Month: June 2023

When Silicon Valley Bank failed in March 2023, the actual legal rule was that th Federal Deposit Insurance Corporation (FDIC) insured bank deposits only up to $250,000. This is plenty for just about every household. But a number of businesses had much larger sums on deposit at the bank, and when these businesses became concerned that the bank wasn’t financially security, they started pulling out those deposits–and this bank run then caused the bank to be shut down. For a more detailed discussion of these events, see my earlier post “An Autopsy of Silicon Valley Bank from the Federal Reserve.”

The federal bank regulators were concerned that other firms were showing signs of pulling out deposits from other banks, and they announced that to stabilize the US banking system, they would guarantee all deposits–even those above the $250,000 limit. Was that decision appropriate? Raghuram Rajan and Luigi Zingales make the case against in “Riskless Capitalism” (Finance & Development, June 2023). They write:

Did uninsured depositors in the failed Silicon Valley Bank (SVB) need to be saved? The argument is that even though everyone knew that deposits over $250,000 were uninsured, if uninsured depositors had not been made whole, panic would have coursed through the banking system. Large depositors’ withdrawals from other banks would have compromised financial stability.

Perhaps! But if large depositors are always protected in the name of financial stability, why aren’t they at least charged the insurance fee that burdens the insured deposits? There are many low-cost ways for corporate treasurers to mitigate the risk of having money in a transaction account at a bank. They can keep only the amount needed to meet payroll and other immediate transactions in a demand deposit (checking) account and put additional soon-to-be needed cash in liquid money market funds. Yet too many firms did not practice elementary risk management. Streaming device maker Roku had more than $450 million in deposits at SVB, according to Reuters. While shareholders in SVB were deservedly wiped out and management let go, large depositors enjoyed riskless capitalism as the government changed the rules to benefit them.

A haircut could have been imposed on SVB’s large depositors. Based on past interventions by the Federal Deposit Insurance Corp (FDIC) this would have cost uninsured depositors about 10 percent of their balances. A few red-faced corporate treasurers would have justifiably lost their jobs. And if there were signs of contagion to other banks, the government could have announced a blanket implicit guarantee for all deposits, as US Treasury Secretary Janet Yellen eventually did. But the FDIC would have saved $20 billion and retained the principle that at least some of those who took risks paid the consequences. SVB would then be seen as capitalism penalizing the incompetent, rather than as an aberration—setting a precedent that will likely engender more attempts at riskless capitalism.

More generally, as the Federal Reserve’s own investigation put it, SVB failed “because of a textbook case of mismanagement by the bank.” If so, flighty uninsured demand deposits can be a feature, not a bug, in the system. If uninsured depositors pay attention, they can shut down incompetent or greedy bank management quickly, saving the taxpayer immense sums. If they are anesthetized because regulators invoke the tired argument that “this is not the time to worry about moral hazard,” uninsured depositors will not pay attention in the future.

The government decision was made after immense lobbying, including many cries for help from venture capitalists. David Sacks, of Craft Ventures, tweeted, “I’m asking for banking regulators to ensure the integrity of the system. Either deposits in the U.S. are safe or they’re not.” 

It’s important to remember that the choices here were not all-or-nothing. The federal regulators could have saved $20 billion by imposing losses of 10%–and provided some useful incentives for large bank depositors to pay attention to their corporate cash, as well. In addition, the payments that banks make for deposit insurance could be scaled so that banks with a greater share of very large deposits would pay more.

But the final paragraph I quoted from Rajan and Zingales crystalizes some of the key issues. Rules aren’t supposed to be changed after-the-fact to benefit businesses. Venture capitalists are supposed to know something about finance. When they start saying that “either deposits are safe or they’re not,” they seem to be stating that they were unaware that deposit insurance, by law, only went up to $250,000.

