Hannah Arendt Center for Politics and Humanities
29Nov/120

The Bureaucracy of Sandy

The after effects of Super-storm Sandy are felt from the beaches to the statehouses. First of all, let’s realize it was not a hurricane, but a freakish combination of storm systems. Super-storm is more truthful than hurricane. Whatever it was, it has upended lives, and politics.

The Financial Times reports today that Governor Chris Christie of New Jersey has now joined NY Governor Andrew Cuomo in requesting not only emergency aid to repair the damage caused by the storm, but also preventative money to build dunes, use eminent domain to purchase property, and generally re-engineer the New Jersey coastline.

The political transformation here is lost on few. As the FT writes:

Mr. Christie, a Republican, has previously sounded more skeptical than Mr. Cuomo, a Democrat, about using state powers to dictate how the state was rebuilt. But he said on Wednesday he might take away local towns’ power to grant “easements” to homeowners objecting to new dunes blocking their sea views and would not rule out using government powers to purchase properties it believed were in the wrong place.

“I have to protect the Jersey shore, both as an economic engine and as a cultural engine,” Mr. Christie said.

The desire to take away local powers and give them to states and to take away state powers and give them to the federal government is neither a democratic nor a republican idea anymore. While the party of the elephant may give lip service to local governance, it has rarely, if ever, backed that up with action. As is now well known, the federal government has grown as fast if not faster under Republican Presidents than it has under democratic.

Hannah Arendt argued that the greatest danger to freedom in the United States was the rise of a large and bureaucratic government. She worried, as she once wrote, that the true threat to freedom was the sheer size of America alongside the rise of a technocracy. The sheer size of the country combined with the rising bureaucracy threatened to swallow the love for freedom she saw as the potent core of American civic life.

Chris Christie and Andrew Cuomo may well be their respective parties’ nominees for President in 2016. They are both deeply popular and have taken a pragmatic and largely centrist approach to governing at a time of financial crisis and natural disaster. And yet, from an Arendtian angle, it is striking that both governors have so internalized the view that problems are to be solved by bureaucrats and technocrats rather than on a local level.

That the bureaucratic approach is so entrenched should not be a surprise. It is both a consequence of a further spur to the retreat from politics that Hannah Arendt describes. Even Christie’s insistence that he must save the Jersey shore as an economic engine shows the near complete victory of economic thinking over politics.

-RB

8Aug/121

The Fecundity of the Unexpected

Readers of the Hannah Arendt Center blog are well acquainted with the pension train wreck that is heading our way.  It is not only public union pensions but also those corporate pensions that still guarantee defined benefits that are radically underfunded. And what hides the immensity of the problem is continued unrealistic assumptions about long-term future returns.

As was reported recently, Maryland—to take just one example—continues to assume a 7.75% annual return on its public pensions, which is even higher than the 6.6% 100 year historical average on stock returns.

While there is blame to go around—including feckless politicians and Wall Street hucksterism—the root of the problem may be a general unwillingness on all sides to realize that the last 100 years may have been an aberration. This is the argument that legendary investor Bill Gross makes in a report he sent to PIMCO clients this week.

Gross takes aim at the oft-repeated "truth" that over time stocks will return a real return of 6.6%. He argues that the returns over the last century were predicated on a Ponzi scheme, giving extra returns to shareholders at the expense of laborers (declining real wages) and government (declining real taxes). As those trends reach their limits, it is inevitable, Gross writes, that real returns must decline as well:

The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions which historically have never been more favorable for corporate profits. If labor and indeed government must demand some recompense for the four decade’s long downward tilting teeter-totter of wealth creation, and if GDP growth itself is slowing significantly due to deleveraging in a New Normal economy, then how can stocks appreciate at 6.6% real? They cannot, absent a productivity miracle that resembles Apple’s wizardry.

And it is not only stocks that will suffer. With treasuries yielding 2.55% (less than inflation), it is increasingly unlikely that long term bonds will provide meaningful returns.  The sad result:

Together then, a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned.

