Archive for December, 2010
Economically, Taiwan is the success story that mainland China could have been — absent the millstone of 60 years of Communism. While most resource-rich countries like Brazil and Russia pump finite natural resources out of the ground to turbocharge their economies, Taiwan has accumulated its breathtaking, $348 billion in foreign currency reserves — the fourth-highest total in the world — the old-fashioned way. Taiwan earned it. Had mainland China (population: 1.3 billion) been as efficient as tiny Taiwan (population: 23 million) in accumulating dollar reserves, China’s reserves would stand at $19.66 trillion — an amount almost 40% more than the entire U.S. gross domestic product (GDP).
Understanding the dynamics behind Taiwan’s remarkable success — as well as its strong prospects — just might alert you to one of the most profitable global investment opportunities over the coming decade.
The “Other China”: Relations with Mainland China
Taiwan has been independent for 60 years since the end of a civil war with China in 1949. American-inspired land reform, aid and investment, and free universal education helped turn it into one of the four original “Asian Tigers,” widely admired for their economic achievements. Thanks to both hard work and a market economy, Taiwan today boasts the world’s second-tallest building and its high-tech industry rivals that of the Silicon Valley.
For all its individual achievements, mainland China views Taiwan as a renegade republic. Yet, for two sworn political enemies, Taiwan and China could hardly be closer. Indeed, the Chinese and Taiwanese business and political communities exist in parallel, non-overlapping universes. Mainland China is Taiwan’s No. 1 export market, with nearly 40% of its exports going to China. Trade between mainland China and Taiwan reached $120 billion in 2008. And mainland China has attracted more than two-thirds of Taiwan’s foreign investment. More than 70,000 Taiwanese companies have invested $120 billion in mainland Chinese businesses since the early 1990s. Taiwanese companies employ some 10 million people in China. More than 300,000 Taiwanese businessmen and their dependents now live in the greater Shanghai area alone. The next time you see “Made in China” on your new computer, realize that the profits are probably going into capitalist Taiwanese coffers.
The “Other China”: The Time Is Now
Relations between Taiwan and mainland China have improved dramatically with the election in Taiwan of a pragmatic new president Ma Ying-jeou, of the opposition Kuomintang (KMT) party, in 2008. Within three months of Ma Ying-jeou’s election, direct flights between China and Taiwan resumed for the first time since 1949. Mainland China agreed to halve the number of missiles that it has pointed at Taiwan from 700 to 350. Taiwan and China agreed to end a ban on Chinese investments in Taiwan for the first time in 60 years.
A report published by the Ministry of Communications in 2004 makes plans for a highway from Beijing to Taipei, Taiwan, to be completed by 2030. The technical challenges of crossing the 94-mile Taiwan Strait aside, the document fails to discuss the even bigger political problem of reaching an agreement with Taiwan. But in Chinese officials’ minds, Taiwan’s reintegration into China is a question of “when” and not “if.” And that spells the biggest re-rating opportunity in all of Asia.
The “Other China”: Putting Money in Your Pocket
Unlike South Korea, the Taiwanese stock market has not been a terrific performer over the past decade, under performing even the anemic S&P 500. Ironically, that all changed during the Great Recession, which coincided with a warming of relations between Taiwan and China.
While the U.S. markets have had quite a run since last March, Taiwan has outperformed over the last 12 months by almost two-to-one.
And if you want evidence of a global economic turnaround, look no further than Taiwan. Its industrial output soared an eye-popping 47.34% in December as the island exited its worst-ever recession.
The bottom line? The once-in-a-lifetime, re-rating opportunity of “the other China” might be one of the top opportunities of the coming decade. That’s also why I have invested in the iShares MSCI Taiwan Index (EWT) for my clients at my investment firm Global Guru Capital. And now there is no reason why you can’t do the same.
A strange thing has been happening in global markets over the past month or so. As the U.S. recovery gathers pace, the U.S. stock market is beginning to outperform its high-growth global rivals.
While most investors — myself included — take it for granted that most global stock markets will outperform the United States year after year, that just may not turn out to be the case in 2010.
A quick glance at the 12-month charts, comparing the performance of the MSCI Emerging Markets Index and the U.S. S&P 500, confirms that the United States is now running neck and neck with red-hot global markets.
