California as the Black Swan in the Coal Mine

Okay, partly it's a game: to salt a lot of high impact words into the title so it Googles well.

I've been reading Nassim Taleb's interesting book The Black Swan and trying to get a handle on his allusive, deliberately (I suspect) vague points about the nature of unpredictability in human affairs. He styles himself an epistemologist, and I suppose there's something to that. While he complains about "epistemic arrogance," there seems to be quite a bit of knowingness in his own analysis, to wit, he conveys the impression that he's simply writing at a level one remove above the ordinary mortal's comprehension of reality. Whatever. A "black swan," in his usage, is apparently a rare and unpredictable (or at least not predicted) event which is transformative in nature and alters the course of human nature thereafter. 9-11 was such an event. Key modern inventions (television, the personal computer and the Internet) often serve as black swans. The global financial meltdown has been a black swan.

Taleb is building on neuroscientific thinking about the "inferential sytems" in human thinking, about which I have Blooged in these very pages. Humans evolved to react quickly on the basis of sensory information, to use first impressions as a reliable guide to what's going on. We don't belabor our analysis if the shadow of what appears to be a large animal suddenly looms over the ground in front of us. Sure, it might be a eucalyptus leaning in the wind, but if it's a bull elephant and we guessed wrong, we won't be there tomorrow to "infer" differently. This kind of thinking explains why current weather conditions are cited as evidence for or against the general trend of global warming. At a slightly different level, it explains the tendency toward religious thinking. The artifacts and tools in our possession were "put together" by intelligent beings (us). Thus, if we see a whole interrelated system which functions like a clockwork (the Universe), our first inference is that someone (like us) made it.

Somewhat off the point of today's sermon, but not entirely. There is a financial crisis engulfing the civilizations of the Western world and Asia right now, but the (apparently) normal functioning of the central governments disguise the depth and severity of the problem. The sudden emergence of this crisis, while predictable (especially in the United States), nevertheless constitutes a Black Swan because this much trouble, so suddenly appearing, has that quality of rare, unpredicted but nevertheless statistically inevitable uniqueness characteristic of such events. Such developments simply do not fit under the fat part of the ordinary bell curve distribution of likely events. The limitations of our inferential systems thus tend to lead us to reject the authority of our more complicated cerebral analyses in favor of our reactions to the seeming placidity of the world around us. In a primitive way, we revert to magical thinking and belief in normal "cycles," such as "recovery" following recession, and this tendency in thinking is buttressed by the apparent normality of what is going on around us.

I saw some of this in the recent column by Paul Krugman about "surging" tax receipts heralding the normalization of American government financing. I realize that Mr. Krugman writes some of his columns while sitting in a lawn chair near his condo in St. Croix, and without doing any research, but this particular error was somewhat egregious even by his standards since the Treasury had just published their receipts for the month of April, 2010, and the print demonstrated a significant fall-off in year-over-year tax revenue (on the order of 13%) versus 2009. This is an odd kind of "recovery," and even odder as a source of confidence. 2009 was supposed to be the very depth of the Great Recession; how can 2010 be worse if things are getting better?

Anyway, the Federal government's ability to print money and recycle debt in a never-ending Ponzi scheme allows it to mask, for a long time, its essential insolvency. Which is why a state such as California may serve as the Black Swan in the Coal Mine. California is facing a $20 billion budget shortfall for the current fiscal year. It has a constitutional mandate to balance its budget, and it has no earthly way of doing so. California's GDP makes it the eighth largest economy in the world (about $1.8 trillion a year), and is running a U-3 unemployment of about 13%. Its GDP is about 13% of the entire nation's GDP (five states, including New York and California, make up about 40% of U.S. GDP). California cannot print money. Mr. Krugman recently wrote that California survives because of federal "transfer payments," but what can I say? California's return on investment (what it receives from the federal government versus what it pays in through taxes) is less than 80%. (Are they hitting that pepper-flavored vodka particularly hard in Stockholm these days, by the way? Or is it just that, as Taleb says, economics is a "science" on about the same plane as Tarot card reading? Memo to Krugman: if you've got access to wi-fi from the lawn chair, try using a search engine called "Google." You can learn a lot.) Anyway, Krugman: rely on his rosy predictions at your own risk.

Thus, California is facing now what the federal government ought to be facing itself but chooses to defer in favor of relentless borrowing. The money that California can borrow is severely limited, since the high interest rates it must pay on bonds (because of its diminished credit rating) add inexorably to the outgoes and push against its budget ceiling. The former B movie star and muscleman currently running the state, who has grown into his job although he still cannot pronounce the state's name, says simply that California is facing "terrible" budget cuts. Naturally, Caleeforneeyuh chooses to cut the subsidies for the most helpless of its citizens, such as the mentally ill, those on welfare, inner city students and similar non-politically-connected subsets. California is laying off many state employees, furloughing others on a rolling basis, closing courts one day a month, slashing higher education, letting cons out of prison, selling office buildings, and many other "Draconian" reductions, and taken together, all these changes are still not enough.

Yet outwardly, things still seem pretty normal, at least in the favored environs of the state such as Montecito, where our great leading environmentalist Al Gore just bought an $8 million house with 6 bedrooms and 6 baths and 6,000 square feet to heat (okay, look: he's not Thoreau, okay? He's a modern American with a helluva good image, and that's where the action is.) Forward momentum keeps the ball rolling for quite some time. Yet as things unravel, this huge part of the United States will present a Preview of Coming Attractions for the country as a whole. It's a shame our "inferential systems" don't get it now, but hell, we're not even to summer re-runs yet. We've got stuff to do.