The consequence of these reduced expectations for public and private pension funds (and also for retirees with 401k plans that assume healthy investment returns) are dire. Simply put, throughout society, we are living beyond our means. We are in denial and continuing to make unrealistic investment assumptions. Gross draws the inevitable lesson for pension plans:

Private pension funds, government budgets and household savings balances have in many cases been predicated and justified on the basis of 7–8% minimum asset appreciation annually. One of the country’s largest state pension funds for instance recently assumed that its diversified portfolio would appreciate at a real rate of 4.75%. Assuming a goodly portion of that is in bonds yielding at 1–2% real, then stocks must do some very heavy lifting at 7–8% after adjusting for inflation. That is unlikely. If/when that does not happen, then the economy’s wheels start spinning like a two-wheel-drive sedan on a sandy beach. Instead of thrusting forward, spending patterns flatline or reverse; instead of thriving, a growing number of households and corporations experience a haircut of wealth and/or default; instead of returning to old norms, economies begin to resemble the lost decades of Japan.

We should applaud Gross for saying what many of us suspect: that the efforts of technocrats who populate pension plans to predict future returns is unpredictable at best and more likely subject to rosy biases. And yet even Gross then goes on to assume the tone of an all-knowing sage, something that seems de rigueur for public commentators today. We will solve the problem, Gross assures us, by turning to inflation.

Maybe Gross is right. But whatever the future holds, we must first confront the fact that as things now stand, we face a collective reduction in our wealth. How we respond to the reality of that threat will define the United States in coming generations. Either we can continue to insist that we are a wealthy nation and go on spending and living as if nothing had changed, or we can adjust our expectations downward.

Or we can somehow seek to unleash new forces of wealth creation that would generate the kind of economic growth and social and economic change that will lead to unexpected transformations in who we are.

We should neither take Bill Gross' prognostications as prophecy nor deny the reality he describes. Gross offers merely a hypothesis about the future, something far different from a fact. We do not have an adequate understanding of human nature and human economy to predict the GDP for this year, let alone for 2030. Human spontaneity, chance, and freedom mean that predictions of the future are simply calculations based upon the assumption that such and such will happen if men act rationally and nothing unexpected happens. In such cases it is helpful to recall Pierre-Joseph Proudhon's remark (loved by Hannah Arendt) that "the fecundity of the unexpected far exceeds the statesman's prudence."

Read more from Bill Gross here. You can also read more on Pensions as Ponzi schemes here and here.

-RB

*This post originally appeared yesterday on Via Media.

5Apr/121

Saving Pensions: “Technocrats, Not Grandstanding Idealists”

Public pensions are a mess. Ok, where is the hope? Yesterday Gillian Tett offered a rare glimmer of good news in a story about Rhode Island treasurer Gina Raimondo. But the good news comes with a bitter aftertaste.

Rhode Island is a small state, but it had one of the worst public pension deficits in the country. Forced to act, it has cut pensions for its workers, raised the retirement age from 62 to 67, and replaced the defined benefits pension (which guarantees a certain amount every year) with a partial defined contribution scheme (which pays out a pension based on how much the retiree has saved). These actions have angered many workers and unions, who are suing the state, but they have also saved the state pension system; one result is that the workers will be receiving some pension, even if it is less than they were promised.

The solution, as Raimondo articulates it, is above all to focus ruthlessly “on the math and facts, to come up with a solution.” Technocrats, not grandstanding idealists, are required.

The preference for technocrats over idealists illustrates a common approach to our extraordinary economic problems around the country: to hand over difficult political judgments to technicians. The same approach is leading the people to hand over the levels of government to technocrats in Greece, Italy, Suffolk County, and now Detroit. Dissatisfied with democratically elected leaders, the people are increasingly craving a government run by businessmen and accountants. It seems that the ruthless calculation of profit and loss is the last refuge of truth in our age.

Read more about what is going on in Detroit here. Read more about the pension crisis here and here.

28Mar/121

Pensions: The Unraveling Fiction

How big is the pension crisis in the United States? As I wrote last week, The Pew Charitable Trust has issued a report that there is a whopping $1 trillion dollar gap between the pensions promised to state public employees and the money that has been set aside to pay those pensions. But I also said that many people think that gap is actually much bigger.

