Can we handle the truth?

Both globally and within most nations, the patterns of consumption required to sustain existing social arrangements are inconsistent with the distribution of the fruits of production. Social and economic stability, therefore, depend upon redistribution for which there is no overt legal framework or political consensus. To square this circle, the financial and government sectors have evolved means of hiding redistribution in complex, continually improvised arrangements. Unsurprisingly, massive wealth distributions arranged in this way leave much to be desired, in terms of straight corruption (the financial and government sectors redistribute a lot of wealth to themselves), justice (e.g. wealth is redistributed to those who happen to speculate early in bubbles), and sustainability (the illusion of value behind the claims of those from whom wealth is taken may prove fragile, but “loss realizations” are socially disruptive if they are not carefully paced and allocated).

Neither financial nor political reform can succeed unless we overcome the social and economic contradictions we have relied upon the financial sector to literally paper over. Off-balance-sheet liabilities that hide the impairment of savers’ claims, whether in subprime mortgage-backed securities or sovereign entitlement programs are not aberrations. They are essential tools in the arsenal of social stability, the economic equivalent of military “black-ops”, things that must be done but must always be denied in order to protect the American (and European, and Chinese) way of life. Unless we define overt arrangements that overcome the contradictions between the organization of production and socially desirable patterns of consumption, each scandal and reform will necessarily be followed by some new technique or trick that delivers, however unjustly or corruptly, the wealth transfers upon which our societies depend. Our choices are to overtly align the fruits of production with patterns of consumption, to continue to employ accounting fictions and magic to pretend away the contradictions, or to undergo some form of collapse.


35 Responses to “Can we handle the truth?”

  1. MoveableBeast writes:

    Steve, this is an excellent and thought-provoking post that cuts through all the noise in the media and blogosphere that (intentionally or otherwise) threaten to drown us in detail so that we cannot focus on the crucial bigger picture. Though I cannot fully follow the nuances of some of your statements, I suspect that even those of us in agreement with you will not necessarily agree on the “right way” to realign production and consumption. Defenders of the status quo will argue that current arrangements are by and large the best possible way we can ever hope to align the two, socialists will push for mass redistribution, liberterians for the end of all taxes and government, etc.

    Can you see a creative way to break this logjam? Or are we doomed to rearrange the deck chairs until we hit the iceberg? My own hope is that somehow, somewhere, a community, state or country will attempt to take a clean-sheet approach to developing what I like to call “the steady-state society”, factoring the basic minimum needs for a society on the dimensions of food, shelter, education and healthcare, fully leveraging the private sector and markets where that makes sense, and supplementing where necessary with regulation, social safety nets, etc. The challenge is to avoid an overly statist approach and also to allow learning and redesign as necessary, recognizing that there will always be unanticipated consequences and glitches to any complex system. One can dream, at least . . .

  2. Indy writes:

    I’m not sure “overtness” is the sine-qua-non problem here. You could have a perfectly overt system of generational robbery that, nevertheless, explodes in an unsustainable burden upon the youth of tomorrow.

    Social stability does not consist merely of preserving patterns of consumption. Might it not also consists of preserving patterns of taxation, rewards to effort, and the burden of the state upon the average worker? One side of the equation isn’t inherently superior to the other in terms of being more or less “socially disruptive” when it comes to forcing individuals to adjust their expectations to a new reality.

    What is the source of the instability we face today in our entitlement programs? The arrangement, in many people’s minds, was one of an inter-generational social contract that simulates an equitable, bargained-for exchange. You contribute a reasonable amount, and you’ll receive a reasonable amount from your descendants, who themselves will contribute similarly for similar promises.

    The instability originates in changes in longevity, demographics, and expensive technology, and the hope for the time-invariance of the equation has long been known to be an impossible fantasy. We would, as private parties, seek an equitable renegotiation of contributions and receipts based on a material changes in circumstances that affects us all.

