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Cyreenik Says

March 2012 issues

Things looking up? Yes, but watch the nativism

The cover for The Economist 17 Mar 12 article Can it Be... The Recovery expresses my sentiments. Perhaps we are seeing the light at the end of the tunnel, and perhaps we are near the end of Great Recession-related Blunders. This is good news indeed! Now we get to look for other kinds of Blunders.

And speaking of other kinds of Blunders, I was doing some research on immigration and when nativism grows strong in the US, and noted a disturbing pattern. There was a surge in nativism in the 1850's. Back then it was called the Know Nothing movement and targeted Catholics, Germans and Irish. There was another surge in the 1920's that lead to severe restrictions on immigration into the US in general -- cutting it to a third of the previous rate and holding it there -- and from Southern and Eastern Europe in particular.

What these two have in common, and is disturbing, is ten years after each movement peaked and then declined back to its usual noise-level, there were huge social catastrophes -- the Civil War followed the Know Nothing movement and the Great Depression followed the 1920's immigration restrictions. It was as if the surge in nativism was a leading indicator of upcoming deep, deep social trouble.

If a surge in nativism is a leading indicator of social trouble, we may want to keep an eye out for big trouble in the 2017-20 time frame. An example of the trouble that nativism can be a signal for is income inequality. This 17 Mar 12 Economist Free Exchange article, Body of Evidence, describes how US income inequality was growing before both the Great Depression and the Great Recession.

The good news is that our contemporary nativist movement has created much less change than the above-mentioned predecessors. So far, only a handful states have acted on it, not the federal government, or much of the nation. But, just like its predecessors, it is now high profile, so it's something to keep an eye on, and we should be watching for what kind of trouble follows it.

The trouble that follows will be a surprise. In both the previous cases the nativism faded and other serious troubles replaced it, but the replacements don't seem to have a close relation to immigration or nativism.

The Dodd and Frank letters to The Economist: An example of how hard it is to give up on a Blunder

In July 2010, in response to the financial crisis of 2007-09, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act has been heatedly criticized from even before it was passed. In 18 Feb 2012 The Economist ran a series of articles with the theme "Over-regulated America" The home of laissez-faire is being suffocated by excessive and badly written regulation. They pointed out Dodd-Frank, Obama's healthcare reform, and Sarbanes-Oxley as iconic examples. The article The Dodd-Frank Act too big not to fail specifically targeted that legislation.

In the 3 Mar 12 edition were Letters to the Editor from both Dodd and Frank defending their act. From Dodd, "SIR – As America and the world struggled to recover from an historic economic crisis, Barney Frank and I were not concerned about the page length of our proposal or about more work for financial regulators. We were, however, concerned about the millions of Americans who lost their jobs, the $648 billion of lost income for American households, the millions of Americans who are still losing their homes, and the trillions of taxpayer dollars required to prevent a global meltdown.
Your analysis of the implementation of the Dodd-Frank act (“Too big not to fail”, February 18th) irresponsibly ignores that history. This is not 1864 or 1913, and a simple solution would not have fixed the myriad problems that led to this crisis."

This response is an example of the emotion that often attaches to a Blunder. Blunders are solutions that are created in the heat of deep and scary emotion. They seem very right at the time they are implemented. That is not too surprising. What is curious is that they continue to seem right to the implementers long after the crisis has passed, and the huge cost of the blunder becomes painfully obvious to cool-headed observers.

This attachment happens because of emotional investment, and it is something to watch out for whenever choices are made in the heat of the moment. It also means that we, as a community, must be aware that decision-makers are very likely to develop blind spots about their difficult decisions, and that subsequent analysis of the cost/benefit of the choice may best be handled by others who did not become part of the heat of that moment.

By the way, I've written about how to solve this too many regulations problem. I call it Regulatory Cap and Trade.

 

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