Who gets paid what and why?

There is tremendous public outrage these days against the bonuses and excesses of executives at AIG and financial institutions like it. I feel the same way. It is just the most extreme example of the tremendous disparities in pay between top executives and regular working folks within companies. The injustice of these disparities is all the more keen now because these financial institutions have received billions in taxpayer money from those same regular working folks and the executive continue to receive the same outrageous bonuses!

For me this begs the question of how we got into this situation and what we can do to prevent it from happening again. That’s a big question, of course, but I have a few ideas.

I would like to broaden the question to why certain people and professions earn the pay that they do. There are a number of perfectly reasonable justifications, for example:

• Some professions require long and extensive training. It is reasonable to pay people more who have deferred their earnings to pursue this education in an amount equivalent to the net present value of those deferred earnings
• Some work is less desirable than other work and people must be paid more to do it (e.g. mining, garbage collecting).

But these reasons do not adequately explain why executives at financial institutions were making so much money. Nor does it explain why teachers, police officers, and firemen earn so little in comparison.

I’ve got a couple theories that seem to explain more of the story:

• Barriers to entry/Privilege: The best professions often have significant barriers to entry that prevent the less advantaged or less fortunate from joining them. These barriers could be the normal barriers of socio-economic status, or they can be explicit attempts to constrain supply and thus increase pay (e.g. the time and money requirements to become a real estate agent), or hidden biases and unspoken preferences that are deeply ingrained in society.
• The Proximity to Money Theory: I would propose that the closer you are to money, the more money you earn. For example, if you charge a 1% fee on a financial transaction, that seems reasonable. But if you consider that the transaction is for $50 billion, and that 1% equals $500 million, a lot of money can quickly get siphoned off to those closely involved. As our financial system has been consolidated and globalized, the size of transactions has increased dramatically, which makes it possible for more and more money to be diverted to a relatively small number of people, consolidating wealth. In the past these fees would have gone to local bank officials, etc. and recycled in local economies. Now it goes to a few global officials who spend their days in the high-rises of New York or London and their weekends in Monte Carlo and their private island off the coast of Thailand. 
  
  So it becomes easier to see why executives at financial institutions earn so much: there is no one closer to more money than them! This also helps to explain why teachers earn so little. Education is very far from money in time and space. Children earn no money and have no money of their own, and will not earn much money for 20 or more years. This makes it hard to understand and explain exactly how much value and money teaching creates. Obviously education is an investment in the future and creates tremendous value, but the short term perspective of our society makes it hard to account for it.
• Workplace culture: This is really a corollary to the first theory. People that are very aggressive in pursuing their financial self interest will tend to be drawn to those professions that allow them to make a lot of money quickly. As people tend to gather in professions like investment banking, the culture of those institutions gets tainted with that same greed and aggression. I have heard many stories from friends and colleagues about the caustic, hostile and intense culture in the (formerly) most lucrative financial institutions. Anyone not out to make a lot of money for themselves or with an emphasis on other human values is bound to choose a different profession in exchange for a more pleasant working environment or be forced out. This creates a negative reinforcing cycle that ends up creating extremely aggressive and hostile institutions, both inside and out, over time.
• Rewarding the impression of success and value: There is also an implicit assumption in western culture that the people who make a lot of money are more important and possibly more valuable. This interacts badly with the workplace culture effect described above to result in increasing status for those who are making lots of money by being more greedy and aggressive. This perverse rewarding of values that would normally be quite low on our list of virtues starts to turn the world upside and is really a shame. This draws in talented people to this system of greed who would otherwise be inclined to do work with more social value. Talented and successful people get used to following the path mapped out for them by social rewards. In the same way one might pursue an A+ in school, these people see that pursuing jobs that will earn them a lot of money are the next step in their path of accomplishments. A big paycheck = A+. Then to survive in this culture of greed and aggression they must adapt or be spit out. Some adapt and some are spit out, but the result is that this system of greed attracts and retains those who are most aggressive and most talented, which is a not just a shame but a true tragedy.
  