In fact, with a bit of a year-end rally, there is a slight chance that the U.S. market will have outperformed emerging markets this year.
S&P 500 Versus the MSCI Emerging Markets Index
It turns out that as of about two weeks ago, the U.S. S&P 500 now actually is outperforming its high-profile BRIC rivals over the past 12 months.
S&P 500 Versus the MSCI BRIC Index
“Who’d have thunk it…?”
But investing in today’s media darlings has little to with making money in the financial markets. It turns out that the best places to make money over the long term are ignored — or even treated with distain — by the mainstream press.
Investing in the BRICs: Some Surprising Results
There’s no better example than China. While those who visit Shanghai and Beijing rave about China’s soaring skyscrapers and dynamic economy, you couldn’t tell all that from the performance of the Shanghai Stock Exchange in 2010.
In fact, despite its recent rally, Shanghai’s index — carrying the millstone of inefficient Chinese state-owned enterprises — has underperformed the S&P 500 by a wide margin.
Going into the final stretch of 2010, Shanghai has lagged its U.S. rival by more than 20%.
S&P 500 Versus Shanghai Composite
That doesn’t mean some investors have not made money in the dozens of edgy, small-cap Chinese stocks that have come to market in 2010. And investors in theiShares FTSE China 25 Index Fund (FXI) will have eked out a small gain. But even as China has overtaken Japan as the world’s second-largest economy in 2010, Shanghai is likely to end up the worst-performing, major emerging market of 2010.
Brazil tells a similar story. After a relentless rise that far outpaced the United States for many years, Brazil’s Bovespa barely has finished in the black for 2010. In fact, if you are a U.S. dollar-based investor who invested in the iShares MSCI Brazil Index (EWZ), you’ve actually lost money in 2010.
S&P 500 Versus iShares MSCI Brazil Index (EWZ)
India is only slightly better. Although India’s stock market has outperformed the United States over the past 12 months, Mumbai and New York have run neck and neck over the last six months, with the race “too close to call.”
S&P 500 Versus BSE 30 Sensex
But it’s the final member of the BRICs, Russia, which is the most surprising.
Russia, after all, is the ultimate “hate country.” After the collapse of 1998, one investor famously declared: “I would rather eat nuclear waste than invest in Russia.” Jim Rogers and George Soros agreed with the assessment of Warren Buffett’s partner Charlie Munger, who said, “We don’t invest in kleptocracies.”
Yet for all of the bare-chested shenanigans of Russia’s Prime Minister Vladimir Putin, Moscow’s show trials and the country’s famous corruption , Russia has been by far the best investment among the BRICs over the past decade, clocking up a Warren Buffett-beating, 25%-plus annual returns since its collapse in 1998.
And it looks like Russia is just about to match that historical average in 2010 as well, comfortably outperforming the S&P 500 by a 2:1 margin.
S&P 500 Versus Market Vectors Russia ETF (RSX)
Russia is the Top-Performing BRIC — Something Fishy?
Beyond the BRICs
The top-performing global stock markets of 2010 were in countries probably not on your radar screen. Although the final decision still is out on whether it was 2010’s #1 performer, one country stands out for its resilience throughout the year.
Earthquakes notwithstanding, free-market maven Chile — a long-standing recommendation in my trading service Global Bull Market Alert through the iShares MSCI Chile Investable Mkt Idx (ECH) — certainly will end up among the top-performing stock markets of 2010.
It’s worthwhile seeing how this small country has outperformed not only the U.S. S&P 500 over the past two years, but BRIC star Russia as well.
S&P 500 Versus iShares MSCI Chile Investable Mkt Idx (ECH)
and the Market Vectors Russia ETF (RSX)
So, what’s the takeaway?
As China’s example shows, fast economic growth and growing heft in the global economy do not necessarily translate into top investment gains.
In China’s case, it’s been quite the opposite.
And it is highly ironic that it is the most corrupt and most hated market in the world that has delivered the best performance among the BRICs. And with a compound annual growth rate close to 25% per year, among the BRICs, no one comes close to Russia.
