples discussed below include Germany and/or the European Central Bank possibly guaranteeing the debts of less solvent members of the Euro zone, the 2008 TARP bailout of American financial institutions, American “entitlement” spending,  possible reductions of mortgage principle for “underwater” homeowners, and what to do concerning illegal immigrants.

We can't agree on what is fair,  but we can agree on some things that are unfair.-Two rules of unfairness

“Fair” is a slippery, overused, and powerful political word, although it seems to have become a synonym for “what I personally think is a good way to share either profit or pain”.  Every politician or interest group or person will describe their desired division of either benefits or taxes (or any benefit or detriment) as fair.  Presumably, most of them even believe what they are saying (OK, I may be naive).  If I am a politician and want higher or lower whatever for some group, I will sooner or later characterize what I want as "only fair".  Guaranteed.  

"Unfair” is an even stronger word; we tend to react more strongly to negative stimuli.  However, what is “unfair” may be more susceptible to universal agreement  than what is “fair”.  Specifically, I believe two particular things strike almost all Americans (and probably Europeans, and maybe everyone) as very unfair.  First, we believe it to be unfair if rules and promises are changed in the middle of the "game" to benefit one party to the detriment of another - a lesson learned as young children playing board games.  When we thought someone was trying to cheat us in such a fashion, we (yes, all of us) would tend to go ballistic.  Second, we believe that, at least generally, good or desirable behavior should be rewarded and bad or undesirable behavior should be punished.  To do the reverse is, we think, fundamentally unfair.  Most adults understand that the world is not always fair, but we emotionally believe that it should be.  More to the point, we strongly believe that our governments should pass laws and regulations which, to the extent possible, promote fair rather than unfair behavior.

It is also important to note that "fair", particularly when viewed in the context of my second rule of unfairness, often relates to rewards or punishments for past behavior by the person or group in question.

"Practicality" and its focus on what will happen in the future, as opposed to who has been trying to cheat whom

What is “practical” or “smart” or “necessary” is obviously also subject to disagreement, but is a less emotional word.  As with “fair”, the negative is easier to agree upon.  Getting agreement on what is not practical is usually easier than getting agreement on what is.   In any event, however, what is practical may or may not be fair, and vice versa. 

In their well-known book, “Getting to Yes; Negotiating Agreement Without Giving In”, Roger Fisher, William L. Ury and Bruce Patton discuss the differences between: 1) what they describe as a “positional” analysis – how did we get here or who did what to whom – which focuses on past behavior, and 2) an “interest” analysis – what is in the interest of each party going forward into the future.  The authors believe that while we have a tendency to analyze disputes in “positional” terms because we arrive at a dispute out a perception of right vs. wrong behavior, it is generally more useful in any negotiation – more “practical” if you will – to focus on where the parties are now and on what they would like to happen from this point forward. 

This tension is evident in the political examples set forth in this Post, and one key to trying to be “practical” is to realize the extent that both “sides” ' future economic interests are intertwined.

The Euro.  When countries break the rules

European countries that adopted the Euro did so under certain rules.  Countries were to supposed to meet certain qualifications before being allowed to join the Euro group.  All members committed to certain fiscal limitations.  They were not to be responsible for each others’ debts (there is some debate on whether and how they might do so indirectly).  Treaty revisions had to be approved by everyone.  Countries were not giving up much, if any, sovereignty, or so most of them seemed to believe.  The problem – from a “positional” or "fairness" view -  is that some people cheated.  The Greeks cooked their books in order to get into the group in the first place.  Other countries did not exactly follow the fiscal rules after they were in, either by using dubious accounting measures, or as a result of domestic political concerns, or just because of what might be considered the economic bad luck which struck in 2008.  Another factor is that the countries were, internally, all playing by their own different rules.  Work weeks, retirement ages, pension levels were national rather than European decisions, and vary widely from country to country. 