  (As an aside, I am pretty sure a similarly negative reinforcing cycle is at play with our elected leaders. We do not seem to be electing the people most of us would most want to see at the helm. I will save a discussion of those dynamics for another time.)

So the system of greed that gets created keeps pursuing more and more money and higher and higher returns until outright fraud or ingenious deceptions are required to keep moving forward (e.g. Enron or the collateralized debt obligation industry laced with toxic subprime mortgages). Then the bubble bursts and we end up with the situation we have today.

So what is the alternative? I certainly don’t have the whole story, but I can see at least two key leverage points.

Figure out how to value longer term investments further from money: If we could convincingly evaluate the return on investment of educating our children, for example, we would probably be comfortable paying teachers significantly more. When we could see that the ROI and reward to risk ratio of paying to have a great teacher is on par (or probably better) than investing in a fancy new hedge fund, money will naturally flow in the direction of education and away from these hedge funds, most of which do not create anything of real value anyway. Certainly not enough to justify their returns and fame.

Tax financial transactions to slow the movement of money: I am not the first to propose this idea, but I like it alot. In today’s world, tremendously huge amount of wealth can transferred around the globe in a matter of a few milliseconds. On the other hand, labor and tangible capital move much, much more slowly. This creates dislocations and disinvestment that promotes huge instability. The fickle whims of global investors chasing return can move their money daily and as a result there is no patient capital that will see projects through to completion. This is very destructive and foolish. Especially in an era of Madoff Ponzi schemes and smoke and mirrors hedge funds, money can easily be siphoned off to institutions promising higher returns but who are not able to truly deliver. Real return on investment in the real world takes significant time. Putting a small tax on global financial transactions would slow the movement of wealth and begin to align financial capital flows more closely with labor and tangible capital flows.

Develop a new societal relationship to wealth: Another way to break this cycle is to not equate wealth with social value. It is a very deep assumption that those who have made more money have created an equivalent amount of social value but I believe this is false. More often major wealth is an indication of ruthlessness and greed. Certainly there are a few scattered wonderful people who were at the right place and right time and hit the jackpot (whether it is Powerball or a new startup), but these folks are the exception not the rule. I am sure that a comprehensive scientific study would confirm this belief of mine. Hopefully one day such a study will be done.

Imagine if we had a strongly progressive tax system that asymptotically taxed earnings so that it was impossible to earn more than $1M, for example. We can debate what the right ceiling is, but I would argue for a lower ceiling for reasons I will describe more here.

• Democratizing money and the good life: If no individual could earn more than $1M, this would be more than plenty for any one person. (I believe it is about $40,000 is where happiness starts to be inversely related to income.) Of course, there may be business opportunities or desires to create situations or environments that would require more money than that. But if no one person could do it themselves we would be forced to work together. In an era of the internet and the potential for global cooperation, there is a tremendous opportunity to pool resources to promote mutually beneficial projects that would not have been possible in the past. We can pool resources to develop new communities, to undertake new research, to start new businesses, etc. There are no longer significant inefficiencies associated with this kind of collaboration and in fact it would probably be a good system to reinforce that projects generate real social value rather than be ego driven vanity projects. Vetting by a group would strengthen ideas and project designs.
• Moderating the pace of our economy: Our economy is prone to overheating, creating booms and busts. I think it would be a good rather than bad thing to put a little sand in the gears by limiting how much anyone could make. People often say that such a progressive tax system would be a disincentive to work, innovation and progress. I disagree. I believe it would reintroduce the wisdom that comes from slowing down and taking more time to be thoughtful. To do the right things, not more things. More activity is not intrinsically valuable. Activity can be destructive, and in a world in which our fossil fuel energy stores are being depleted and the environment is at the breaking point with regard to carbon in the atmosphere, pollution and overharvesting, it is probably a good thing to slow down the whole system. This would slow down the overall economy, creating more time for people to spend time with family, friends and to work in their local communities on intrinsically satisfying projects and plans. Also, curbing the green instinct would be socially valuable and a secondary benefit to slowing the economy.

Thoughts? Comments? Reactions? I’d love to hear what you think.

