McCain Just Doesn’t Understand Economics 1

I heard John McCain blame the CEOs of the failing companies for the current financial mess. He claimed that it had nothing to do with deregulation. Does John McCain blame the millions of people who took on mortgages they would eventually not be able to afford? Was it just a problem of a few bad CEOs and millions of ordinary folk?

This is further proof that John McCain just does not understand how capitalism works or needs to be regulated. Capitalism rewards taking risk as long as it pays off handsomely.  If you are a CEO who does not take excessive risk and your decisions do  pay off but not as well as those CEOs who are taking imprudent risks, then you are soon out of a job. So the wise CEOs either learn to adapt to the excessive risk taking strategy or they are weeded out of the CEO market.

How do you protect a CEO who knows a bad risk when she or he sees it?  One way is to put in regulations that do not allow for the excessive risk taking that achieves short term payoffs and long term disaster. Not only does this protect the wiser CEOs, but it also prevents the bubbles from getting to such dimensions that they end up in such big disasters.

I saw a similar thing happen to mutual fund managers during the .com bubble. The managers who knew how to manage risk prudently and stayed away from the .com companies soon got fired for not having the stellar results of the fools who were jumping on the bubble.  Those of us who stayed with the few remaining managers of value oriented mutual funds felt like fools for getting measily 12% a year returns when others were getting 90%.

In the end we didn’t feel like such fools after all. We got to keep our gains (or most of them) while many .com followers lost it all.  It’s not so much how high your net worth ever got, but how much of it you got to keep in the long run.

When the economy was booming and the Republicans called for more deregulation and more tax cuts to stimulate the economy even more, we engineering oriented people realized what a horrible mistake this was going to be.  We engineers know about the value of what we call negative feedback. In economic terms this means that the government is supposed to be the counter-weight to excesses in the economy.  This is just like electronic negative feedback is the control on excessive amplifier gain.  Without the negative feedback or worse in the presence of positive feedback, high-gain amplifiers tend to go into wild oscillations. In the economy we are seeing wild oscillation because of the application of positive feedback instead of negative feedback.

We engineers know that you have to start with a high gain amplifier before you can start applying judicious amounts of negative feedback.  Similarly we appreciate the economic engine that is the U.S. economy.  It is just this appreciation that makes us understand that regulation also has its limits.

It doesn’t matter what discipline you study that gets you to this insight. I believe Barack Obama and his advisers have it.  The people who never come to this insight, like John McCain and his adviser Phil Gramm, should never be put in charge.

I only wish voters who never get this insight would understand what they are missing.  Of course, it they did understand, then they would have, by definition, had the insight.

Even Donald Rumsfeld knew that there were known unknowns and unknown unknowns.  His aphorism may have sounded funny, but I wish the electorate had the humility that this should have given to Donald Rumsfeld. If only he had really taken this to heart.

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

One thought on “McCain Just Doesn’t Understand Economics

  • RichardH

    Here is another of those darned NYT links from RichardH.

    Mr. McCain and the Economy


    On Tuesday, he clarified his remarks. The clarification was far more worrisome than his initial comments.

    He said that by calling the economy fundamentally sound, what he really meant was that American workers are the best in the world. In the best Karl Rovian fashion, he implied that if you dispute his statement about the economy’s firm foundation, you are, in effect, insulting American workers. “I believe in American workers, and someone who disagrees with that — it’s fine,” he told NBC’s Matt Lauer.

    Let’s get a few things straight. First, no one who is currently running for president does not “believe in American workers.”

    More to the point, the economy is stressed to the breaking point by fundamental problems — in housing, finance, credit, employment, health care and the federal budget — that have been at best neglected, at worst exacerbated during the Bush years. And as a result, American workers have taken a beating.

    In clarifying his comments, Mr. McCain lavished praise on workers, but ignored their problems. That is the real insult.