And it’s hard to argue with the numbers…
So, if you really want to turbo-charge your investment profits, ignore the headlines and expand your investment horizons beyond media darlings China, India and Brazil.
Your portfolio will thank you for it…
If Singapore were a college student, it’d be the iconic student-athlete — a polite, white-bread, high-school valedictorian, a two-sport college athlete, who is also top-ranked Division I running back, a Heisman trophy finalist and a future NFL star — a Toby Gerhart among countries.
Indeed, the number of times that Singapore appears at the top of global economic rankings is nothing short of astonishing — and kind of annoying. Singapore ranks #1 in global innovation and competitiveness. It’s ranked first for having the most open economy for international trade and investment. And it’s the world’s easiest place to do business. And unlike, say, a (lucky) trust-fund country like Norway which pumps its wealth out of the ground, Singapore achieved all this by dint of sheer hard work. Over the past 40 years, Singapore has transformed itself from an economic backwater to an Asian Tiger success story. When this former British colony became a fully independent country in 1965, its per capita GDP was a lowly $511. Today, that figure has risen to $53,192, making Singapore wealthier per person than the United States.
So, if you believe that betting on the perfect kid is a worthwhile investment strategy, you could do worse than to include Singapore in your investment portfolio.
Asia’s Overachiever: Getting the Basics Right
A city-state at the tip of the Malay Peninsula with a population of just over 4.8 million, ironically, the secret to Singapore’s success is the diametric opposite of the individualistic, entrepreneurial-driven, quintessentially American success story of Silicon Valley. Singapore’s authorities are famously interventionist, having power to prosecute people who violate laws relating to “improper use of the Internet.” They once even famously banned the sale of chewing gum.
Its positively un-American approach to economic development notwithstanding, Singapore has gotten the basics right. And Singapore’s low levels of corruption, skilled workforce, stable environment, and efficient infrastructure have made it arguably the greatest economic success story among the Asian Tigers. Corporate tax is a mere 17% and personal taxes are only 20% on incomes over $300,000 Singaporean dollars ($213,000). In the midst of the Great Recession, unemployment never hit higher than 3.4% –a figure unimaginable to most Western economists. Recently, Singapore also has become the world’s fastest-growing offshore banking center, and its strict bank secrecy laws and a favorable tax regime have put the country on track to become the 21st century’s answer to Switzerland.
Not that it’s been clear sailing for Singapore over the past decade. Since the 1997-98 Asian financial crisis and the sudden downturn in world trade in 2001-02, the government has intensified its efforts to nudge Singapore toward a “knowledge-based” and service economy. During the 1990s, Singapore was the world’s leading producer of disk drives. Today, like its neighbors, Singapore is facing the loss of competitiveness against China. That’s why the philosopher kings of Singapore have embarked upon a mission to promote Singapore as a premier tourist destination.
Singapore was hit hard by the global economic downturn, but has bounced back quickly. In the second and third quarters of the year, GDP rose by nearly 9% and has now made up all but 1.8% off its peak. Property values have soared, forcing the government to take steps to prevent possible asset bubbles. Singapore’s economy likely will expand at a rate of 6.5% in 2010 — a rate virtually unheard of for a country already this wealthy.
Asia’s Overachiever: Path to Stock Market Profits
While the U.S. markets have had quite a run since last March, Singapore has outperformed the S&P 500 over the last 12 months by almost two-to-one. Since the market bottomed in March of 2009, the iShares MSCI Singapore Index (EWS) is up an eye-popping 114%.
While the headlines blare about China’s and India’s economic achievements, Singapore just might be the single most under-appreciated economic success story on the planet. And you too can take part in the fruits of this Asian Tiger’s remarkable economic success by investing in the iShares MSCI Singapore Index (EWS) ETF.
As annoying as Asia’s Overacheiver can be, it’s hard to argue with success — and profits.
It was only 1o months ago that Chile was hit by a magnitude 8.8 earthquake, the fifth-strongest ever measured in the country. The good news is Chile’s capital, Santiago, located about 200 miles northeast of the quake’s epicenter, avoided the worst of the disaster. Electricity was quickly restored to 80% of the city. The airportresumed operations and several shops opened for business on within a day. The Chilean stock market resumed its relentless trek upward without a hitch.