The richer countries – particularly Germany – are now faced with requests that they, either directly, or through the European Central Bank, or by other means, bail out the countries that cannot finance or refinance their own debt without such assistance.  I must tell you, if I were a German (or a Finn or a Swede), I would not be happy about this prospect, and my instinctive reaction would be to tell needy countries, particularly the Greeks, to go ahead and default and leave the Euro, even if it meant crippling losses to my own banks.

Therein lies the problem, with both this European issue and the other, American issues.  The well being of the “good guys” and the “bad guys” (or the “ants” and the “grasshoppers” or whatever one wants to call them) are connected.  Everything is interconnected when one deals with numbers this size in the world economy today.  For example, if the Greeks were to default on their bond obligations, an immediate consequence would be that French, German and other banks would take tremendous losses.  American companies which may have issued credit default insurance would take a hit as well.  In the longer term, the loss of Greece and perhaps others from the Euro group would deprive Germany of much of the economic market and factors that have enabled it to increase its exports and become much more prosperous.  In short, as good as it might make a German citizen feel, if the German Government were throw other countries off of the perceived gravy train, it may be throwing our hypothetical angry German citizen off the train with them.  Many economists believe the pain to the rich countries will be greater if they let themselves be governed by considerations of what is “fair”.  It would simply not be “practical” to do so. 

At this point, the Germans seem to be trying to do three things:  1) keep the Euro from collapsing (practical); 2) force "austerity" upon the less well off countries (my belief is that the governing elites view this as primarily practical, but that for unhappy citizens, there's also a strong element of punishment involved); and 3) set up some structure with teeth to make sure that no one can break the rules in the future (practical and fair).  Whether this is either wise or possible remains to be seen.

2008 and the Troubled Asset Relief Program ("TARP")in the United States

The 2008 "bailout" of American banks via the TARP program has similar characteristics to the current Euro problem.  The banks, bankers and other players in the financial services industry made some terrible economic/business decisions.  They invested in (and convinced their customers to invest in) what turned out to be obvious garbage.  (I  recommend “The Big Short”, by Michael Lewis to anyone who has not yet read it).  They were capitalists, existing in a system of good vs. bad bets where, presumably, making really bad bets meant you lost lots of money.  However, the bankers, at least those at the top of the food chain, did not personally “lose” money.  Instead, they received huge monetary compensation packages for kicking the American economy into a toilet.  Their bonuses did drop – for a year.  Yet our Government, in a capitalist system, bailed these banks and bankers out.  We rewarded the bankers for behavior which was almost certainly both stupid and greedy.  We violated the first fairness rule by changing the rules to protect capitalists from their business losses.  Doing so was even more a stunning violation the second fairness rule above: “good or desirable behavior should be rewarded and bad or undesirable behavior should be punished”. 

Virtually everyone is still angry about this because it was obviously not fair.  The Tea Party doesn’t like it.  The Occupy Wall Street Protesters don’t like it.  Many of the Congresspersons who voted for TARP did not like it either, for various reasons.  Yet it passed, with bipartisan support, because it was not only practical, but necessary, to do something to save the financial system. (Yes, TARP was certainly highly flawed, but it was also a rush job.) 

The truth is that Main Street  needs Wall Street to function, or, to put it another more dramatic and even less precise/accurate way, the 99% needs the 1%.  If the banking and financial system had gone into further systemic shock and banks had really stopped lending for any substantial period of time, the entire American economy, not just the bankers, would have suffered far more than it has.  Credit is the blood supply of the American economy.  You want to shrink the big banks? OK with me.  You want to cut bonuses?  OK.  You want to throw a bunch of people in jail?  OK.  You want to raise marginal income tax rates on the wealthy?  OK.  But we need banks, and lending, to function.  Period.  So being practical may have required us to be less focused on fairness than everyone would have liked, at least in late 2008 and early 2009.