It’s perhaps useful to consider a hypothetical scenario: Say that a venture capital fund has done all of its due diligence, and determines that investing $50 million in a certain company is a good idea. In this hypothetical, the money is being sent to the company in an armored car, when it is suddenly hit by a passing disintegration ray from an alien spaceship. The money is gone–but it’s a sunk cost unrelated to the business prospects of the company. If it was previously worthwhile to invest $50 million in this company, it’s still worth making the same investment. It’s not a surprise that the venture capitalists wanted to rewrite the rules avoid any losses at all in the Silicon Valley Bank debacle. But venture capitalists like to pride themselves on providing useful oversight for the firms in which they invest, and in the basic task of managing corporate cash jammed into large accounts at Silicon Valley Bank, they badly fell down on a basic aspect of the oversight they claim to provide.

David A. Price serves as interlocutor in an interview: “Daron Acemoglu: On Henry Ford, making AI worker-friendly, and how democracy improves economic growth” (Econ Focus, Federal Reserve Bank of Richmond, Second Quarter 2023, pp. 22-26). The preface to the interview offers this summary: “Today, Acemoglu says hurray for economic growth — but is also concerned that choices made by policymakers and companies are channeling the gains from that growth away from workers. And as he sees things, the powerful AI technologies that have come to the fore in the past several years, embedded in products such as ChatGPT, should be regulated with the economic interests of workers in mind.” Here are a few of Acemoglu’s comments that caught my eye:

What type of AI do we want? What are the technologies of the future that would be most beneficial to society, particularly workers? I cannot imagine any technology that would be harmful to workers for a long period of time and yet would be beneficial for society. And therefore, my view is that right now we are going in the wrong direction in the AI community. We are going in the wrong direction in the tech community, because there is no regard paid to what these technologies are doing to workers’ jobs, democracy, mental health, all sorts of issues. So we really need to ask, can we redirect these technologies? …

[O]f course workers need to adapt as well. And I think workers who have skills or choose to specialize in things that one way or another are going to be done by machines are not going to do well. So I think social skills, social communication, teamwork, adaptability, and creativity are going to be rewarded by the labor market. The way that machines augment humans, humans should also augment machines.

But make no mistake, it’s not just those skills. Today, and I believe in the next 10 years, the United States economy is going to need a huge number of carpenters, electricians, plumbers, lots of people who do very valuable, very meaningful skill-requiring, expertise-requiring combinations of manual and cognitive work. It’s a mistake for us to think everything is going to be digital. And it could be very beneficial for us if we tried to make new machines, including AI, in such a way that they complement electricians, plumbers, carpenters. I think that complementarity is really critical. …

 If you want to think about workers benefiting, you have to think about what new tasks they can perform. And the key thing about electrical machinery — and the Ford factory in the early 20th century is a great exemplar of this — is that it generated a whole series of new tasks.

With the introduction of electrical machinery, production became more complex. So you needed workers to attend to the machinery and then you needed a lot of supporting occupations: maintenance, design, repair, and a whole slew of engineering tasks as well as many other white-collar occupations. So what really was beneficial both from the point of view of the workers and from the point of view of productivity wasn’t the fact that those factories were substituting electrical power for some other kind of power. They were completely reorganizing work in a way that made it more complex and thus created more gainful activities for workers.

Not everything was rosy. It was hard work. Compared to today, workers were worn out. They found it very difficult to keep up with the pace. It was still much noisier than the kind of factories that we would see later. And Henry Ford himself, especially later in his career, became zealous for anti-union activity. So it’s not like saying Ford was a visionary in every dimension. But Ford exemplified a new type of industrialization, which created new tasks and thus opportunities for workers.

I am perhaps less optimistic than Acemoglu about the ability of economists and social scientists to predict the current direction and effects of new technologies, and to propose ways of redirecting these technologies. Even if such analysis can be carried out in broadly persuasive ways, I am downright skeptical of the ability of the political system to implement such policies. Moreover, while the US and perhaps a few other countries are debating about what technology might become, other countries around the world will not be waiting for the results of this contemplative process, but will be moving ahead on the cutting edge of these technologies.