Chile: Free Market Reforms + Discipline = Economic Success
Unlike Greece or other countries on Europe’s periphery, Chile has been a model for how a small developing country should conduct its economic affairs. This country of nearly 17 million people, with an economy about the size of Alabama, is arguably the most economically successful and certainly, on a per capita basis, the wealthiest country in Latin America.
Understanding the reasons behind Chile’s economic success can help you identify other countries in the world that are getting the basics right — and, like Chile, are the source of stock market profits that put the U.S. S&P 500 to shame.
Despite its impressive achievements, Chile’s success has been a quiet one, with few countries seeking to duplicate the “Chilean Miracle.” Chile first introduced free market-oriented reforms with the help of the “Chicago Boys” — a group of University of Chicago-trained economists — during the bad old days of August Pinochet’s military government in the 1970s. The first democratic government of Patricio Aylwin — which took over from the military in 1990 — continued with these economic reforms, as have successive governments since then. The impact of these reforms became crystal clear as Chile’s economic growth rates began to outpace that of its Latin American rivals almost overnight.
Chile’s growth in real GDP averaged 8% during 1991-1997, rivaling that of the Asian Tigers. Although it fell to half that level after the Asian financial crisis in 1998, Chile’s economy recovered, boasting growth rates of 5-7% for most of the past decade — considerably outstripping growth rates in neighboring Brazil. By 2006, Chile had the highest nominal GDP per capita in Latin America. And recently, it was the first Latin American country to join the OECD, an exclusive club of “developed nations.”
What’s most impressive about Chile is that it has stuck to its reforms through thick and thin — a discipline that is sorely lacking in recent U.S. administrations. After being elected in 2006, President Bachelet took a lot of flack when she failed to succumb to pressure to spend Chile’s windfall earnings from high copper prices. The “Great Recession” of 2008 and 2009 revealed the wisdom of her policies. When the global financial crisis set in, government coffers had the cash to implement one of the world’s largest stimulus plans. The ant prevailed over the grasshopper, yet again.
Skeptics point out that for all the importance of free-market reforms, Chile wouldn’t be this far along without its huge reserves of copper. Copper accounts for about one-third of the government’s revenue and, as the world’s third-biggest producer of copper, even a small stumble in Chile’s copper production due to the recent earthquake sent global copper prices soaring.
But ideas do matter. What copper is to Chile, oil is to Venezuela. Yet, Venezuela is an economic basket case. Contrast the economic fates of Latin American countries that invoked the name of Che Guevara (Cuba, Venezuela) with the economic views of Milton Friedman and the “Chicago Boys” (Chile) during the past 40 years, and you can see why Chile has become a poster child for free market reforms. As the late, great Jim Rohn observed, “People aren’t building rafts to escape to Cuba.”
Chile: Consistently Hot
While most global stock markets go in and out of fashion, Chile has been the single, most consistent performer among all global markets over the past decade. It has ranked as the third-best performing market in the world for each of the last 10 years, 3 years and year-to-date.
Sadly, U.S investors have not profited directly from the Chilean index’s performance, until the launch of the iShares MSCI Chile Investable Mkt Idx (ECH) in November of 2007.
But had you invested $10,000 in the iShares MSCI Chile Investable Mkt Idx (ECH) on the date of its launch on November 20, 2007, you’d be sitting on $12,001 — a solid 20% gain. Had you invested that same amount into the S&P 500, you’d have only $8,685. That’s a remarkable 38% difference over the span of only 27 months.
Chile also has been a star this year among emerging markets, up 6.9% so far, the top performer in Latin America, even as the overall MSCI Emerging Markets Index has dropped 5.4%.
Bottom line? Chile may sell-off in the next few days after its devastating earthquake. But I believe that Chilean equities will soon find their feet, and will be among the top stock-market performers for the coming decade.
Few financial concepts have caught on as quickly as “BRICs”, which stands forBrazil, Russia, India and China, the “Big Four,” fast-growth economies in the world today. Goldman Sachs economist Jim O’Neill coined the phrase back in 2003, and it now has come into widespread use as a symbol of the shift in global economic power away from the developed G7 economies toward the developing world.
