Letter to Minneapolis

I lived in Minneapolis from 1999 until I moved to Sydney in 2017. In the last few days, the Minneapolis Police Department is again making the local news in Australia (following on the case of Justine Diamond) with the murder of George Floyd. Thanks to the internet (thanks internet !?) we can now livestream Minneapolis WCCO-TV here, along with the dumpster fire that is Twitter.

When I first took the job, and before moving, the University of Minnesota connected me to a real estate agent (from Edina Real Estate) who showed us around some neighbourhoods he thought we would like (Uptown, Edina). I asked about crime rates. He wouldn’t tell me (I think he implied it was illegal, which it may have been) and said I would need to look that up separately. I asked about some other neighbourhoods, like North Minneapolis, and he, in his Minnesota way, discouraged it. After moving there, I figured out why.

Open street on Minehaha Avenue in happier times. The center of some of the rioting.

We ultimately moved to Prospect Park in Southeast Minneapolis. We would shop and eat out at restaurants in the area around Lake and Hiawatha that was recently torched. We would regularly shop at the Targets on University in St. Paul and Snelling in Roseville that were looted. [Their logo is a target, obviously they were asking for it. And just sitting there, loitering in bad neighborhoods at all times of day and night, imagine what would happen to a person who did that.] [I am assuming looters are not reading this, if they are: looting is bad and does not directly address the problem, and probably undermines the general cause.]

Obviously much of this is crime of opportunity, which can be understood in game theory terms, following on the signalling of collective action among potential rioters, along with the distraction of police. But the core is not looters, the core is a protest against the police, and societal dysfunctions more generally. If society does not treat you with basic respect for your life, liberty, and property, the courtesy should be extended in reverse.

American society is broken. While irrational optimism is important to see our way through the present dilemmas, I believe it is important to recognise the degree of brokenness to do what is necessary. While this might bring us through the Kübler-Ross stages of grief from denial through acceptance, it is only with acceptance and recognition of reality that appropriate change can occur.

By all means vote for the right people, it may be necessary, but do not believe for a moment that it is sufficient. Elected officials, even when the “right people” are in a majority, do not control the Minneapolis Police, or many of the other institutions that are the root of America’s failures.

America, more than perhaps any other country, has become first-rate at admiring readily-solved problems problems [e.g., but this is not a complete list: police violence, gun violence, traffic violence, pollution, disenfranchisement and election malpractice, health insurance, congestion, pandemics, inability to build]. The most basic indicator of social success, life expectancy, is low for a country of its wealth, and falling. This is infuriating.

I say they are readily-solved as developed nations (a list we must sadly now exclude the United States from) have solved them, at least better than the US, and resources are hardly scarce in a country where the average size of a new home is on the order of 3000 square feet and there is a car for every driver, and a military which outspends the next 10 countries combined. This is not to say it is politically easy, otherwise one assumes they would have already been dealt with. But there are no technological barriers, nor lack of good ideas, just an unwillingness to make a hard decision. Politicians should be willing to take votes that will cost them their jobs. They will inevitably find work with the revolving door in industry anyway. There remain other problems (like endemic racism) which are more difficult, which also remain unsolved. America would collectively rather not go through any short run disruption to address even solvable problems with a huge long-run payoff. It suffers from failure of delayed gratification.

I have always thought Minnesota was one of the better governed US states, with a longer time-horizon than most. Minneapolis is very good (for the US, not on a global scale) at building bike lanes and of course it attracts hipsters (and wannabe hipsters) with coffee shops and microbreweries, and the city’s population has risen significantly over the past decade, but it also leads in segregation. All of the progress in bringing people back to the city is for nought when they cannot walk unafraid from violence perpetrated by the police.

This is not new. In recent memory, most notable was the well-known case of Philando Castile, nominally a traffic stop in a local suburb with a trigger happy cop, which inspired numerous peaceful protests closing freeways to temporary inconvenience. There was also Jamar Clark. But before that St. Paul tasered and arrested someone for sitting in the Skyway waiting to pick up his child.