    But the problem is that those very changes in circumstances have given the class of recipients the political power to allocate the risk entirely to their counterparty – their own descendants. What is really disruptive (or, at least, politically destabilizing) is when a system structurally pits large, homogeneous voting blocks against each other in a zero-sum game of transfer payments. In trying to resolve the problem of this change, their interests are diametrically opposed. Mutually beneficial compromise may be impossible, and instead of settlement, pure power politics determines the outcome. Is this not a potentially highly unstable and disruptive state of affairs?

    I guess one could take an economic view of things when the system encounters its insolvency time-bomb and liabilities far exceed revenues. The philosopher king could try to equalize the marginal social disruption from raising taxes and cutting benefits, and it would be an empirical question (a hotly debated one!) of how much to do in each direction.

    What constitutes “social disruption”, and how we might measure it in order to construct a policy of minimalization is an interesting question. But if it involves riots, protests, strikes, violence, and criminal activity – then it’s fairly obvious that preserving the expectations of the elderly retired would not be our main worry since these are phenomena of youth and the middle-aged.

    Probably the best solution to this particular problem would be a system of “generational integrity” that ring-fences liability around the beneficiaries and redistributes between them, and within their class, when conditions change. Perhaps you could have a variable-rate estate-tax that collects enough every year to make up the difference between liabilities and payroll-tax revenue. I’m open to ideas.

  3. lark writes:

    Sorry, this seems to me to be the quintessence of mush. You are equating all social welfare payments with subprime mortgages and waving your hands about ‘indebtedness’. This is just muddle. You need to be specific. Medicare vs. Social Security in the US, for example. These distinctions matter.

    The notion that social security is a ‘black op’ is just silly. It is also well funded. The fact that this entitlement program may need to be shored up in the (distant) future is hardly a secret.

    The notion that our society depends on these ‘wealth transfers’ is ill-defined. What exactly are you talking about? Public school?

    This is a fundamental point: social investment is not primarily a ‘wealth transfer’. That frame of reference is itself a problem. Social investment is investment in human capital.

  4. Steve:
    Look to California to America’s future. No, we can’t handle the truth. That’s why I expect a civil war in this country between 2030-2040. Have a nice day.

  5. […] – Can we handle the truth? […]

  6. […] […]

  7. the pro from dover writes:

    Small is beautiful.

    That is all you need to know.
    If everything is broken down into manageable units -everything that is (banks, states, currency areas, corporations, government) then more people can see, understand, and participate.
    They also find it easier to make people accountable.

  8. Peter Caritato writes:

    I am trying to understand what you mean by “inconsistent with the distribution of the fruits of production”. What pattern of consumption would be “consistent”? Also, how do you define “the fruits of production” in this argument?

  9. […] Steve Randy Waldman, “Both globally and within most nations, the patterns of consumption required to sustain existing social arrangements are inconsistent with the distribution of the fruits of production”  (Interfluidity) […]

  10. glory writes:

    re: creative ways to break the logjam & small is beautiful, i think the starting point (so often) is information asymmetries; small ‘works’ in large part because everyone is accountable — it takes a village and so on. but, by definition, it is harder to scale… yet one would think that applying information technologies should help that. fareed zakaria had esteemed guest paul volcker on yday saying gov’t is broken* so, as a starting point, what can gov’t do to fix information asymmetries? it is a public good after all!

    expert labs** is an attempt at one end of the spectrum, while another might be revamping the whole system of gov’t under non-territorial voting***

    barring that, i think most intriguing (as did marx ;) is promoting cooperatives and employee ownership**** as perhaps the most practical avenue to *gasp* socialism :P if everyone is provided a piece of the means of production, then ‘democracy’ would carry more weight…

    btw, george soros’ institute for new economic thinking sounds like something up your ally; you should apply for a grant!

    * cf. & paul krugman echoes viz.


    *** – “Suppose instead of election a man were qualified for office by petition signed by four thousand citizens. He would then represent those four thousand affirmatively, with no disgruntled minority, for what would have been a minority in a territorial consituency would all be free to start other petitions or join in them.”