BRICs Building the World
By dint of their sheer size and population — and their collective decision to embrace their own particular brand of capitalism — BRICs are the economic future of the world. Together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. And thanks to their predicted rapid growth by 2050, the BRICs could eclipse the joint economies of the current richest countries of the world. China and India will become the dominant global suppliers of manufactured goods and services. Brazil and Russia will be the world’s leading suppliers of commodities. The BRICs today already account for a combined GDP of $15.435 trillion dollars on a purchasing power basis. By that measure, they are already collectively larger than the United States.
Here’s what Goldman Sachs had to say in its original report “Dreaming with BRICS: The Path to 2050,” published in 2003.
* China’s economy will surpass Germany in the next few years, Japan by 2015, and the United States by 2041.
* India’s growth rate will be the highest — not China’s — and it will overtake Japan (today the world’s second-largest economy) by 2032.
* BRICs’ currencies could appreciate by 300% over the next 50 years, providing a big tailwind for investors in BRIC assets.
* Taken together, the BRICs could be larger than the United States and the developed economies of Europe within 40 years.
* By 2025, BRICs will bring another 200 million people with incomes above $15,000 into the world’s economy. That’s equal to the combined populations of Germany, France and the United Kingdom.
If anything, Goldman Sachs has become more bullish on the BRICs since it published its original report. The size of China’s economy overtook Germany’s economy in 2008, a year earlier than expected, and will overtake Japan in 2010. Goldman Sachs now believes that the Chinese economy will overtake the United States by 2027. And with India accounting for 10 of the 30 fastest-growing urban areas in the world and 700 million people moving to cities by 2050, its influence on the world economy will be bigger and quicker than implied in 2003.
BRICs on a Roll
The BRIC countries have stepped onto the world economic stage with a newfound confidence. Shanghai hosting the World’s Expo in 2010 highlights its aspiration to become a global financial center by 2020 — investing twice what rival Beijing did when hosting the 2008 Olympics. Brazil is about to embark on its own infrastructure boom as it is hosting both the World Cup in 2014 and the Olympics in 2016. Two of the world’s top five on the Forbes Rich list are from India. (Number one is from Mexico.) In 2010, Moscow has the second-highest number of billionaires in the world after New York City.
Here’s why you can expect the BRICs’ roll to continue.
First, for the first time in recent memory, BRICs are growing not by borrowing, but by investing. China has the world’s highest savings rate. Brazil and Russia are sitting on huge foreign currency reserves, thanks to windfalls from oil profits. Even freewheeling Brazil is showing heretofore unseen discipline by running a fiscal surplus.
Second, soaring commodity prices have put more money in BRICs’ pockets than ever before. That means much less danger of a financial meltdown like the ones Brazil and Russia had in the 1980s and 1990s.
Finally, higher credit ratings mean that BRICs today can issue debts in their own currencies. A decade after defaulting, Russia has a higher credit rating than the European Union economies of Greece and Portugal. The result? Much more stable economic expansion and financing of investment that both depend on the whims of foreign investors.
“Prediction Is Hard, Especially about the Future.” —Yogi Berra
Here’s a reality check: Despite their recent high profile, BRICs have to get a lot of things right to imitate the success of Japan, Germany and South Korea. Potential problems include China’s oppressive regime, India’s choking bureaucracy, Brazil’s history of policy flip-flops and Russia’s gangster capitalism.
So yes, the BRIC economies are collectively already about 15% bigger than the United States. But take away the economic affirmative action of purchasing power parity, and look at wealth in real terms, and the U.S. GDP ($14 trillion) is almost 40% larger than all four BRICs combined ($8.6 trillion). Using real GDP, the average American is almost 15 times richer than his or her BRIC counterpart. After all, there are 2.6 billion total citizens in the BRICs and only 308 million Americans. And in spite of the nation’s billionaires, more than 200 million Indians live on less than $2 a day.
And historical prediction is a mug’s game. The year 1900 had its own version of BRICs: Argentina, Russia, Austria-Hungary and the United States were the fastest-growing economies in the world. Investors were clamoring to buy Russian railroad bonds for the same reasons that they are investing in Chinese solar stocks today. What did the world look like in 1950? Two world wars and several revolutions later, Austria-Hungary and Russia didn’t even exist; Argentina went from economic bull to basket case, and the United States was a global superpower, responsible for 50% of the world’s economic output.