The earth will continue to spin on its axis. Life will find a way. Civilization on the other hand is not nearly so robust. Nominally civilized Europe fell into how many wars last century? It’s not beyond repair, but every moment it remains unrepaired it gets harder. When in a hole the first step is to stop digging. Whether it gets fixed or not is a collective decision and I wouldn’t bet money on it.

“Look for the helpers.” Mr. Rogers said. The helpers are supposed to be the government, which includes the police. That’s what they teach in elementary school. They are not. No amount of policy change will should ever convince us they should be trusted. Their very position, arrogating to themselves a monopoly on the use of violence is perhaps necessary for the avoidance of anarchy, but not without questioning. Of course one must deal subserviently with any organization like the police that has more weaponry than you do. But that doesn’t mean you trust them.

There is an institutional problem that multiple weak mayors have been unable or unwilling to solve. Institutions only work with the consent of the governed. Removing and replacing a police force, especially one the size of Minneapolis is difficult, but not impossible. However with both the murder of residents they are charged with serving and their failure to maintain order in the aftermath of their own misdeeds, they have demonstrated unfitness for purpose. This is not a few bad apples, it is systematic. Fewer than 10% of officers live in the city. It would be easy enough to insist it be 100% and shed many officers voluntarily.

In contrast, while police in many other countries are overly militarized, they retain the confidence of their citizens. Our encounters with the local (New South Wales) police here have been professional as they investigated 1 break-in and theft (and recovered a laptop) and 1 attempted, including taking fingerprints, something Minneapolis could never be bothered to do when we had break-ins there. Notably the police are state rather than locally run. None of this is to say there are no problems: police brutality exists in Australia.

Disband the Minneapolis Police. Bring in temporary outside security forces with clear directives if necessary. Start over. That is what the protests are telling you. Listen to your residents, you govern with their consent.

Although this is not the general point, a modern banking system may have averted the whole problem, which reportedly started with questions about the legitimacy of George Floyd’s cash payment, resulting in the police being called (4 cops for a fake $20 seems excessive in normal circumstances), rather than the use of readily verified electronic debit transaction. It was startling returning to the US in January on the lack of universality of debit payments and the use of signatures in so many places.

On Debt Repudiation

The US Debt, a national blessing in the words of Alexander Hamilton, continues to rise in size despite an economy as strong as its going to get. Over recent decades it has risen as a share of gross domestic product.US-Debt-GDP-Ratio



We can discuss causes: decline in revenue due to recession and tax cuts; increased spending due to interest on the debt (which is a positive feedback system), economic stimulus during recessions, and defense spending. While it is not at the World War II record high, it’s higher than its been in the post-war period. While interest rates have been low for the past few decades (especially the last decade), there is no guarantee this will continue. And when interest rates rise, the debt will be more and more difficult to repay.

Who owns the debt? The $21T debt ($65,000 per capita) is owned both by Americans and by foreigners. About 28% of the debt is owed to the government itself (think about the Social Security Trust Fund). Of the remainder ($14.8T) half is owned by foreigners. China owns a bit over $1T. That’s a lot of money of course. The interest on that at 2% per year is $20B/year (you can do the math at different interest rates). So far, that’s hardly enough to break the economy over, though you can easily imagine an unwise President doing so.

In olden days, a superpower could send troops into a foreign country to seize assets when debts were unpaid, such as the US invasion of The Dominican Republic in the early 20th century.  Instead today it is the most powerful that is becoming increasingly financially strapped.

An historic example is England’s King Edward I whose populace was in debt to Jewish money-lenders (since Jews were not bound by Catholic prohibitions on usury but were prohibited from other activities), choose to issue the Edict of Expulsion in 1290. Only after the Monarchy was deposed by Oliver Cromwell were Jews readmitted to England in 1657.