    ****;sid=10/01/28/03583888 &


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  12. glory writes:

    also btw, re: “The instability originates in…” i think simon johnson would argue from looting* and, i would say, more are coming to that conclusion, e.g. jeremy grantham,** which i think leads to NIE*** if one considers social justice a public good…

    but if you look at current institutional arrangements, this struck true to me: “I wondered if we aren’t in some way converging with our supposed rival. China has managed the transition from a repressive, authoritarian, impoverished country to an industrial, corporatist oligarchy by allowing a loud and raucous debate while also holding tightly onto power. Perhaps we are moving toward the same end from a democratic direction, the roiling public debate and political polarization obscuring the fact that power and money continue to collect and pool among an elite that increasingly views itself as besieged on all sides by a restive and ungrateful populace.”****

    like i’ve been reading erik larson’s _devil in the white city_ about chicago’s 1893 world expo [it’s pretty great btw and bet it will probably end up on the big screen, also see _jimmy corrigan, the smartest kid on earth_ ;] and in the background glimpses larson provides, you can see stirrings of labour unrest that presaged the haymarket riot (which gave rise to the eight-hour workday and, eventually, the ‘weekend’) not to mention civil liberties (clarence darrow) and the FDA (upton sinclair)… anyway, it all seems rather similar to the problems china is facing that have been, heretofore, largely hidden by rapid growth BUT still risk being laid bare as the global economy slows — like how (gilded age) social divisions were exposed***** in the US’ multiple late-1800s recessions.

    now china has been (more or less) sensitive to these issues of course — the rural/urban divide, provisioning sufficient (if not universal) health care and education, consumer product/building/food/environmental safety, corruption (civil liberties, not so much) — but if they, the politburo, cannot manage them or if trade disputes force some of the issues, then i can see china becoming less flexible, not more… democracy (even if bought and paid for) has its advantages, but then again i guess so do the commanding heights!

    * as might tim hartford (and partha dasgupta) – “stable societies – that is, where cheats can be found and punished, if only by a refusal to do business with them in future – are a precondition for successful institutions. If every interaction is a one-off, co-operation is impossible, and all those wonderful investments in machinery, education and innovation will simply never happen”


    Clients can’t easily distinguish talent from luck or risk taking. It’s an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity, aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more.

    As total fees in the past grew by 0.5%, we agents basically reached into the clients’ balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.

    This is true with the whole financial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We’re debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.

    For 100 years the GDP Battleship grew at 3.5%. (Even the Great Depression did not change that trend.) But after 1965 the GDP growth rate ex-finance fell to 3.2% a year. After 1982 it fell to 3.1%, and after 2000 to 2.5%, with all of these measurements to the end of 2007 before the current crisis.

    From society’s point of view, this additional 4.5% burden works like looting or an earthquake. Both increase short-term GDP through replacement effect, but chew up capital. All of the extra financial workers might as well be retirees or children, in that they are supported by the rest of the workforce, but they are much, much more expensive.

    viz. and even the economist is leaning there cf. esp wrt – “the public sector has different incentives from the private sector”

    *** – Douglass North: “The natural state is a mixture of mutually interdependent economic and political interests that reinforce each other. The economic interests are the elites that produce economic activity. But they tend to support political groups that in turn will protect them from too much competition. The interplay is the elites in the political world protecting the economic elites from too much competition and giving them monopolies, while on the other hand the economic elites provide the funds that support the political elites.” and more recent work by paul romer in


    ***** and re-exposed…

  13. This sounds over-dramatic to me.

    I really don’t think it has to be that complicated or difficult.

    Total societal utility is much greater, the economy is much more productive, economic, scientific, technological and medical growth is much greater, and inequality is much lower with smart, adequate social insurance and an abundance of high return social investments. We did this very well post war until the recent era of Republican domination, and it resulted in a golden era of high growth evenly distributed.

    A key first step to ending the Republican decline is to end the filibuster. This greatly increases the odds of adopting so many positive things, like greatly increased public campaign finance and reform, universal health insurance, strong finance reform, greatly increased college and training aid, free universal pre-school, strong anti- global warming action, and so on.

    It can really start a virtuous circle.