The states' calculations assume a rosy 8% or even 10% return on their investments. The Pew report shows that even with those unrealistic assumptions, there will be a $1 trillion gap, since the states are underfunding their pension funds even based on optimistic returns.

Recently, Gillian Tett of the Financial Times talked to a few academics about the question and learned why the gap is actually $3-5 trillion dollars, and not simply $1 trillion. The basic problem is that low interest rates (now around 2%) mean that the investment on pension funds is not returning close to the hoped for amount. As Tett reports:

Thus academics, such as Joshua Rauh of Northwestern University, think that if a more realistic rate of return were used, this would reveal that state pension funds are now underfunded to the tune of $3tn-$4tn. Other observers are even gloomier. “This $4tn figure is a lower bound,” argues Robert Merton, economics professor at MIT. “Liabilities as reported by state and local governments seem to creep steadily up with each report due to ‘actuarial losses’ or overly generous assumptions about mortality and worker behaviour. In recent years, these have added growth of about 4-5 per cent per year to total liabilities.” And, of course, the longer that US interest rates – and bond yields – remain ultra low, the worse this underfunding gap becomes.

Tett's essay makes for a sobering read. As she rightly points out, this problem cannot be ducked forever. Remember, the 2009 bailout that President Obama pushed through was $900 billion, slightly under $1 trillion. We are talking about a shortfall in state budgets of $3-5 trillion in coming years. This is enormous and the effect on state governments and public services will be disastrous. But the very worst effect will be on all of those public employees who have been counting on contractually guaranteed pensions who will, I fear, learn what workers in Rhode Island and Alabama recently learned: such contractual guarantees don't mean much.

What does it mean to have a fact-based politics? This is a question that Hannah Arendt struggled with. First in her writings on totalitarianism, she saw that at the core of totalitarian regimes was the need to keep alive a coherent fantasy that motivated the mass movements supporting the regimes. When inconvenient facts appeared, they simply had to be eradicated.

Later, writing during the Vietnam war and in response to her book Eichmann in Jerusalem, Arendt argued that lies came to serve not totalitarian movements, but well-meaning idealists and technocrats who convinced not only others but even themselves that their lies were in the service of a winnable and noble cause.

Today we face the unraveling of a huge fiction. While the United States is still a wealthy country, we are not as wealthy as we have pretended to be over the last 15 years. But instead of addressing this self-deception, we are continuing to demand higher pensions and better medical care without actually asking who is going to pay for such services. It is a nice slogan to say that pensions and healthcare are human rights. But the current way we are achieving such human rights is by lying to ourselves, and, most pointedly, to the public employees who will see their promised pensions and healthcare evaporate during their retirement.

It would be nice if one of the Presidential candidates in either party would actually discuss the crisis in state pensions. But that would require courage and leadership, not to mention a willingness to have an honest conversation about the fact that this country continues to live beyond its means and promise benefits it cannot afford.

-RB

6Jan/120

In This Political Year in Which We Will Elect a New President

Just yesterday Republican Candidate and former Speaker of the House Newt Gingrich began running a television ad called "Timid or Bold."  The point is to contrast his own apparently bold leadership with Former Massachusetts Governor Mitt Romney's supposedly timid style—a style and substance the ad compares with that of Barack Obama. Only Gingrich, so the ad implies, has the courage and daring to take the steps need to right the ship of state.

Whatever one makes of their diverse policies, the spat between Gingrich and Romney highlights a basic ambivalence about leadership in modern politics. On the one hand, we crave a bold and brash leader—look at the groundswell of support for first Hermann Cain, then Newt Gingrich, and then Ron Paul.  On the other hand, we are quick to abandon such leaders as soon as their foibles, eccentricities, infidelities, and crimes are brought into the light of day. We demand of leaders today a moral probity that would have toppled giants like Thomas Jefferson, John F. Kennedy, and Martin Luther King Jr. This is of course not to compare the current Republican candidates to these leaders, but merely to point out that there is today a deep desire for a leader who can break out of the mold of technocratic political hack and, at the same time, a fear of those who shoot from the hip, take chances, and make mistakes.