"Entitlement" programs and the perception of fairness

On the other hand, the 1% also needs a relatively prosperous and stable 99%, or at least a large middle class, to buy stuff, make stuff, and not engage in a violent revolution.(didn't see that one coming, did you?)  If I were part of the 1%, the increasing levels of income disparity, continuing high unemployment and continuing reduction of the number of well-paying manufacturing jobs would worry me- a lot, for both solely economic reasons and because of its effect on public perception of the legitimacy of governments (more on this later). It’s only fair (lol) that those who are successful in our system are rewarded.  How much they should be rewarded in order to be fair depends on one’s own ideological bent.  However, rewarding them too much (as well as too little) may not be practical.  It may kill the goose laying the golden eggs. Yet many conservatives who have an intensely negative reaction to any hint of  “wealth redistribution” do not seem to understand this. 

Conservative attitudes on this point are based in part on a belief that certain, but not all, “entitlements” are “handouts” to the undeserving.  I believe most rank and file members of (or at least sympathizers with) the Tea Party movement view Social Security and Medicare in a different way than, say, food stamps, Medicaid and unemployment insurance.  Most of those of us who are older have contributed substantial amounts to both Social Security and to Medicare.  We have lived our adult lives with the expectation that the rules governing those programs would not change in any dramatic fashion – that certain basic social compacts to provide for our elderly would remain in existence for us.  Moreover, many of us have not done anything “wrong”; all we have done is get older.  This happens to rich and poor, liberal and conservative, deserving and undeserving.  The famous angry citizen with the sign demanding that the Government “keep its hands of his Medicare” was saying what he meant.  However, because people are living longer, health care costs have risen, and the population has aged, maintaining these programs in their current form may not be practical. It would be impossible without someone paying more or getting less.  On this issue in particular, all of our politicians and interest groups engage in a lot of what is called "magical thinking".

Programs such as food stamps, Medicaid and unemployment benefits, however, are not entitlements from which we all expect to benefit.  To get them, one is, after all, supposed to be poor or unemployed.  Many conservatives appear to believe that being poor or even just unemployed is evidence of  bad behavior that should be discouraged and not rewarded by “gifts”.  I have heard politicians say things like “If you’re poor or don’t have a job, it’s your own fault”.  (In some cases, it may be. There are lazy poor people. There are also old, disabled, disadvantaged, unlucky and “just made some bad decisions” poor people. There are also rich people who fall into each one of those categories.)  Rather than wander off onto a discussion of  whom, if anyone,  deserves support from the rest of us, their fellow citizens, let it suffice to say that many Americans, particularly those who view themselves as conservative,  believe this to be a “fairness” question – that “redistribution of income”, under most circumstances, is not only "Socialism" (gasp), but just not fair because it appears to reward those who “lose” at the game of capitalism. Practicality (as well as morality and my own view of fairness, but I am not going there) seems to suggest a different approach. To me, cutting such programs with a meat axe is not likely to significantly decrease the number of unemployed, or create good jobs, or make recipients of entitlements into taxpayers.  In any event, this is an area where all sides are trying to use both fairness and practicality as support for their respective positions.

Democrats seem to have a more popular argument on Medicare and Social Security than on other entitlements because of this different view of the fairness of the programs involved (as well as because seniors tend to vote more heavily than poor people).  However, the dollar amounts involved – and a focus on practicality - would lead to the opposite conclusion.  The big numbers – the ones that would have to be cut to significantly reduce spending – are in Medicare and Social Security.