Imagine it’s 2030 and there is a financial crisis of some form. Interest rates rise because confidence in repayment collapses. The economy locks up. The US is no longer the world’s most trustworthy economy. However, the US still has the strongest military. The US can choose to issue still more debt at ever higher interest rates, or it can turn the table over and no longer play the game. What might a populist President and Congress do?

So instead of the debt-holders being compensated, they are repudiated. The US stops paying interest on all bonds, or selected bonds, or bonds held by selected parties (non US nationals, Chinese) under some trumped up excuse.

Obviously the US can no longer borrow internationally in these circumstances, or even domestically, not for many decades until financiers forgive and forget. But if the interest on the debt is sufficient, this may be a trade-off worth making. Should the US continue to pay, say, $100B annually to its lenders, and borrow more, and get deeper in debt, or just keep the $100B and live within its means going forward.

The US in 2030 is not likely to be the Dominican Republic of 1916, foreign powers cannot simply invade to collect their debt. At best they can declare a trade war and impose tariffs.

I obviously don’t know if something like this plays out, but I do know the market is undervaluing the possibility.

Trust as a positive externality

A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King
A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King

NB: I am not a macroeconomist (IANAM)

A few years ago, Francis Fukuyama put out a book called Trust, a summary of some arguments are presented at: Social Capital and Civil Society – Prepared for delivery at the IMF Conference on Second Generation Reforms

He argued that social capital was a positive externality that produces trust, and civil society only succeeds if people have trust in the words of others, i.e. they believe others will do what they say, and of course that only emerges if people do if fact do what they say.

The recent economic meltdown in the world economy has resulted apparently in banks being unwilling to lend to other banks for fear they won’t be paid back. That fear arises because, in fact, some banks now defunct, did not pay back loans. They lack trust. One (or in this case a few) bad players shattered the system of trust that had a positive externality in encouraging lending.

The economy only works because of beliefs that a small piece of paper (a dollar bill) will be redeemable by complete strangers for something far more valuable than a piece of paper. Through this belief, we can replace barter with a money economy, we can lend money we don’t have (a la banks) and create wealth by investing in wealth-creating instruments now rather than waiting until sufficient resources are acquired.

It is hard to say how many years advanced economically we are because of borrowing, but one imagines it is probably decades. If the ability to borrow collapses, not only can we not grow faster, we will grow slower as old debts still need to be repaid out of current income leaving little available out of current fund for investment.

Positive externalities operate in two ways, as virtuous circles (more of ‘a’ begets more of ‘b’ which begets more of ‘a’) or in reverse as a vicious circle (less of ‘a’ begets less of ‘b’ which begets less of ‘a’). Changing direction requires an external shock (a collapse of trust for instance, or a major infusion of trust through a government intervention).

The classic examples of virtuous and vicious circles in transportation and public transport ridership and service, which grew as virtuous circle from the 1880s until the 1920s, and where after the past 60 years of vicious circle operation, most of the US has very little service and ridership left (despite 30 years of very expensive investments). In the US, transport is “pay as you go” at the federal level, which may very well be a source of for our under-investment, as there is an unwillingness to capitalize now our benefits from investments due to the positive gains they will provide in the future. If we don’t want the entire economy to follow the path of public transport in the US, something must be done.

As suggested above, the collapse of trust is warranted if the players are not trust-worthy. Even if there is an external insertion of funding, if the behaviors of the players reveal their true preferred actions, and these are not regulated in a transparent way, the system cannot necessarily be restarted without new rules to establish trust. As Ronald Reagan was fond of saying “Trust but Verify” (doveryai, no proveryai”).

The same I am sure will hold true of bankers, who not only seemingly distrust each other, but also should distrust the previous failed systems of verification (bond rating agencies) that were insufficient in providing advance warning of emerging problems.

Verification only works with transparency, where the actions of players are observable by all. This occurs on open regulated markets, rather than over-the-counter trades.