    For more on this see:

  14. Hear hear!

  15. najdorf writes:

    Apologies if I’m cutting down a straw man, but I detect some of the utopian fallacy in the comments:

    Attempts to realign production and consumption outside of existing market/democratic frameworks are highly unlikely to create more just outcomes under any reasonable standard of justice. Unfortunately, sharing the resources of Earth with billions of other semi-rational, mostly-self-interested beings is a pretty complicated task. You can’t just decide what’s fair, wave your hand, and make it happen, even if you run a small community, because even in a small community there are external needs and effects and internal competition and dissension. Furthermore, even if you and your associates are all good people, at current crowding levels you are almost guaranteed to come into contact with bad people, particularly absent the restrictions placed on individual conduct by powerful central government. There is no freedom or justice when your life, liberty and property are subject to the whims of any more ruthless or physically powerful bad people who enter your neighborhood.

    Humanity has made a great deal of progress in the last century; hard individual work productively channeled into group endeavours under shared norms is our best hope to maintain or continue, but a huge number of latent risks and lingering problems lurk. The best hope we have is that undesirable aspects of current systems and distributions motivate people to exert more of their effort on education, political action, and the development of healthier institutions. There’s not a more systematic, top-down way to make this happen – it takes a lot of good people working hard to make a good world, and the status quo concentrates a lot of power in the hands of people who are not particularly interested in reforms that would improve common welfare. You can only oppose this power with the possibly greater power of the masses to exercise their talents in order to create something better.

    The stumbling block I see is not simply existing institutions or systems, but the fact that on an underlying level we’re only a few steps above monkeys. Many people who get a terrible deal under the current system are content to live it out because they have very little education and a great deal of access to TV and beer. Many people who get a great deal under our system simply got lucky but think that they made it all happen by personal will and therefore don’t care at all for the lower-situated. We live in a highly complex world, but for the most part our brains are not built to handle it in all of its complexity, and so we tunnel into narrow focuses and try to pretend that everything else doesn’t exist. What sort of understanding does the average middle-class American have of the government that directs 25-40% of the wages of his or her labor? What sort of understanding does the average financial market participant have of the true nature of risk, the costs of doing business, and the probability of future events that will shape the outcomes of his or her financial plans?

    I agree with Richard Serlin above that it’s conceivable humanity can continue to advance – but it’s reckless to suggest that such advance will be simple or easy. It’s very hard to do right and very easy to do wrong. The history of the 20th century should make that clear to anyone who lived through it.

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  18. Social comments and analytics for this post…

    This post was mentioned on Twitter by MarkThoma: Can we handle the truth? – interfluidity

  19. dave writes:

    Can we handle the truth?

    Isn’t the better question do we want to? What incentive does the average person have to know the truth? Other then a few of us intellectual junkies that get off on knowledge, of what value is “being informed” to the average person. It seems it is little more then depressing and distracting for the average powerless citizen who will never get close to making policy or influencing it in a productive way.

  20. Nice site you have here, But sometimes I get an error when i go to the homepage of your site.

  21. […] Can we handle the truth? Steve Waldman […]

  22. septizoniom writes:

    i find this post somewhat vague. would you please be more specific about what you are saying. your writing is generally a pleasure to read, but this post is prone to many readings. thank you.

  23. liberal writes:

    Social and economic stability, therefore, depend upon redistribution for which there is no overt legal framework or political consensus.

    A good start would be the acknowledgement from economists that a large fraction of so-called profit is in fact rent collection. Like all the money generated in real esetate (prior to the collapse, of course).

  24. John Riley writes:


    I appreciate the need to align production with consumption, but I don’t think that will be easy. We might start first to get our budgeting process in order.

    Nothing has alarmed me more recently than reading the details of the Obama budget in the New York Times which projects a deficit that will grow to 11 percent of our total economic output in 2011. Additionally, the budget projections suggest deficits will NOT return to sustainable levels over the next ten years, but by 2019 are expected to rise sharply to more than 5 percent of the gross domestic product. This outlook, following the Republican administration’s spending spree in the latter years of their term without any efforts to pay for those increases, is a severe indictment of our political leaders.

