The Delusion of Control

The National Association for Business Economics released a survey this week reporting that “more than 90 percent of economists predict the recession will end this year.” On that forecast, I would not bet any money that I could not afford to lose.

Their cautious but optimistic forecast is in line with those of government officials, such as Ben Bernanke, and it reflects two biases. First is the well-known herding mechanism that drives forecasters. If you issue a forecast that is in line with the forecasts of others but the consensus is wrong, who can blame you? There is safety in numbers. All who are wrong exclaim, “We didn’t anticipate….” The second bias comes from the belief that surely what Obama, Bernanke, and Geithner are doing will have some effect.

In her book A Mind of Its Own, Cordelia Fine describes a classic social psychology experiment about the delusion of control:

Take, for example, a task in which volunteers are asked to try and get a light to come on by pressing a button. Volunteers are told that the button might control the light; in fact, the light comes on and off randomly and its illumination is entirely unrelated to what the volunteer does with the button. Yet although the volunteers have actually no control over the light, their perception is very different. They experience the illusion of control, as it is known, and claim to have an influence over the light. As subjects for further vanity, people rate their personal control more highly if the light happens to come on more often. In other words, we are even more susceptible to the self flattering impression that we are responsible for how things have turned out when they turn out well.

Let’s apply this to our seemingly bottomless—for now—faith in the capacity of Obama, Geithner, and Bernanke to control the economy. Obama, Geithner, and Bernanke tell the public that there are light switches in their offices and that they know how to turn them on. The three of them sit by their switches, frantically trying to get the lights to come on. And when the lights happen to come on—in other words, when there is occasional good news about the economy—the public dutifully applauds and says on cue, “Aren’t we fortunate that in our time of troubles we have found such talented individuals who know how to turn on the lights.”

The only problem is that—to the extent they have any control at all—their light switches are not connected to a healthy economy but rather to mechanisms that causes further harm to the economy.

Notice the title of my essay is “The Delusion of Control” and not the more genteel “The Illusion of Control.” David Gershaw explains the difference between illusion and delusion.

An illusion is a perceptual disturbance, while a delusion is a belief disturbance….a delusion is a deeply held false belief that is maintained—even when other information contradicts the belief. The contradictory information is either ignored completely or discounted in some way.

In other words, some are under delusions about how the economy works. They believe—against all evidence—that the cure for too much debt is even more debt and that the cure for a failed business decision is a bailout. They are not suffering from illusions; they are deluded.

Back to the forecast by the business economists. An astute observer, Bill Bonner, recently wrote:

The private sector is not going to begin a new growth period until they’ve paid off, worked out, defaulted on, or shirked a lot of their present debt load. We’ve estimated that they need to get rid of about $20 trillion worth. And that’s going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized…and fixed. Debt needs to be reduced.

Do business economists really think that this process—in the face of all the interferences by government—will be completed this year?

Does Bloodletting Boost Stocks?

Daily we are told by the pundits that consumer confidence is back and that the worst of the economic crisis is over. It is not hard to find stories such as yesterday’s at CNNMoney.com where Paul La Monica told us:

The market rally keeps chugging along. And even though some are concerned that stocks have moved up too quickly from their March lows, there is one undeniably healthy thing about this surge: Investors are not nearly as afraid about the economy as they were a few months ago.

What is the cause of this optimism? The Washington Post tells us today:

The improvement [in the financial system] reflects the combined impact of a wide range of actions, many of them taken with little public attention, according to government officials and private economists. But more important than any single program, the sources say, is a deepening confidence from financial markets that the government is prepared to take aggressive action — a confidence that Obama officials have repeatedly worked to cultivate in speeches and public appearances.

In other words, the good guys are in office, they are very smart, and they are willing to act. So now, we can all be confident.

Treasury Secretary Geithner told the Washington Post: “A huge part of getting out of this crisis is about confidence. And it’s the impressions, the impacts, not just by the quality of policies themselves, but by the sense of action by the government . . . that’s critically important to confidence.”

According to Geithner, it doesn’t even matter what he, Bernanke, and Obama do, as long as they do something. Can this really be true?

A classic logical fallacy is post hoc, ergo propter hoc which means “after this, therefore on account of this.” In other words, Geithner, Bernanke, and Obama took action; therefore, since the stock market is going up, it is because of their boldness. Of course, this negates obvious questions, such as “Why did the markets go down until March?” And other explanations, such as “the market is in a classic, countertrend, bear market rally that many expected and predicted,” are ignored.

And what happens in the not-so-distant future when the stock market begins to fall and goes under its March low? First, we can be sure that the media will not apply post hoc, ergo propter hoc to Obama, Bernanke, and Geithner. We will be told that the market is going down despite all of their heroic efforts. And those “heroic” efforts will continue—despite evidence that they don’t work.