Is the stimulus enough?

I believe the current federal investment in energy efficiency and renewable energy will prove to be an underinvestment we will regret later. The entire economy is stagnating and there are very few industries that will be growing over the next 5 years. We have passed the point at which energy will only become more and more expensive and this will create a drain on the economy for years to come if we do not address it. Yes, President Obama has put unprecedented amount of money into a transition to a future of energy independence and infinite renewable energy that will serve us well, but from where I sit I think we probably need 20 or more times the amount of money that has already been pledged. This is not a scientific estimate (although I would very much like to have one done), but my gut estimate of the magnitude of the underinvestment. It looks like others agree with my assessment generally. 

We should take the opportunity presented by the next 5 years to develop the new infrastructure we will need to provide the affordable energy to get our economy going again, and sustainably for the long haul. Any delay in making this investment will only create more costs and slow our recovery. Every dollar spent on energy efficiency and renewable energy has a tremendous return on investment. We are not talking about wasting any money: this is a smart investment. Just like a corporation that under invests in its future will be overtaken by its competitors, we need to be bold and do what is necessary sooner rather than later. There is no use beating around the bush or delaying the inevitable.

The same is true for New Mexico in general. If we do not invest in our future today, we will soon fall further behind California, New Jersey and other states despite our better renewable resource potential. There is a danger we will be colonized by out of state companies from these other places that will siphon off the lion’s share of the revenue, rather than growing our own industry that will return maximum benefits to our citizens.

New Mexico is challenged by its small population and relative poverty. Our state budget is small enough that making a major investment in a future of renewable energy is a much more substantial hardship than for a rich and populous state like California or New Jersey. Despite our better location and developable renewable energy resources, there is a chance we will fall behind and fail to benefit as much as would otherwise be possible.

The example of Germany provides a good contrast. By instituting an aggressive feed in tariff for renewable energy, they now have the strongest renewable energy economy in the world despite having very poor solar energy potential compared with New Mexico and most of the United States generally. There are studies that have determined that this investment has more than paid for itself in new job creation and new economic activity, etc.

I hope that we are able to develop the confidence to make similarly substantial, wise and productive investments in our renewable energy economy in New Mexico. 

An Intuitive Electronic Music Interface

I have been a lover of music my whole life. I have often wished that I had been more disciplined as a kid and had learned to play an instrument well. But I didn’t, and now I still lack that discipline and being older it is that much harder to train my hands to do what I want them to do. This has been frustrating.

So I have tried to think of shortcuts to quality musical expression that require not require developing physical virtuosity. I want to make music, I want it to be good, and I want it to be easy.

My most frequent ideas revolve around electronic music, mostly because electronic music tools generally allow one to record and layer sounds and tracks piece by piece in a way that does not require the same performance skills. They are forgiving tools in the sense that you can try and retry different options until something sounds good, and not be limited by my ability to perform a complete piece, which would be beyond my skill. Much like a word processor makes it easier to write more easily when compared with pen and paper, these electronic music tools allow the same kind of revision and editing.

The downside is that music making can become a technical, dead and tedious process of working in front of a computer. For example, I have tried using FL Studio and find the software powerful, but challenging to enjoy as a process of music making. So perhaps I am looking for something half way between Guitar Hero and FL Studio. :)

Here is my idea of what I would like. If I was independently wealthy and didn’t have anything else to do, I would make it myself. Perhaps by putting here I can find some people to help me, or maybe someone will steal the idea and make it for me.

Essential elements:

• A multi-touch enabled big screen to control the performance
• All of the music generators, samplers, etc. to create sounds
• All of the processing effects
• The ability to visually and musically interconnect the generators and effects dynamically with a drag and drop interface
• Dynamic control “pads” on screen for manipulating the characteristics and parameters of the sound generators and effects live
• Widgets for graphical effects, and visualizations of different types associated with the music, so that the control screen itself can be part of the performance and projected to an audience

Perhaps all we really need is the interface screen to interconnect to existing software systems. But if this could be created I think it could take electronic music creation to both greater heights in the hands of professionals and down to the masses like me.