    It is no exaggeration to say this puts our national security at risk, erodes our leadership position in the world and threatens our standard of living.

    Government uses Bottom Up Budget Process

    The government uses a traditional budgeting process, albeit much more complicated than business. Essentially, it’s a bottom up approach where all departments and agencies of government build their budgets and submit them to the White House for approval. Then it’s up to the President to make whatever adjustments he feels are appropriate, influenced largely by political considerations. When the budget goes to congress for approval, local and regional interests take over and the numbers are tweaked unsparingly.

    In essence, the hot button political issues in a given year are the areas that get the funding increases without regard to providing for the out years. For example, the country’s infrastructure has been ignored for years and continues to deteriorate although the President has made this one of his many priorities.

    Situation is Serious, Fundamental Change is Needed

    The country’s situation is serious and calls for a fundamental change in the way the government budgets. Without knowledge of the constitutional or legal issues involved, I would like to see a top down budget process where the public takes a one time, binding vote to set the country’s budget number and budget deficit ceiling for 2011. The 2011 budget number could not be less than the 2010 budget.

    Economists say budget deficits should not consistently exceed 3 percent. However, the administration’s budget projections call for 3.6 percent each year for the next 10 years.
    The public vote would bind the administration and congress to reduce the deficit below 3 percent by the end of 2013 and three years after that, reduce it further to 2.5 percent. Thereafter, future administrations would be bound to deficits of no more than 2.5 percent. The only program exempt from the resulting cuts would be National Security which should include NASA.

    National Security Would be Exempt From Cuts

    For example, in 2011 the National Security budget is approximately $782 billion and Iran threatens the Persian Gulf prompting the United States to take action to forestall their aggression at a cost of $100 billion. When the administration prepares the 2012 National Security budget, it would use the $782 billion figure for the 2011 deficit calculation rather than $882 billion.

    If the politicians don’t have the will to take action and they fail to meet these financial accountability goals, there would be consequences. The voters would become engaged. If the deficit has not been reduced to less than 3 percent by the end of 2013, the Democrats would present a set of budget cutting options, as would the Republicans, and a public vote taken on which plan to adopt. If neither plan receives a majority vote, the parties would submit revised plans. The same process will be used again if the 2.5 percent deficit goal is not achieved by the end of 2016.

    Entitlement programs Need Better Controls

    The top down approach means the administration and congress would be pressured to work together in finding a solution to the growth of entitlement programs and find common cause in ways to bring them under control. It also will weigh heavily on the administration to find better ways to grow the economy and create jobs to get the revenues that would enable them to meet their deficit reduction goals, legislate new programs or expand existing programs.

    If and when an increase in the national debt became necessary, another public vote would be taken if the administration and congress have not met the deficit reduction goals. This will help refocus Washington politicians from spending on their favorite projects to rebuilding a strong financial engine that will restore our world leadership.

    However, the greatest benefit of a top down budget approach is to put power back in the hands of the people. We gave them the power, so let’s take it back. Can it be done? Let’s ask the voters.

  25. Steve Roth writes:

    septizoniom writes: “i find this post somewhat vague.”

    I have to admit that I find it uncharacteristically likewise.

    But the crucial line is notably less so:

    “Social and economic stability, therefore, depend upon redistribution”

    IOW, modern, high-productivity economies cannot thrive without major doses of redistribution to maintain aggregate demand.

    Proof: there is not a single prosperous country that does not have massive redistributive programs.

    If countries with more libertarian policies were in fact so efficient, one would have expected at least one to have emerged, and for it to have surged ahead of the others. It’s never happened.

    Steve’s point, I think, is that for political and moralistic reasons, these necessary redistributive programs (from infrastructure to education to health care to welfare and social insurance)–especially in the faux-puritanical/conservative U.S.A.–are 1. an inefficient hodge-podge, and 2. funded through smoke-and-mirrors financing rather than simply paying the necessary bills via (efficiently allocated) taxes.

