#2 -Political economy

Learning a bit more about Economics, Fed, and down the rabbit hole with visualizations

Hi All,
Here are a few aspects that I found interesting and have been reflecting on.

Learning new things 

I have been part of building software for some financial institutions or companies for most of my professional career, moving money around. One of my first “gigs” was building amortization software for bigger companies owing money to the government called “National Debt.” I can’t say that I knew a lot of finance or economics at the time. I definitely did not know the difference between a stock and a bond.

Since then, I have worked on multiple e-commerce systems with different degrees of moving money around, building various banking solutions. I learned most about finance from a  solution for withholding tax for one of the world’s biggest banks. Most of these are quite more on the technical functions of financial instruments or applying business-specific rules than the more economics-oriented ones of policies that impact the big picture. With that, a personal hobby of mine is economics and its many sub-branches like behavioral economics, which is my current favorite. Much like any software where we believe the best decisions are taking, there are often forces at hand that drive specific behavior. Simply put, one would believe that every company, as part being a capitalist function, works to maximize its profits. Still, behavioral economics can show that other effects can be at play. Besides behavioral economics, I was curious about reading more about how the levers of economics function since that is more high-level than the application of Bed and Breakfast tax in the UK or finding optimal fraud rules in e-commerce. Probably the easiest to digest has been Ray Dalio’s “How does the economics machine work ?” 

While I took few online courses on economics in the past, I like reading non-fiction. It somehow has a better narrative, and if you don’t need deep knowledge, it’s often an easier way in, so I picked up “The age of turbulence.”.

The first half is an autobiography/memoir of former Chairman of the Federal Reserve Alan Greenspan, including his life that shows what shaped Greenspan. It's quite interesting to see developments of someone with a gigantic influence on the world's economy. For those unaware of him, I  will ignore his commercial projects and build-up of Townsend-Greenspan & Co., Inc. that generated a good portion of his wealth which is sizeable feet on its own focus on this government work. Here is a shortlist of some of his involvements with US politics :

  • He was Chairman of the Council of Economic Advisers under President Gerald Ford, 

  • 1968, Greenspan was part of Richard Nixon as his coordinator on domestic policy in the nomination campaign

  • On June 2, 1987, President Ronald Reagan, a Republican, nominated Greenspan as Fed chairman

  • Democratic president Bill Clinton reappointed Greenspan

  • In 2000, Greenspan raised interest rates several times, leading to the dot-com bubble's massive burst. The way this was executed landed him in a lot of criticism. Even to most agree actions slow down the market was needed.

  • In 2004, Greenspan was nominated by President George W. Bush to serve for a fifth term as chairman of the Fed, making him the longest-serving Chairman. 

I can continue listing names here. The list is just surreal, names like Donald Rumsfeld or Dick Cheney but let’s say he was very involved for many years in shaping economic policies in the US at the highest possible level.

President George W. Bush talks with Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Paul O'Neill, and White House Chief of Staff Andy Card after their lunch meeting Thursday, August 1, 2002.

What does the Fed chairman do really outside being a really important-looking figure taking photos with Presidents?

His main responsibility is to promote maximum employment goals, stable prices, and moderate long-term interest rates. While this is a complex-sounding definition, it boils down to how easy it is to loan stuff and control inflation. To go back to Ray Dalio’s video, the Fed is really the lever that tries to balance out the peaks of the “bull” and “bear” cycles to control inflation. Too much inflation and you land into scenarios like Brasil was for some time where farmers try to keep waiting to sell their goods since selling today would mean their money's worthless tomorrow creating a lot of odd behaviors and fear. Or countries like Zimbabwe where US$1 is becoming equivalent to Z$2,621,984,228. Obviously, these are dramatic examples, but Fed, on a simplified view, attempts to keep the economy together. The Fed also ensures that the payment system works and that banks have the right amount of regulation driving good behavior. In other countries, similar roles are often by the national bank's governors, finance inspection board, but it varies on impact and independence across countries. 

Since this is a very influential role with trickle-down effects in the US and the rest of the world, the term for servings is 14 years and selected by the president. Making the setup very bipartisan. In this case, Greenspan is a republican but less of a Trump-style one and more of an open market, lower regulation kind. 

So all of this said, what other interesting aspect I reflected on? 

Central planning vs. open market

The book is fascinating to tie with events throughout history. For example, in the late ’80s, they had meetings setting the Soviet union economists to discuss policy. Similar meetings were done with China in the 90ties. The big difference between the Soviet block vs. the West was attempting to have central planning vs. Open market pricing.  

We in the tech world pride in decentralized power, and movements like lean and books like the lean startup show in great detail why centralization kills innovation and sometimes productivity. 

So how did the soviet run things? 

Stalin instituted the “First five-year plan,” a list of economic goals with the plan being implemented in 1928 and took effect until 1932. The plan was supposed to move the Soviet Union from a weak, poorly controlled, agricultural state into an industry powerhouse. The same model was used in a 5-year time frame till the soviet union was dissolved in 1991, and a similar plan can be found in other communists countries at the same time. 

Now, this obviously requires extensive planning, projections, and statistics.  I found it interesting while reading up that IBM was in the mix with the Soviet State in the 1930s by supplying punch cards and calculating machines to help this process.

The base premise of all of the plans is similar—a focused central effort to grow in multiple areas, in theory, all achievable. In practice, though quite a few succeed, many programs fail. The very first 5-year plan saw big increases in Capital goods and overall industry output. That said with the collectivization of agriculture messed up significantly the local dynamics leading to famine in which 3.3 to 7.5 million died, which is quite comparable to total Covid deaths in today’s sense. Overall far from a clear win for anyone, really. 

The general problem with central planning is you can’t really foresee all things that will happen. You can “force” specific demand and drive behavior, but full controls without full data oversight is impossible. This is seen in the Twelfth five-year plan, 1986–1990, where the soviets attempt to create decentralization to overcome the command economy's problems. The central quotas also end up reducing the incentives to compete and innovate. 

The main area where this can be seen is agriculture, and the difference is staggering between the US and Soviet between 1930-1991. Most iconic is the overview of “When Boris Yeltsin went grocery shopping in Clear Lake” and is shocked at what is available for the normal customer.  

Greenspan states that free-market capitalism is superior to other forms attempted thus far in human history.  A lot of the belief is that people's motivation for self-interest is the foundation to a successful, growing economy. It is interesting to see from a quite conservative that he pushed many ideas of how the lack of quality public secondary education for the general public contributes to the divergence of rich and poor within the United States.

There is a lot more to say on other topics to the Fed, and I hope to write a bit more on related topics like Modern Monetary Theory and its relation to Bitcoin. 

Down the rabbit hole

Data visualization can help bring up patterns that were not easy to see without a new slicing. Using visualization, we can get essays as a new form of journalism. Rather than TL;DR ten thousand page doc, we can see a lot of data in one place. 

Here come pudding.cool with topics like 

My suggestion is to jump into the archive and get lost for hours.