Of Ants and Men

I’ve had an ongoing real and internal struggle with a red ant hill in my back yard. In general, I use no non-organic pesticides and generally understand that insects are beneficial for gardens. I try to cultivate a position of tolerance even if there is a part of myself that would prefer not to be bothered by them.

Red ants are in a different category for me that also includes earwigs, centipedes and roaches. There is something about these bugs that make them hard for me to coexist with. I would even be willing to let these red ants do their thing, but they have set up shop in a highly trafficked footpath and I know they will grow a huge mound if I don’t stop them.

So first I tried one kind of ant trap: no effect. Then a second type: no effect. Then diatomaceous earth sprinkled on their mount: very little and temporary effect. In fact, it almost felt to me that this benign, organic solution was a kind of torture for them: perhaps the equivalent of napalm for humans? It seemed like a cruel solution.

I finally had to break down and buy the Amdro powder everyone seems to use. Now I know why: they ate it up like candy and now I see no activity at the mound. Success? It achieved the end and seemed to do it quickly and hopefully reasonably humanely.

Success, of a kind. But I am also saddened at having to use my overwhelming power and physical superiority to crush them in this way. I have no illusions that nature is anything but red in tooth and claw, but I still maintain a hope that we as humans with the ability to consciously evolve are moving in a more humane direction (most environmental evidence to the contrary).

And my ability to choose those ants’ fate so decisively makes me nervous. I am sure the ants had little understanding of what was happening to them or why. I envision them developing stories about the Dark Times, or attempting to explain their fate in terms of a vengeful god or some other cosmic or religious explanation. (Please excuse my anthropomorphism.)

The point is, how can we be sure there are not large and powerful creatures, equivalently large when humans are compared with ants, who out of some passing fancy or whim decide to do the equivalent of sprinkle some Amdro on our mound? Our entire universe could be something like a raindrop in these being’s universe: totally inconsequential. Our time and space scales could be radically different and so we have little knowledge of each other. They may have no idea they are effecting us at all at the same time we are experiencing horrible catastrophe at their hand.

More than the pointlessness of a totally random universe, I fear that our suffering may be caused by nothing more than such a cosmic oversight!

Choosing engaged democracy and building the good life

I recently discovered that there is research to confirm my concerns about the media and the way it can isolate us into our own echo chambers that undermine societal dialogue and democratic cross-fertilization. Cass Sunstein, law professor at the University of Chicago, is the author of this research. He focuses on the internet in particular, but I would suggest his findings translate to cable television, talk radio and other highly segmented media outlets as well. 

The wonderful thing about the modern world is the explosion of new options, technologies, ideas and possibilities. Old assumptions drop away, leaving us with new opportunities to choose. As we interact with others from increasingly different cultural backgrounds and with new ideas, new ways of looking at things and new technologies that make new ways of working and living feasible, we discover choices we didn't know we had. This is really exciting...

BUT the downside is that the traditional practices that held cultures together, that provided people with meaning, and that structured lives in ways that fostered healthy lives and communities are also being questioned and abandoned. 

At this point in history, it is difficult to know how to separate the wheat from the chaff. What is the wheat? What is the chaff? In the past, cultures had developed their own notions of "wheat" and "chaff" that members of those cultures accepted and used. Perhaps they would change subtly over the years, but there were few major rifts or disruptions. And by and large this separating of the world into good and evil, what works and what doesn't work, etc. worked for the members of those cultures. 

However, I would suggest that these systems of meaning worked for those members of cultures unevenly, and that there was significant room for improvement for many, but in the absence of any alternatives that could be easily compared people just went along. Consider the inherent patriarchy and second class citizenship of women in most cultures prior to the women's liberation movement of this century and you have a sense of how a culture might have uneven benefits without rebellion. The internalized oppression of patriarchy was powerful because it was not perceived clearly, or the alternatives were not understood, and so it continued on. 

Of course, even in the republican democracy that was created for the first time through the Constitution of the United States, as great a leap forward as it was, African Americans (and women) were initially denied full participation. Due to a combination of overt oppression and internalized oppression, this system continued without change for many years.