BRICs: Building Your Way to Profits
Cautionary tales notwithstanding, BRIC countries today offer some of the most exciting investment opportunities on the planet. You can make more money in one month investing in BRIC stocks than what you can grind out in the S&P over three years. Brazil’s stock market, the Bovespa, has gone from about 9,000 in September 2002 to over 70,000 in May 2008. Savvy investors in Russia made more than 60 times their money between the meltdown in September 1998 and the market’s peak in May 2007.
And today, it’s easier than ever to invest in BRICs. Among companies listed on the New York Stock Exchange, 34 are Brazilian, six are Russian, eight are Indian and 16 are Chinese. And that doesn’t include technology companies that are listed on the Nasdaq. There are a handful of BRIC exchange-traded funds (ETFs) as well.
The lesson? Investing in BRICs can offer you one of the most fascinating (and profitable) ways to invest over the coming decades.
Technology Select Sector SPDR (XLK)
ProShares UltraShort Euro (EUO)
The Governor and Company of The Bank of Ireland (IRE)
ProShares UltraShort FTSE/Xinhua China (FXP)
ProShares Short MSCI Emerging Markets (EUM)
PowerShares DB Commodity Short ETN (DDP)
CurrencyShares British Pound Sterling Tr (FXB)
This past weekend, I met with several top University of Chicago professors, as the illustrious university’s alumni gathered to celebrate the recent fifth-year anniversary of their London business school campus. As the intellectual haven to Austrian School economist Friedrich Hayek and monetarist Milton Friedman, Chicago has a “free-market” reputation. The Chicagoans were gracious hosts. After my relentless peppering of the professors with politely punchy questions, the dean even singled out one of our heated exchanges as a terrific example of “Chicago-style” debate. I didn’t want to embarrass him by pointing out that I wasn’t even an alumnus.
The business school’s famous “Business Forecast Luncheon” pitted some of the top University of Chicago-educated brains against each other as they locked horns on forecasting the outlook for the U.S. economy.
By dissecting the constituents of the United States’ 2.9% gross domestic product (GDP) growth rate in 2010, the panel provided insight into the fragility of the current U.S. economic recovery.
For all of the handwringing about government spending, the hard data show that there has been no real net Keynesian stimulus in the U.S. economy at all. The increase in federal government spending barely made up for a huge drop in spending by state and municipal governments. Consumption rose, but only slightly. Net exports have been negative, as imports have soared. It turns out almost all GDP growth in 2010 was due to investment, specifically, inventory accumulation. Overhang in housing means that residential construction is a crucial element missing from this recovery. The only genuine new investment in the U.S. economy has been in technology and software, which grew at 15%. That probably accounts for Nasdaq’s strong performance this year.
The panelists were unanimous in predicting a muddle through for the U.S. economy in 2010. All were bearish on the prospects of the euro-zone remaining intact over the next few years. Greece is hopeless. Surprisingly, Ireland has a good chance of making it. John Huizenga also predicted a weak U.K. pound sterling, as fiscal austerity hit the U.K. economy. The head of Deutsche Bank research, a not-so-closet advocate of Austrian economics, highlighted the “mal-investment” taking place, thanks to a Ben Bernanke-blown asset bubble, and he predicted a collapse of emerging markets, commodities and the China bubble, a year or two down the road.
The best trades based on the predictions of the illustrious panel? Go long on the technology sector in the United States — Technology Select Sector SPDR (XLK). Bet against the euro — ProShares UltraShort Euro (EUO). Take a flier on The Governor and Company of The Bank of Ireland (IRE) — up more than 50% in just the last week. Short the pound sterling by selling the CurrencyShares British Pound Sterling Tr (FXB). At some point over the next year or two years, short China through ProShares UltraShort FTSE/Xinhua China (FXP) and the emerging markets through ProShares Short MSCI Emerging Markets (EUM).
Ivory Tower Meets the Real World: “The Power of Nudging”
The ideas hatched at the University of Chicago are making their impact felt in a significant way through the work of behavioral economists Richard Thaler and law professor Cass Sunstein (now defected to Harvard University), authors of “Nudge: Improving Decisions About Health, Wealth, and Happiness.”