That said, it’s interesting to contemplate what kinds of technologies are encouraged by present economic and institutional arrangements. Technology often chases market size. Thus, investments in health care technologies that might be desirable to consumers in high-income countries will tend to be larger than those that could save lives in low-income countries. In addition, a health care technology aimed at a new market of consumers with health insurance may be a more attractive investment than a technology which, say, cuts an existing expense by 10%. Similarly, investments in agricultural technology that affect crops and farmers in high-income countries are likely to be larger that those that would improve the situation of crops and farmers in low-income countries. As Acemoglu suggests, business executives in high-income countries may be more likely to prioritize technologies that can replace workers, rather than technologies that empower workers. Venture capitalists may be more likely to support digital companies that can start up with relatively few employees, rather than supporting companies in industries that would require building factories and hiring more workers. A common criticism is that government tends to want research projects that are pretty likely to show a positive result, and thus tends to emphasize research that offers predictable but modest gains, rather than research that offers unpredictable but sometime much higher gains. There’s a lot of useful thinking to be done about whether the underlying incentives built into the existing eco-system technological investment.

In 2019, Acemoglu and Pascual Restrepo wrote “Automation and New Tasks: How Technology Displaces and Reinstates Labor” in the Spring issue of the  Journal of Economic Perspectives. Interested readers might turn there for more detail. From the abstract of that article:

We present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US employment over the recent past. At the center of our framework is the allocation of tasks to capital and labor—the task content of production. Automation, which enables capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect. As a result, automation always reduces the labor share in value added and may reduce labor demand even as it raises productivity. The effects of automation are counterbalanced by the creation of new tasks in which labor has a comparative advantage. The introduction of new tasks changes the task content of production in favor of labor because of a reinstatement effect, and always raises the labor share and labor demand. We show how the role of changes in the task content of production—due to automation and new tasks—can be inferred from industry level data. Our empirical decomposition suggests that the slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, a weaker reinstatement effect, and slower growth of productivity than in previous decades.

One of the repelling magnets of the subject matter of economics, at least for many encountering it for the first time, is the assumption that people are self-interested. In the telling of this assumption, what listeners seem to hear is that economists believe that people are always selfish. Any distinctions are lost: for example, the notion that self-interest can be viewed as a working assumption rather than as a claim about the essential nature of people; or that self-interest might be important in certain settings, while being fully compatible with altruism in other settings; or that self-interest can easily co-exist with many forms of cooperation; or that self-interest can be viewed as another way of saying “freedom to make your own choices for the reasons you see fit; or that that self-interest fully understood is not a license to disregard the interests and desires of others.

Alexis de Tocqueville wrote about the distinctively American relationship with the idea of self-interest, which he just calls “interest,” in the second volume of Democracy in America, published in 1840. In particular, I’m thinking of Chapter VIII in volume II, section II, titled: “The Americans Combat Individualism By The Principle Of Interest Rightly Understood.”

Tocqueville writes about how, in earlier times, wealthy and powerful individuals often liked to talk about how they were guided by virtue, and by the greater public good, rather than by self-interest. A common implication was that ordinary people should do what they were told, and follow the path allotted to them, because this virtuous path led to the common good. But Americans were different, Tocqueville argued. They instead were excited about the idea that pursuing self-interest (well-understood!) was the most useful way for a society to pursue the common good. Here is a part of Tocqueville’s meditation on the subject:

[T]he inhabitants of the United States almost always manage to combine their own advantage with that of their fellow-citizens … In the United States hardly anybody talks of the beauty of virtue; but they maintain that virtue is useful, and prove it every day. The American moralists do not profess that men ought to sacrifice themselves for their fellow-creatures because it is noble to make such sacrifices; but they boldly aver that such sacrifices are as necessary to him who imposes them upon himself as to him for whose sake they are made. They have found out that in their country and their age man is brought home to himself by an irresistible force; and losing all hope of stopping that force, they turn all their thoughts to the direction of it. They therefore do not deny that every man may follow his own interest; but they endeavor to prove that it is the interest of every man to be virtuous. I shall not here enter into the reasons they allege, which would divert me from my subject: suffice it to say that they have convinced their fellow-countrymen.

