Best of 2015: The Least Dumb Ideas Consensus

Today the Federal Reserve ponders a third attempt this year to raise interest rates. The chasm between the hype and the consequence of this action could not be greater. Turn on CNBC -- if you want to lower your IQ -- and you will see adults arguing (as if something was really at stake) that a quarter percentage point move up in interest rates is so aggressive that it threatens to send the economy careening into recession.

Just for some context: A quarter percentage point means 25 cents worth of interest for every $100 dollars in debt. If you believe you are "managing" an economy that you find to be that fragile, even after eight years of unprecedented money printing and price manipulation, then you either (a) are long overdue for self-reflection on the soundness of your own theories or (b) tragically think far more of your abilities than reality warrants. Likely both.

Understand that, under the economic theories we now supposedly live under, we won't really be fully recovered economically until interest rates are returned to an historically normal condition and the Federal Reserves balance sheet -- those trillions of dollar of toxic assets -- are wound down, thus preparing us to fight back the next recession.

Debating a quarter percentage point is not only a joke, it should signal to everyone that our economy is operating without a theory. We're just reacting, making it all up as we go, shrouding our ignorance with a veneer of data and the pretense of thoughtful deliberation. As former chairman Ben Bernanke indicated in a recent Freakonomics interview, the actions of the fed are so intertwined with politics that we should not expect candor when it makes those in power look bad. Which is always.

My favorite part of that interview was Bernanke reacting to himself from a 2005 MSNB interview where he said housing problems were localized and would not impact the national economy. Here's what he said:

I absolutely – first things you said, by the way, when saying in 2005 and 2006 the economy was going to continue to do well, it did do well.  2007 was not a bad year until the end.  So, the economy was doing OK in a broad sense.  What we missed, what we didn’t anticipate, was that the decline in house prices and the problems in mortgages would generate this huge panic. So that — you know, I can’t, I can’t deny that.  I think that I wouldn’t give us a particularly good grade before the fall of 2007.  After that, when we began to see what was going on, there, we were much more aggressive in responding.

In other words, when he said things were doing well, they were doing well, until everything fell apart, and then they reacted. When I said the dam would hold, it did hold, until it fell apart, and then we had to run to high ground. Remember that third grade logic next time you hear an economic forecast or employment projection.

We're all just making it up as we go along. Admit that and you can actually start responding to uncertainty in an intelligent and productive way.

Stuck Bertha in Seattle, back when we were so confident we knew what we were doing. We still are, at least on the outside.

Stuck Bertha in Seattle, back when we were so confident we knew what we were doing. We still are, at least on the outside.

If you’re reading this blog, you likely know the narrative we apply to capital investments. Projects coming from the top down tend to be orderly but dumb while projects coming from the bottom up tend to be chaotic but smart. We all prefer smart to dumb, but we Americans have a really strong preference – and have established systems that enable bureaucrats and elected officials to ensure – that we get orderly over chaotic, even when it means accepting dumb as a result.

A recent example of some chaotic street art is a case in point. When I shared this story in our social media feed, even members of our audience gave some pushback. People can’t just go painting flowers on manhole covers. The notion offends our affluent sensibilities, perceptions of our success that begin and end with the orderliness of the world around us.

I’ve also pointed out that it is really difficult for local governments – even those desperate for innovation – to embrace a chaotic but smart approach because we – American society – have little tolerance for the chaos and failure of experimentation. We accept a beta version of the next iTunes with all of its flaws to be worked out, but the government had better deliver flawlessly on its promises (and with the money they already have).

Enter the megaproject; the least-dumb idea that consensus provides.

A recent article in the New Yorker on megaprojects is a treasure trove of quotes. Americans scoff at the lonely bureaucrat tasked with painting crosswalks or fixing sidewalks -- so little glamour in such modest work -- but we culturally admire those who dream big and, like a finely pruned peacock, display the confidence comensurate with their vision.

Engineers are delighted to develop new technology, politicians revel in the visibility they reap from building monuments to themselves, and everyone else—developers, bankers, lawyers, consultants, landowners, contractors, and construction workers—is happy to claim a share.

And unlike the beta version of iTunes and the software patch that follows, megaprojects are designed to excuse their own failures. According to the article, nine out of ten go over time and over budget. The story of Pakistan’s Tarbela Dam is the example they use. Unanticipated delays intersected with unexpectedly high inflation rates quadrupled the cost, but those things are out of the control of project advocates, so no lessons are learned.