The political consultant and pollster Frank Luntz writes that,

Successful leaders establish [their] persona not by describing their attributes and values to us, but by simply living them.

Leaders are like "superstars," those who connect viscerally with their people. They do so, via authenticity. Leaders must be unhesitating, direct, and assured. They must "show" their decisiveness, and not simply tell it. The best politicians are "always true to themselves." As Luntz puts it, "You cannot get away with acting in politics for too long."

Luntz is right, which is why what he says so terrifies me. For as we demand of our politicians ever more authentic leadership at the very moment when the politicians themselves have retreated behind the opacity of spin, counter-spin, and double-speak. At no time have politicians been such consummate actors; or, at the very least, at no other time have they been so clearly seen to be so. We live in a moment of unparalleled transparency coupled with an unspeakable fear of revelation. The result is that the American people vacillate between an impossible hope for a political superstar and the unyielding despair that such leadership is no longer possible.

Few people have thought so deeply about the activity of politics as Hannah Arendt. One who did, however, was Max Weber.  In 1918 Weber delivered his lecture "Politics as a Vocation" at the invitation of a group of radicalized students. Weber's lecture famously draws a distinction between two motives of political leadership, an ethic conviction and an ethic of responsibility.

Weber’s ethic of responsibility holds that while a responsible politician takes both ends and means into account, he must be willing to employ violence to fight for the good. On the other hand, Weber’s ethic of conviction is best exemplified by religious actors: “A Christian does what is right and leaves the outcome to God.”  With Thoreau, the adherent of the ethics of conviction says: let the world be damned so long as I am saved. Fiat Justitia, pereat mundus.  It is just such an absolutist ethic of conviction that Arendt condemns in her essay Truth and Politics.

Weber affirms the necessary opposition between these two ethics. “It is not possible,” he writes, “to reconcile an ethics of conviction with an ethics of responsibility.” Nevertheless, after twice reaffirming the fundamental antagonism between the two ethics, Weber qualifies his distinction. While politicians must act responsibly according to the rational dictates of the head, there is as well a need for heartfelt conviction. Weber remains skeptical of political appeals to the heart; most politicians who do so are sentimental and manipulative “windbags.  And yet, Weber writes:

I find it immeasurably moving when a mature human being—whether young or old in actual years is immaterial—who feels the responsibility he bears for the consequences of his own actions with his entire soul and who acts in harmony with an ethics of responsibility reaches the point where he says, ‘Here I stand, I can do no other.’

When a responsible politician, aware of the consequences of his actions, decides to rationally take an unbending stand, then, Weber argues, he acts both as a politician and as a human being. Such an act “is authentically human and cannot fail to move us.” There is, in the action of a fully human politician, the recognition of the tragic nature of political action. The politician takes his ethical stand fully aware of the foreseeable and even the potentially unforeseeable consequences that may follow.  In this sense, then, “an ethics of conviction and an ethics of responsibility are not absolute antitheses but are mutually complementary, and only when taken together do they constitute the authentic human being who is capable of having a ‘vocation for politics.’”  

The point is that politics is a difficult calling, one that requires both mature responsibility and also brash and bold decisiveness—and also the judgment to know when each is called for. And at certain times, any great politician must be willing to throw away success and popularity for a cause he believes in. Thus:

Only he has the calling for politics who is sure that he shall not crumble when the world from his point of view is too stupid or too base for what he wants to offer. Only he who in the face of all this can say ‘In spite of all!’ has the calling for politics.

Which brings us to my favorite lines from the end of Politics as a Vocation:

Politics is a strong and slow boring of hard boards. [A]ll historical experience confirms the truth—that man would not have attained the possible unless time and again he had reached for the impossible. But to do that a man must be a leader, and not only a leader but a hero as well, in a very sober sense of the word.

We would do well to have some politicians meditate on Weber's account of the political calling. But if they won't, you should. Weber's essay is here for you to read over this first weekend of this critical election year.

-RB