Montaigne said long ago: “Were I not to follow the straight road for its straightness, I should follow it for having found by experience that in the end it is commonly the happiest and most useful track.” The doctrine of interest rightly understood is not, then, new, but amongst the Americans of our time it finds universal acceptance: it has become popular there; you may trace it at the bottom of all their actions, you will remark it in all they say. It is as often to be met with on the lips of the poor man as of the rich. In Europe the principle of interest is much grosser than it is in America, but at the same time it is less common, and especially it is less avowed; amongst us, men still constantly feign great abnegation which they no longer feel. The Americans, on the contrary, are fond of explaining almost all the actions of their lives by the principle of interest rightly understood; they show with complacency how an enlightened regard for themselves constantly prompts them to assist each other, and inclines them willingly to sacrifice a portion of their time and property to the welfare of the State. In this respect I think they frequently fail to do themselves justice; for in the United States, as well as elsewhere, people are sometimes seen to give way to those disinterested and spontaneous impulses which are natural to man; but the Americans seldom allow that they yield to emotions of this kind; they are more anxious to do honor to their philosophy than to themselves. …

The principle of interest rightly understood is not a lofty one, but it is clear and sure. It does not aim at mighty objects, but it attains without excessive exertion all those at which it aims. As it lies within the reach of all capacities, everyone can without difficulty apprehend and retain it. By its admirable conformity to human weaknesses, it easily obtains great dominion; nor is that dominion precarious, since the principle checks one personal interest by another, and uses, to direct the passions, the very same instrument which excites them. The principle of interest rightly understood produces no great acts of self-sacrifice, but it suggests daily small acts of self-denial. By itself it cannot suffice to make a man virtuous, but it disciplines a number of citizens in habits of regularity, temperance, moderation, foresight, self-command; and, if it does not lead men straight to virtue by the will, it gradually draws them in that direction by their habits. If the principle of interest rightly understood were to sway the whole moral world, extraordinary virtues would doubtless be more rare; but I think that gross depravity would then also be less common. … I am not afraid to say that the principle of interest, rightly understood, appears to me the best suited of all philosophical theories to the wants of the men of our time, and that I regard it as their chief remaining security against themselves. Towards it, therefore, the minds of the moralists of our age should turn; even should they judge it to be incomplete, it must nevertheless be adopted as necessary.

I do not think upon the whole that there is more egotism amongst us than in America; the only difference is, that there it is enlightened—here it is not. Every American will sacrifice a portion of his private interests to preserve the rest; we would fain preserve the whole, and oftentimes the whole is lost. … No power upon earth can prevent the increasing equality of conditions from inclining the human mind to seek out what is useful, or from leading every member of the community to be wrapped up in himself. It must therefore be expected that personal interest will become more than ever the principal, if not the sole, spring of men’s actions; but it remains to be seen how each man will understand his personal interest.

There’s a lot to chew on here (as is so often true with Tocqueville). I might emphasize the insight that self-interest well-understood may help to build “habits of regularity, temperance, moderation, foresight, self-command,” and the insight that how people learn to understand their self-interest may be of considerable importance. But perhaps the biggest question is that if people are not to act in their work and civic lives in the ways that they personally perceive as in their own self-interest (well-understood!), then who instead gets to decide how people should act?

Twenty years ago, Edward Tufte published The cognitive style of PowerPoint: pitching out corrupts within, an essay that still speaks to many of us who have sat through presentations where bullet points are read aloud to us, one by one by one, and where the speaker feels a need to race through the last two-dozen slides in the final five minutes of allotted time. Tufte studied thousands of slides from actual presentations, and offers detailed and precise analysis of concrete examples. But for a sense of his overall argument, I’ll quote only some of his broader themes:

The fans of PowerPoint are presenters, rarely audience members. Slideware helps speakers to outline their talks, to retrieve and show diverse visual materials, and to communicate slides in talks, printed reports, and internet. And also to replace serious analysis with chartjunk, over-produced layouts, cheerleader logotypes and branding. and corny clipart. That is, PowerPointPhluff.