“Time is like a window through which black swans can fly,” Ansar told me, alluding to the so-called black-swan theory, which explains how unexpected events shape history. “The bigger the window, the more likely the birds fly in.”

What can we really know? No number of observations of white swans will prove that all swans are white, but the observation fo a single black swan is sufficient to refute the premise.

What can we really know? No number of observations of white swans will prove that all swans are white, but the observation fo a single black swan is sufficient to refute the premise.

What can we really know? No number of observations of white swans will prove that all swans are white, but the observation fo a single black swan is sufficient to refute the premise.

I love this reference to the Patron Saint of Strong Towns Thinking, Nassim Taleb, and the notion of a black swan. The “theory” (it is actually more of an observation) is not that unexpected events shape history, but that we humans believe we know more than we actually do, that we can look at all the white swans around us, know that for thousands of years we’ve only seen white swans and then confidently conclude that all swans are white. Our hubris prevents us from not just anticipating a black swan but from even acknowledging that there are things we can’t anticipate. (There are actually black swans, by the way.)

Doing so – acknowledging our limitations – would shatter our sense of being able to bring order to chaos in the same way Hurricane Katrina did in 2004 and, more close to home for me, flooding in the Red River Valley did back in 1997. We look back at those events as failures of systems – we didn’t build the dike high enough, strong enough and thick enough – as opposed to failures of imagination; we didn’t consider that we could be wrong so we felt confident building in areas historically devastated by flood and hurricane.

This failure to be honest with ourselves – to believe there is order when there is actually just suppressed chaos – allows others to be dishonest with us. Our preference for the order of the megaproject creates opportunities for politicians, bureaucrats, corporations and labor unions to create a nice glide path for these projects to follow. From the article:

He [Flyvbjerg] writes that megaproject planners are often outright dishonest, systematically overestimating benefits and underestimating costs. He cites an unusually candid comment that Willie Brown, a former speaker of the California State Assembly and mayor of San Francisco, made in a 2013 newspaper column. Referring to huge cost overruns during the construction of San Francisco’s four-and-a-half-billion-dollar Transbay Transit Center, Brown wrote, “We always knew the initial estimate was way under the real cost…. If people knew the real cost from the start, nothing would ever be approved. The idea is to get going. Start digging a hole and make it so big, there’s no alternative to coming up with the money to fill it in.”

Don’t be offended by this; we actually prefer it this way.

So what is the alternative? What does chaotic but smart look like? Our friend, former Mayor of Seattle Michael McGinn, gives a rough sense of what this approach means. Again, from the article:

In 2009, McGinn, a Sierra Club activist with little political experience and modest financial backing, was elected mayor of Seattle. He had campaigned against the tunnel, arguing for a cheaper option: a plan, already found feasible by an advisory council of city and state stakeholders, to develop the city’s light rail, expand bus service, and repair and reorganize streets.

McGinn’s approach would have meant a lot of trial and error. That would all be really messy with lots of uncertainty.

Feasible, but messy. McGinn’s approach would have meant a lot of trial and error. It would also have meant some uncertainty in how traffic patterns, and subsequent investment, would adapt to the removal of the elevated highway. Changes would ultimately be needed to zoning codes, tax systems, street standards and other systems of government to respond to an evolving reality. Today these changes would be unknown – unpredictable – because they would be incremental reactions to conditions as they happened. Some of the changes would be bad; they just wouldn’t work and would need to be undone or changed in some other way. This would all be really messy with lots of uncertainty and, in a word, chaotic.

Nassim Taleb has said that, in complex systems, we need to use incremental change to probe uncertainty. However, if you personally are so confident that you have no uncertainty, or if you believe that uncertainty can be overcome through better planning (or a bigger budget), Taleb’s valuable insight will be lost on you. Sadly, you will most likely be part of the orderly but dumb problem systematically destroying our cities.

What results, Flyvbjerg says, is the “survival of the un-fittest”: the least deserving projects get built precisely because their cost-benefit estimates are so misleadingly optimistic.

Admit you don’t know. Embrace the chaotic but smart. Understand that a strong town is built with a thousand competing ideas instead of one master vision. A lack of resources is forcing us there anyway; let's get started now.

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