Consider bloodletting. The “art” of bloodletting as a medical treatment persisted for over 2500 years until the 19^th Century. Here is one account of an unfavorable outcome—the death of George Washington:

According to his physician’s notes, Washington was afflicted with an inflammation of the upper windpipe on a Friday night. As it progressed, he developed a fever and difficulty breathing. Following medical standards of the time, he had someone come to bleed him that night. Twelve to 14 ounces of blood were removed, but he did not improve. The next afternoon, he was bled “copiously” twice more. When that proved ineffective, another 32 ounces of blood were removed. In addition to bleeding, his physicians also tried purging. By Saturday night, he was dead.

While here is an account of a “successful” treatment in 1824:

One typical course of medical treatment began the morning of 13 July 1824. A French sergeant was stabbed through the chest while engaged in single combat; within minutes, he fainted from loss of blood. Arriving at the local hospital he was immediately bled twenty ounces (570 ml) “to prevent inflammation”. During the night he was bled another 24 ounces (680 ml). Early the next morning, the chief surgeon bled the patient another 10 ounces (285 ml); during the next 14 hours, he was bled five more times. Medical attendants thus intentionally removed more than half of the patient’s normal blood supply—in addition to the initial blood loss which caused the sergeant to faint. Bleedings continued over the next several days. By 29 July, the wound had become inflamed. The physician applied 32 leeches to the most sensitive part of the wound. Over the next three days, there were more bleedings and a total of 40 more leeches. The sergeant recovered and was discharged on 3 October. His physician wrote that “by the large quantity of blood lost, amounting to 170 ounces [nearly eleven pints] (4.8 liters), besides that drawn by the application of leeches [perhaps another two pints] (1.1 liters), the life of the patient was preserved”. By nineteenth-century standards, thirteen pints of blood taken over the space of a month was a large but not an exceptional quantity. The medical literature of the period contains many similar accounts-some successful, some not.

Bloodletting persisted so long because favorable outcomes were attributed to the treatment, while unfavorable outcomes were deemed to have occurred despite the excellent treatment.

Bloodletting is an apt comparison to the bailout orgy that Washington is giving us. Unfortunately, the “blood” of healthy and productive economic contributors is being “let” and it is being transferred to those who are already dead, such as Chrysler.

Can that work? Of course not! But not to worry! The treatment, according to Geithner, doesn’t matter. The public will become more confident with every quart of blood he takes.

The Pharmaceutical Bubble

At my university, it is time for the annual open enrollment in health insurance. Every year I am astonished by the rates for prescription drug coverage. For family coverage, an employee’s cost is $79 a month, and the State of Maryland subsidizes the plan to the tune of $316 a month for a total cost of almost $400 a month. $400 a month! Just what are Americans popping?

Consider Lovaza. Lovaza is GlaxoSmithKline’s prescription fish oil, specially modified to provide high concentrations of omega-3 fatty acids. The cost for one year on Lovaza is an astonishing $3360. By the way, Lovaza—which is being marketed to reduce triglyceride levels—contains unhealthy, partially hydrogenated vegetable oils as a carrier base for the fish oils.

It is true, however, that the modern, Western diet generally lacks essential omega-3 fatty acids, particularly in relationship to an excess of omega-6 fatty acids.  Among other things, omega-3 fatty acids are essential for a healthy heart. But, simple modifications can easily restore omega-3 to your diet. There is no need for a pill. Wild salmon is omega-3 rich, as are vegetarian sources such as flax, walnuts, tofu, and leafy greens. (One caution: There are contradictory studies indicating that there may be an increased risk of prostate cancer with consumption of flax seed oil, but not flax seed meal.)

Modifying ones diet to increase the intake of omega-3 fatty acids costs but a tiny fraction of the $3360 a year price tag of Lovaza. Clearly, prescription drug insurance causes huge distortions in behavior. How many patients who do not have insurance for prescription drugs would consider buying Lovaza?

The marketing tactics of the drug companies, aided and abetted by the FDA (Food and Drug Administration), are truly unconscionable. We are told by GlaxoSmithKline that Lovaza “is approved by the FDA to reduce very high triglycerides” and that “unlike Lovaza, dietary supplements are not approved to treat any disease.”

This is misleading, since food and dietary supplements are not tested by the FDA concerning their power to prevent or cure disease. Recently the FDA made national headlines when they warned General Mills about their claim that Cheerios (an oats based cereal) is a means to help reduce cholesterol:

Based on claims made on your product’s label, we have determined that your Cheerios… is promoted for conditions that cause it to be a drug because the product is intended for use in the prevention, mitigation, and treatment of disease…[Cheerios] may not be legally marketed with the above claims in the United States without an approved new drug application.