The Foreclosure crisis and mortgage relief

Another example of this focus on fairness can be heard in debates about whether steps should be taken to assist homeowners whose equity is “underwater” by reducing  principle balances of  mortgages, whether through changes in the Bankruptcy Code or via some other legislation.  One side will say:  “What message does this send to those who did not borrow and spend too much money – those who acted prudently and saved and left themselves a cushion?”   Well, my wife and I are two such people.  We’ve always been very reluctant to acquire debt.  And I must tell you, while we do not believe ourselves to be particularly virtuous, it does not seem fair that the “grasshoppers” should be able to stay in their (sometimes big) houses and have their legitimate debts “just” forgiven.  (this reaction comes from someone whom can rant at great length about fraudulent mortgage originators and predatory lenders.) This is a “fairness” argument, not a “practicality” argument.  The other side will argue that if foreclosures continue at this pace, the real estate market and the construction industry will fall upon even harder times, and that those are two big pieces of both our citizens’ private assets and our economy.  That is a “practicality” argument - that people like me and my wife – the “ants” - will in fact be much better off if we agree to cut  “grasshoppers” some slack on this issue.  No one in this debate, however appears to acknowledge that it is a matter of judging between competing political values.  Fairness and practicality, in this case, are like apples and oranges.   One side says such programs would be unfair.  The other says it would be practical.  Neither seems to realize that both sides may be correct. 

No one wants to pay attention to the fact of two competing sets of political values

It is not my intent to take a substantive position advocating particular policies on underwater mortgages or on any other specific issues referenced in this piece, particularly since, as Ross Perot once said about policy, “the Devil is in the details.”  My point is that different sides are often arguing from different points of reference/basic assumptions.  One group may focus on what it perceives to be fair with regard to a particular issue, the other on what it perceives to be practical. Sometimes, everyone conflates the two.  No one seems to be acknowledging this distinction.  The politicians stoke up their bases largely on what are presented as fairness issues, the elites talk to other elites about what is practical, the pundits are doing one or the other, and no one wants to admit there may be a conflict  between pursuing one value over the other.  The result is a lot of heat and not much light on the issues.

I am not breaking any new ground in making this distinction.  The great German political philosopher Max Weber described two sets of ethical virtues: the ethic of conviction (“Gesinnungsethik”) and the ethic of responsibility (“Verantwortungsethik”).  If one were to focus on being “practical”, and use the ethic of responsibility, an action would have meaning only as the cause of an effect.  What would really matter is the effect, or end result.  The ethic of conviction, however, does involve “fairness”.  Using it, a person should base his political decisions on the means as well as the ends; this ethic gives weight to certain ultimate values and meanings of life.  (My apologies to Weber scholars for probably misstating his ideas).

Practicality and fairness may require each other, at least in the longer term - and some thoughts about treatment of illegal immigrants

What is fair, or at least is perceived to be fair, may be, ultimately, absolutely critical in terms of practicality.  David Brooks wrote recently in the New York Times about this point in the context of the Euro crises, noting that failure to play by the rules in that and other economic areas had resulted in what he termed a “crisis of legitimacy”.  Mr. Brooks went on to argue that our public institutions could not and would not survive in the long term if everyone came to believe that the game is “rigged”, and that effort, hard work and playing by the rules are not rewarded by our economic system.

Mr. Brooks makes a very good point, which can also be viewed in terms of long term as opposed to short term practicality.  One example of this long term/short term distinction may be found in the current discussion of what policies the United States should pursue with regard  to illegal immigrants.

Illegal immigrants did not follow the rules.  They knew they were not following the rules.  (Perhaps they had a good reason for not following the rules, such as the prospect of grinding poverty for them and their children, or death for political reasons. Nonetheless, they did break the rules.)  So in no way is it “fair” (under a strict interpretation of my own rules) to allow these rule breakers to become citizens or even “legal”.  (Their children are a more complicated issue from a fairness perspective; they did not choose to break the rules, whether they were born here or crossed a border when they were 3 years old, but they have theoretically benefited from the rule breaking.)  And what of those who waited to come here legally, or otherwise chose not to break the law?  No, the fairness argument here says, “no amnesty in any form”.