The pair are the fathers of a newly-hatched theory about “libertarian paternalism” — an intentionally controversial name used to describe the insights of behavioral economics to influence people’s behavior. Whatever the name, what was “Ivory-Tower” thinking a few years ago is now real-world stuff. Cass Sunstein is now the Obama Administration’s regulatory czar, appearing regularly on the Glenn Beck program’s socialist “Gallery of Rogues.” The irony is that Thaler is helping David Cameron’s new conservative U.K. government establish a “nudge unit.”
“Nudging” is all the rage, both on the left and the right of the political spectrum…
Behavioral economics’ great insight is that we humans don’t make our decisions rationally. That’s something that advertising guru David Ogilvy could have told you 60 years ago. Although Thaler would never put it this way, “nudging” takes the principles of advertising — a catchy name, good product positioning, and “wordsmith-ing” copy to maximize consumer response — but applies it to the objectives of “higher-level” public policy. Instead of trying to sell you, say, a certain brand of deodorant, enlightened “nudging” encourages you to eat healthy foods, to pay your bills on time and to invest your retirement account sensibly.
Although we’re quite used to being manipulated by large corporations to buy one brand of detergent over another, using a “bag of tricks” — those are Thaler’s own words — to get people to make the right choices about other aspects of their lives is somehow more troublesome.
First, it’s hard to admit to yourself that you are unable to make your own right choices. But it’s even harder to accept that a government official has framed a question or a situation so that you will make the “right choice,” thinking it’s really your own free will. I am convinced 99%… as is yours, by the way. But even if I am a non-thinking automaton, is it Thaler’s job to play parent and guide me in the right direction? And, by the way, isn’t there a slight chance that Thaler himself might suffer from the same irrationality as you and I do. And if he doesn’t, couldn’t he just sell us the “cure” and be done with it? No “nudging” necessary…
The tenor of our discussion reminded me of Plato’s concept of the “noble lie.” In Plato’s “Republic,” it was OK for the “people of gold” (that’s Thaler) to lie to people of bronze (that’s you and me) — as long as it’s good for us.
Of course, what’s “good” is different in ancient Athens or, say, 1930s Germany. Put another way, if Thaler were consulting with the Taliban’s newly established “nudge” unit rather than with the U.K. Prime Minister David Cameron in London, “nudging” unlikely would be about where to place the fruit bowl in the cafeteria line. The serious point is that “nudging” beyond putting up a traffic light or two, or the placement of fruit bowls, presumes a universality of values that does not exist.
I then asked Thaler about the “unintended consequences” of his nudges. He gave me a pat Chicago answer about the necessity of looking at the “evidence” and focusing on things that work. That answer, as I’m sure Thaler recognizes, begs the question. The reason consequences are “unintended” is that the “evidence” you see today is, by definition, incomplete. Just look at the dozens of examples of well-intentioned environmental policies that ended up as a disaster. Drop a new fish in a lake to hunt down a nasty predator and, within two years, you’ve upset the ecological balance, and the entire lake is wiped out.
Yes, nudging works for, say, painting warning signs on streets to “look left” or “look right” to help tourists in London. But, as always, the question is where you draw the line. Somehow applying Justice Potter Stewart’s famous definition of pornography, “I know it when I see it,” is just not very satisfying.
My own perspective is that Thaler is yet another example of well-intentionedAmerican naiveté. Nasty people seem remote when you spend your life thinking big thoughts with a faculty of six Nobel Prize winners on the shores of Lake Michigan. But ignorance of them does not mean they don’t exist. And before we get overly impressed with our highly educated selves, I would remind Thaler of the work of psychologist Philip Zimbardo in the “Stanford Prison Experiment” to highlight how uncomfortably close we all are to acting like nasty concentration camp guards as soon as someone puts us in a position of authority.
If you want a sense of this, the next time you’re at the airport, go ahead and resist the “nudges” of a uniformed Transportation Security Administration employee and see what happens…
Agree or disagree, I am thankful for the intelligence and openness of “Chicago-style” debate. It is one of the most remarkable and enduring achievements of our Western civilization.