    That may not be a recipe for collapse, but it is a recipe for periodic collapses. It’s not a coincidence, I think, that the biggest economic collapses in the last century both had their epicenters in the U.S., and both at times when wages as a share of GDP were at historic lows, and profits as a share of GDP were at all-time highs.

  26. Steve Roth writes:
  27. […] We All Can’t Just Charge Each Other Rent Forever By baum A brief summary on the economic disutility of the finance sector. Clients can’t easily distinguish talent from […]

  28. Just pay people to consume.. it is easier than you think in todays world.

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  30. Luis Scerbo writes:

    Less is the new-fangled more

  31. The Rat writes:

    If I’m interpreting you correctly, what you call for is complete openness and transparency between all countries and politicians for the betterment of our world as equal citizens, regardless of origin and background. You appear to be seeking utopia, and sadly, I believe we will see global collapse before the aforementioned.

  32. Cassandra writes:

    Hi Steve

    An impressive density to a parsimonious post!

    Prof Shoven as Stanford (in an interview with BBGs Tom Keene) thinks politicians underestimate The People’s ability for sobriety and action. The idealist in me wants to believe him, Maybe it is a communication issue? Yet plain non-hysterical, non-hyperbolic folk like Pete Peterson and Bill Bradley have gained no traction. For me, I still recall the last great attempt – Carter’s malaise speech – which met an emphatic if unexpected response, one not forgotten by elected US & UK politicians since then. As a result, I have resigned myself to the belief that only a true AA Moment, a Team America Vomit Scene of monumental proportions would rouse sense from its hibernation, and allow Truth to pierce the cozy comfortable veil of demagoguery and obfuscation. And I thought that moment had come with the crisis – a moment that would finally inject some pragmatic objective reality into the discourse. But this was squandered. But I do not share the view of imminent or deterministic systemic collapse, for I can foresee multiple paths, the “Sao Paulo” path now gaining favor in my odds. This seems the more natural evolution of american capitalism (and society) on our current course. And it is an coarse reality, probably unnecessary, but in the absence of tackling the issues you raise, increasingly likely.

  33. […] allowed higher levels of consumption during the good times. But now times are not good, we need (in Interfluidity’s apposite phrase) ‘redistribution for which there is no overt legal framework or political […]

  34. Debra writes:

    I can beat you at generalization, although I am far from being capable of picking up much of your vocabulary which is foreign to me, and which I don’t really grasp.
    Correct me if I’m wrong but…
    You’re talking about… inequality.
    And wealth redistribution.
    Questionable assumption number 1 : stability is the sovereign good, to be achieved at all costs.
    Prove it, or at least argue for it in a way that it no longer appears as a given postulate.
    What if I say that society evolves and changes through, and as a result of continuing periods of instability ?
    What if I say that… INSTABILITY is the name of the game ?
    What is behind the majority of the arguments that I read on blogs like yours is a form of utopian conservatism which resembles…socialism to me.
    Before you brush me off, I should say that I live in a (foreign) country where socialism is NOT a dirty word, and we do NOT throw it out like an unspeakable insult.
    But you ARE arguing in favor of some form of centralized social, and STATE control that is unquestionably socialist (in my book).
    Socialism basically means… deciding that the State’s mission and vocation is to organize and pick up the tab for many social activities which COULD be done in different ways (not necessarily for money, or by private enterprise). These activities are consensually labelled “the public good”.
    This greatly enlarged mission means… greatly enhanced State control.
    (This is Poly Sci 101, I think…)
    Every advantage has its disadvantage, and every disadvantage has its advantage.
    Think about… the disadvantages of the State’s social control.
    Keep.. THINKING about them.
    These days… ALL of our governments are starting to look more and more SOCIALIST (whether that be the Chinese government, the French government, the American government…)

  35. dlr writes:

    I am little confused. Exactly what overall redistribution are you assuming is going on? I see all sorts of flows —- From savers to borrowers. From the middle class to the poor (and to the rich) — via the tax code, for instance. From the young to the old. The healthy to the sick. From unorganized labor to organized labor.

    Which ones do you think dominate? Which ones do you think are essential for social or economic stability?