So when we look at cultural conflict and change in the past, there are a few alternatives. 

1. No change
   
2. Secession and establishment of an alternative culture somewhere else
3. Civil war between factions with a winner and a loser
4. Compromise between disparate interests: This is what we have in the U.S.
   
5. Transformation and transcendence: through dialogue and wisely engaged conflict, old divisions and compromises are transcended and new win-win alternatives are invented.
   

Over time as we have learned more about democracy, we have moved slowly down this list. I think right now we in the U.S. are somewhere about a 4.3 on this scale and the world as a whole is probably a weighted average of 3.6. I would like to see the whole world reach 5.0, and I will believe we will in time.

So to return to the "echo chamber" concept I have discussed above, in the past the echo chambers were formed primarily by discrete cultures that operated within their own systems of meaning and logic. Without deep and regular dialogue with "outsiders," cultures were essentially closed systems of meaning. People knew what society expected of them, knew what would happen if they didn't do what society wanted and society had ways of marginalizing the perspectives of others outside their culture so as to discourage defection or challenge. Whether these others were "infidels," "heathens," "the damned," "barbarians," "primitives," etc. cultures knew how to elevate their own views and attack and defend from contrary views. This ensured the continuation of those cultures.

But today the situation has been reversed. Traditional cultures have very little ability to protect their systems of meaning because the interaction of disparate cultures is unavoidable. (This is why we see a polarization into fundamentalists and the rest of us. Some people are trying to cling to what has been lost, and others are floating along with the rapid changes.) What we see emerging are new self-selected echo chambers forming fueled by radical individual choice and an ever expanding menu of media choices. This is the problem I referred to at the start of this post. 

So it is interesting how much things have changed! 

But the essential point of this post is that I think we need to examine our meta-choices, if you will, our choices about our choices. We need to recognize that we have the ability to choose not just as individual consumers of prepared content, but as co-creators of new systems of meaning. We can choose not just to watch certain media or consume this or that, but we can choose to create entirely new cultures! This will be appealing to many people because what what most people want is not unlimited choices throughout their day (which is overwhelming and unfulfilling), but instead for their daily experience to automatically and without effort to reflect their values and provide them with satisfaction. This can only happen if we can choose an entire culture to participate in.

1. First, we need to recognize the value of culture and comprehensive systems of meaning in creating healthy, happy lives.

 

2. Second, we need to begin thinking for ourselves about what cultures and systems of meaning might appeal to us, and articulating this for ourselves and others.

3. Third, we need to begin reaching out to others around the globe who share our cultural desires and vision.

4. Fourth, we need to get together with these others and decided to put these cultural ideas and principles into practice tangibly and experimentally.

5. Fifth, we need to record our experiences, both positive and negative, as clear-eyed as possible. We need to discuss these impressions with the others in the particular experiment we have chosen and see what collectively we have learned. We need to make adjustments and improvements to our experiment and then reevaluate periodically over time. 

6. Sixth, after a period of time, we need to take a break and engage with other people from other experiments and compare notes. What has worked for us? What has worked for them? As a result of this cross-fertilization, some people will have new ideas to bring back to their experiment, others will choose to abandon their experiment, and others will choose to join the other experiment.

In this way, we will invent new cultures that work better and better for more and more people. It will take time, but it is possible. The key is to recognize that we have choice at the level of culture itself.

The 60's were a time of social experimentation and society both benefited and was harmed by this experimentation. People were so intoxicated by their newly discovered freedom that they went wild. 

What was lacking was a scientific orientation and discipline to the experimentation (even if the experimentation itself is about something entirely different than science and discipline). A recognition that we don't have the answers ready-made and that we need to carefully create and invent them together was absent.

I am hoping that we are exiting the period of backlash to that experimentation and entering the next wave of experimentation. The difference this time is that we will experiment more maturely, more effectively, and more consciously. This will make all the difference in setting us on a course toward The Good Life and Heaven on Earth, one small considered step at a time.