What does the FDA announcement about Cheerios instill in the public? Perhaps the FDA announcement induces fear that only prescription drugs can maintain our health? Who benefits when such fears are promoted? How can a society of people expect to remain prosperous and free when collectively they are ignorant of how to maintain and restore health? How can any society afford drugs as wasteful as Lovaza?

I was able to find that sales of Lovaza were $102.8 million in January and February of 2008. Imputing from that, Lovaza sales were well over a half billion dollars for the year 2008.

On a pharmaceutical drug rep forum, Cafepharma, I found this post from a patient:

HEY DRUG DUDES, i’m a guy on disability. i take a shit load of drugs trying to beat cholsteral [sic] and trygiserides [sic]. cost is killin me. nothin cheap out there??? goin to canada for some . newest for me is lovasa. got any ideas where to shop for best price???? any help appreciated!!!

My advice to this patient: It is time to get some new advisors. First, your advice to yourself is very bad; resign as your own advisor. Next, fire your doctor. If the doctor you have is prescribing Lovasa, how much does he or she know about restoring and maintaining health? Instead of squandering your money on Lovasa, spend a small fraction of that on some natural foods cookbooks and change what you eat.

There is little doubt in my mind that the bubble in pill-popping will end as abruptly as did the bubbles in housing and in stock prices. For now, the pharmaceutical bubble is being sustained by market distortions caused by government privilege and government regulation. This bubble is destroying our health, teaching Americans to eschew responsibility, and helping to bankrupt our nation.

What You Can Do About the Flu

With the stock market in a strong, counter-trend rally, fear of the flu has replaced concern over financial matters as the top worry of many people. Short-term forecasts about the severity and virulence of the flu are about as likely to be accurate as are short-term forecasts of the direction the stock market will take. Yet, I would not bet against either a dramatic fall in the stock market later this year or a dramatic resurgence of the swine flu this fall or winter. Both are manifestations of the same underlying cause—namely, a shift in the collective social mood.

In his book The Wave Principle of Human Social Behavior, Robert Prechter writes:

The fact is that epidemics and pandemics seem to hit populations during major negative social mood trends. …When we study pandemics of the Dark Ages or the Spanish influenza epidemic that broke out during the bear market of 1917 (which year also saw intense fighting in World War I and the Communist coup in Russia), there always appears to be a bear market in force, and the extent of the epidemic tends to correlate with the size of the setback in mood.

A negative collective social mood—characterized by such feeling as depression, anger, and fear creates the conditions for both falling stock prices and the spread of disease. “But wait,” you might say. “Isn’t disease caused by viruses and bacteria?”  Although there are complex reasons—which no human being can ever fully understand—as to why one individual succumbs to a virus and another individual doesn’t, it would be a mistake to overlook the underlying psychological and spiritual state of the individual. Thus, we come to my first recommendation for protecting yourself from a flu epidemic:

Cultivate feelings of love, gratitude, happiness, and forgiveness. Tragically, most human beings hold the mistaken belief that these feelings are generated from sources outside of themselves—people, places and circumstances. Instead, these feelings are generated from a choice we make deep inside ourselves. During periods of negative social mood, our egos give us plenty of reasons why we should be angry, ungrateful, unhappy, and unforgiving. If we choose to follow the advice of our ego, bad feelings will drown out good feelings. It is up to each of us to turn away from our egocentric thinking and make a different choice.

Expose yourself to the Sun in order to increase your intake of Vitamin D. I am not recommending sunbathing on the beach, but I am recommending activities such as walking, hiking, running, and gardening. During these activities you can expose your skin to moderate amounts of sunlight without the use of sunscreen. Many Americans living in northern climates are deficient in Vitamin D, and Vitamin D is an important component of a healthy immunological system. See for instance Epidemic Influenza and Vitamin D

This summer, stop yourself from guzzling soft drinks and eating copious amount of ice cream. The summer months bring huge increases in the consumption of soft drinks and ice cream, both of which contain huge amounts of sugar and corn sweeteners. Sugar weakens the immunological system and will make you more vulnerable to illness in the colder months. See here for instance. Do not underestimate how much sugar you are consuming. For instance, there are over 16 teaspoons of sugar in one 20 oz bottle of Coke. Learn to enjoy water instead of sweetened drinks.

Incorporate into your diet common, culinary herbs and roots, such as ginger, garlic, turmeric, sage, thyme, that have medicinal properties. These ingredients have important antiviral and antibacterial compounds. Buy organic when possible. Much of the non-organic garlic and ginger is from China and is contaminated. See here.

In matters of health, bailouts—in this case, flu vaccines and Tamiflu—may have their place for some. But, prevention is cheaper, safer, and far more reliable. It is far better to be proactive today then to panic about the flu at some future date. Americans who don’t take their own measures now will be forced to rely upon whatever dubious measures the government recommends down the road.