Friday, August 2, 2013

Selling Academic Snake Oil

I should probably be listening to some quiet music, petting a cat and drinking a cup of the excellent tea my daughter-out-law got me for my birthday. It's best practice when I'm this annoyed. But two months is too long to go without posting something, so I'm going to harness my irritation.

I was driving back from Donora earlier today, so I turned on WESA's noon news show, Essential Pittsburgh. It's a decent local show that I should probably listen to more regularly. I'm just not much of a radio guy since the internet became a viable news source. But when stuck in the car, I at least check in with WESA in the hopes that Terry Gross isn't interviewing some author I have no intention of reading, or All Things Considered isn't doing some tedious art story. Sometimes, it works out.

All imagse from Wikimedia Commons. If you don't know who this is, don't worry about it.

I was very pleased to hear that Essential Pittsburgh was discussing Detroit's bankruptcy, and its implications for Pittsburgh. There are some obvious parallels, although it'd be a mistake to stretch them too far. Both were industrial cities. Both had the industries on which they depended collapse. Both have suffered from inept government, hostile state legislatures and an American economic paradigm that privileges suburbs at the expense of the cities which make suburbs viable. Pittsburgh is currently in better shape than Detroit, but that's a function of Big Steel having executed its faceplant before Big Auto.

I was considerably less pleased as I listened to the program. One of the guests was a gentleman named Antony Davies. And he's the worst kind of academic hack; ignorant of the facts, rigidly bound by the parameters of a paradigm that bears no resemblance to reality, and promoting conservative ideology disguised as objective scientific truth, in exchange for hefty speaker's fees.

The essence of Dr. Davies argument is this: Pittsburgh has been more successful than Detroit because Pittsburgh's response to losing its primary industry has been to get out of the way of entrepreneurs, allow them to allocate capital on the basis of self-interest and expected rate of return and "take their pain now rather than later". Dr. Davies contrasts this with the case of Detroit, where government "bailed out" two of the big three auto-makers. According to Davies, government always misallocates capital, because "they lack the incentive to get it right". The result was that Detroit "took it's pain later", in the form of its current bankruptcy.

Detroit. How about we bail out their pension funds by canceling the F-35 program?

This is such a load of intellectually dishonest crap it's hard to know where to even begin refuting it. But let me begin by pointing out that the cases of Detroit and Pittsburgh are very different. The steel industry and the auto industry are very different. The decline of the two industries took place at different times, and to compare Detroit's situation now, a few years after 2/3 of the auto industry went bankrupt, to Pittsburgh's situation now, 3 decades after the collapse of Big Steel, is an intellectual error.

Furthermore, in his eagerness to laud entrepreneurial captains of industry, courageously staking their fortunes on nothing but their business acumen, Dr. Davies neglects an important point. The very entrepreneurs he extols are in large measure responsible for the collapse he thinks they'll rescue us from. Big Steel died for a variety of reasons, but perhaps the biggest reason was epic mismanagement by the industry. The entire debacle is brilliantly described in John Hoerr's And the Wolf Finally Came, which describes systematic under-investment in new technology, new facilities and new equipment in order to keep quarterly profits (and management bonuses) high. The effect was a steady increase in production costs until American steel simply couldn't compete with imported steel from countries with much newer, more efficient production facilities.

I suspect Dr. Davies would reject Hoerr's meticulously documented findings in favor of the old "it was the union's fault" trope, although I don't know that. But even if that were true, it ignores the fact that management signed the contracts that supposedly broke the industry. So much for visionary entrepreneurs.

The exact same blind spot exists regarding the management of the auto industry. As early as the 1970's, the UAW was pushing for the development of a small, fuel efficient and inexpensive product. Management continued to produce boats, both because that's what they'd always done and because they were more profitable. As with steel, a paradigm locked corporate culture failed to innovate and compete, instead focusing on short-term considerations deleterious to the long term viability of the industry.

Dr. Davies' faith in the acumen of entrepreneurs would seem to be misplaced. But he also neglects the role of business visionaries in the misgovernment of Detroit. Detroit pension officials didn't bribe themselves, they were bribed, by businessmen seeking to influence the way government allocated capital. Dr. Davies insists government "gets it wrong because they have no stake in getting it right." But of course the pursuit of self interest by both government officials and business people is a major reason why Detroit is in the shape it's in. And I will bet any of you money, right now, that when this sad tale is finally unravelled, we'll learn that unethical business practices by Big Finance had a role in reducing the value of pension fund investments.

Visionary entrepreneur Bernie Madoff

Finally, Dr. Davies seems to have a breath-taking ignorance of the specifics of Pittsburgh's "success". He cites "education" and "bio-tech" as two sources of the city's vitality. But the two big educational institutions in the city are  Carnegie Mellon University and the University of Pittsburgh. If he insists on counting his employer, we can include Duquesne University. So his entrepreneurial visionaries are a non-profit university kept afloat by an unending stream of DARPA money, a non-profit university affiliated with the State, and a non-profit university owned by the Catholic Church.

The biotech companies he lauds were started with public seed money. Dr Davies didn't discuss specific areas of the city undergoing revitalization. I suspect he is largely unaware of them; he stinks of the suburbs. But one big success has been Lawrenceville, a neighborhood once notorious for its heroin culture but now experiencing an influx of upscale businesses and gentrification. That didn't happen because of visionary entrepreneurs allocating capital because of their business acumen. It happened because of tax-increment financing and a public-private partnership. The visionaries in this case were city and state officials, and a neighborhood organizationThat's true of Bloomfield, and East Liberty, and Hazelwood too.
Heinz Field, center of North Shore development which includes  PNC Park & The Rivers Casino. Government was crucial to developing the North Shore, which generates hundreds of millions of dollars per year.
The biggest employer in the city is UPMC, which is a not-for-profit healthcare system dependent upon government research money and Medicare and Medicaid reimbursement. The construction of the South Side Works, and Washington's Landing and The Waterfront (just outside the city) were all made possible by State clean-up of old industrial sites.

To summarize, Dr. Davies narrative of Libertarian success, made possible by entrepreneurial genius enabled by government disengagement is utterly mythical. I am told by my brother that I often see bad faith where in fact there is merely incompetence. Dr. Davies may be a cynical pimp of Libertarian propaganda making his living by speaking to groups of aggrieved one percenters. Or merely a "paradigm-locked dipshit". I leave that question to the interested reader.