PP convenience for the speaker can be costly to both content and audience. These costs result from the cognitive style characteristic of the standard default PP presentation: foreshortening of evidence and thought, low spatial resolution, a deeply hierachical single-path structure as the model for organizing every type of content, breaking up narrative and data into slides and minimal fragments, rapid temporal sequencing of thin information rather than focused spatial analysis, conspicuous decoration and Phluff, a preoccupation with format not content, an attitude of commercialism that turns everything into a sales pitch. …

Many true statements are too long to fit on a PP slide, but this does not mean we should abbreviate the truth to make the words fit. It means we should find a better way to make presentations. With so little information per slide, many many slides are needed. Audiences consequently endure a relentless sequentiality, one damn slide after another. When information is is stacked in time, it is difficult to understand context and evaluate relationships. Visual reasoning usually works more effectively when the relevant information is shown adjacent in space within our eyespan. This is especially the case for statistical data, where the fundamental analytical act is to make comparisons …

In day-to-day practice, PowerPoint templates may improve 10% or 2o% of all presentations by organizing inept, extremely disorganized speakers, at a cost of detectable intellectual damage to 80%. For statistical data, the damage levels approach dementia. Since about 10¹⁰ to 10¹¹ PP slides (many using the templates) are made each year, that is a lot of harm to communication with colleagues. Or at least a big waste of time. The damage is mitigated since meetings relying on the PP cognitive style may not matter all that much. By playing around with Phluff rather than providing information, PowerPoint allows speakers to pretend that they are giving a real talk, and audiences to pretend that they are listening.

Tufte is of course a genius at thinking about effective graphical presentation of data. Many of us are not going to live up to his standard. But many of us can do better, too. As he points out, a good image that presents a set of data relationships can convey a great deal, and breaking those messages into bullet-points can obscure so much.

Tufte quotes from perhaps the classic Powerpoint satire of all time, Peter Norvig’s “Gettysburg Powerpoint Presentation.” Notice that it manages to include six slides for a two-minute presentation. Before the more famous part of the text, Lincoln would begin:

Good morning. Just a second while I get this connection to work. Do I press this button here? Function-F7? No, that’s not right. Hmmm. Maybe I’ll have to reboot. Hold on a minute. Um, my name is Abe Lincoln and I’m your president. While we’re waiting, I want to thank Judge David Wills, chairman of the committee supervising the dedication of the Gettysburg cemetery. It’s great to be here, Dave, and you and the committee are doing a great job. Gee, sometimes this new technology does have glitches, but we couldn’t live without it, could we? Oh – is it ready? OK, here we go:

The speech that follows would be accompanied by six slides, which are perhaps not in the most useful order, but hey, the slides show professionalism and really help out the audience, right?

In a similar vein, Gokul Rajaram recently posted an anecdote about his experience in creating a set of slides for Eric Schmidt at Google:

In 2006, I helped Eric Schmidt [CEO of Google at the time] create a deck outlining Google’s strategy, for a presentation Eric was delivering to the company. It taught me a profound lesson on how to present.

When I showed up to my first meeting with Eric, he asked me to visit with every product team at Google, chat with them to figure out what they were working on, and then summarize it on one slide (for each team).

Easy enough, I thought. I would use 3-5 bullet points per slide.

“But”, Eric said, “I want no words on any slide”.

My well-laid plans disintegrated in an instant. How was I supposed to convey the key messages from each team, without WORDS?

Eric must have seen the panic on my face, and kindly gave me a hint. “Put the text in speaker notes”.

“But what goes on the slides, Eric?” I continued panicking.

That classic, gentle “Eric smile” fluttered on his face. “Why, images, of course!”

“You mean, you want each slide to just be comprised of images?”

“You got it. And use the title wisely. 7-8 words max. Let’s meet in a week to review progress.”

Rajaram suggests several lessons from his experience. For example, one of them is “The larger the audience, the fewer the words on the slide.” But my point here is not to reify Schmidt’s approach to slide-decks, or Tufte’s for that matter. (Tufte is a believer in detailed paper handouts to accompany slides, which might have been workable in 2003 when he wrote his essay, but is so countercultural in 2023 as to be from a different era.) I just think we would all be better off with slide presentations that have fewer bullet points, fewer pages jam-packed with words, and fewer detailed numerical tables that can’t be read by anyone more than 30 feet away. Presentations impose costs of time and attention on others. In successful presentations, your attention is attracted, rather than taxed, and the entire time feels well-spent.