Yet the “practical” argument, at least in the short term, suggests a different policy, even from a strictly economic self-interest perspective.  Business groups have been resistant to the idea of requiring their members to make very sure they are not hiring illegal immigrants.  Economic studies as well as anecdotal evidence indicate that illegal immigrants are filling many job openings that would not be filled by legal citizens.  In some cases, where local authorities have clamped down, local economies have paid the price, as businesses have been suddenly unable to find enough workers.  Illegal immigrants serve in the U.S. Military.  Many pay taxes.  Demographically, continued immigration (legal or illegal) is necessary for the long term economic health of an otherwise aging America.  Without immigrants, there will not be enough younger workers to pay my Social Security benefits as well as those of the older members of the Tea Party.  This is not even considering the time, effort and money it would take to locate, deport and keep out several million people.

However, encouraging further illegal immigration is a bad thing in the longer term.  Among other things, having laws or rules that are widely unenforced or unenforceable (whether relating to immigration, alcohol (during Prohibition), marijuana, securities fraud or tax evasion) simply undermines the social contract.  If we are going to make something illegal, we should seriously try to enforce that law.  If we can’t or won’t, I suspect that the conduct in question perhaps should be legalized in some fashion.

Also, any path to legalization for illegal immigrants would be a practical disaster when one considers longer term incentives for behavior.  If people think that they can break the rules because the rules will eventually be changed to forgive their “bad” conduct, they (or others) are much more likely to break the rules in the future. Why not do it, if, eventually, we’ll be forgiven and become legal?  This problem of  longer term incentives for future actions applies to European Governments, Wall Street bankers and other possible beneficiaries of rules changes as well as to potential future illegal immigrants.

Practicality is also important in determining fairness in the long run.  If something does not work – does not do more or less what it is supposed to do -  it, along with whatever fairness it may promote, will be corrupted if not abandoned as a policy. 

But for the long run to "work", the short run must "work" first-my bias towards "practicality"

I started a law firm with two partners in 1994.  We briefly discussed "mission statements" (popular at the time).  We finally decided against one, because while we had all sorts of nice ideas about fair treatment of clients and employees, we decided our real "mission" was to make enough money to stay open.  Because if we did not do that, it did not matter what our longer term or more theoretical goals were.  If the short term economics did not work, at least adequately, whatever our specific plans were for the longer term would have to be drastically changed if not completely abandoned. 

This realization has led me to always keep practicality in mind.  Policies concerning economics (whether for nations, partnerships or individual) should be fair, but they have to be at least somewhat practical.  Long term policies are nice, but if you're demonstrating in Greece or unemployed in Spain or living in your car in the United States, reducing Government debt is, shall we say, a bit of an abstract issue.  And if enough people cannot meet their basic short terms needs, and perceive that their Governments are not even trying to act in the general benefit, at least in Democracies, they are likely to act in such a manner as to adversely effect the long term insistence of others that the system be "fair".  What we have now is political dysfunction in the United States, as both the Tea Party and the "99%"  feel that the Government is under the control of some sinister outside force or forces, and a Europe where there does not seem to be be a single Government that wants to put any of the current proposals up for a public referendum, because the voters will probably say "no". 

Conclusion: a failure to think and/or speak honestly
Both what is fair and what is practical in a given situation is and should be subject to vigorous debate among citizens.  However, the habit of our leaders – and ourselves -  of pretending that these issues are not complicated, and that being “fair” is always the same as being “practical”, does everyone a disservice.  As noted initially, it may be that everyone is very cognizant of what I view as unarticulated assumptions, but that is not my impression.  It is tempting to assume that this failure to address real issues in a meaningful way is the result of political demagoguery or public stupidity, but I do not think that is the case, particularly in terms of the public.  Rather, I think that people - leaders and followers alike - are often just not thinking, but reacting in their own comfortable patterns which fit into particular ideological approaches.  We all can and should do better, and can and should demand better of our leaders.  It might help to keep in mind a quote from H. L. Mencken: “For every complex problem, there is an answer that is clear, simple, and wrong.”