My blog friend Mark Safranski’s recent musings on the nature and sources of strategic thinking brought to mind an old politically incorrect joke whose punchline is “Know how; need chance.” He opens the post with a substantial list of strategic thinkers and then tries to find commonalities among them. I found his list of commonalities uncompelling. I don’t think these commonalities illuminate what strategic thinking is comprised of but rather what circumstances provide the greatest opportunity for strategic thinking.

For all we know the greatest strategic thinker of all time is sticking components onto a circuit board in Chengdu. We’ll never have the opportunity to see the results of her strategic thinking because she’s just struggling to make money to send to her parents back on the farm.

There’s a very interesting article at Wired on the presumably increasing problems with reductionism in science. “Reductionism” is the assumption that increasing detailed knowledge of the parts will necessarily lead to a better understanding of the whole. Not only is there no proof for that; there is good reason to believe it is not true:

The truth is, our stories about causation are shadowed by all sorts of mental shortcuts. Most of the time, these shortcuts work well enough. They allow us to hit fastballs, discover the law of gravity, and design wondrous technologies. However, when it comes to reasoning about complex systems—say, the human body—these shortcuts go from being slickly efficient to outright misleading.

Consider a set of classic experiments designed by Belgian psychologist Albert Michotte, first conducted in the 1940s. The research featured a series of short films about a blue ball and a red ball. In the first film, the red ball races across the screen, touches the blue ball, and then stops. The blue ball, meanwhile, begins moving in the same basic direction as the red ball. When Michotte asked people to describe the film, they automatically lapsed into the language of causation. The red ball hit the blue ball, which caused it to move.

This is known as the launching effect, and it’s a universal property of visual perception. Although there was nothing about causation in the two-second film—it was just a montage of animated images—people couldn’t help but tell a story about what had happened. They translated their perceptions into causal beliefs.

Would a detailed knowledge of the structure of matter have been helpful or inhibiting to a Newton or an Einstein? I think rather the latter.

Objective observation, understanding, and insight are elusive faculties, possibly not subject to cultivation. You can prepare the soil and plant the seed but whether there is a crop or not?

More than a century ago Edison demonstrated the value of a systematic approach in invention. But that’s engineering not science. Would he and the research laboratories he built have been more or less effective if they’d received enormous subsidies?

If you liked 2011, you’re going to love 2012. I wish I could predict with confidence that Iran wasn’t going to test a nuclear weapon in 2012 or that Israel would not attack Iran but, honestly, I’m just not sure any more.

• U. S. GDP will increase less than 3%.
• At the end of the year the unemployment rate will be no lower than 8%. I suspect it will be closer to 9%.
• Housing prices as measured by the Case-Shiller index will continue to decline, probably by no more than 5% and no less than 3%.
• The number of U. S. troops in Afghanistan on December 31, 2012 will be somewhere between 80,000 and 110,000.
• Republicans will retain their majority in the House of Representatives.
• Republicans will assume a narrow majority in the Senate.
• Joe Biden will stay on the ticket and, especially, will not be replaced by Hillary Clinton.
• President Obama will be elected to a second term.
• The PPACA will be upheld by the Supreme Court.
• The Republican Congress will be unable to override the president’s veto of its repeal of the PPACA (although amendments and partial repeal may go through).
• As the date in February on which Italy must re-finance its debt nears, European leaders will go through another spasm of activity. They’ll kick the can down the road again.
• As of December 31, 2012 Greece will still be a member of the EMU.
• 2012 will not be a good foreign policy year for China. Several of their major clients will embarrass them including North Korea, Iran, and Zimbabwe.
• The al-Assad regime will retain at least nominal control of Syria.
• The “Occupy” encampments will not return with their former strength when the weather improves.
• The Descendants, The Girl With the Dragon Tattoo, The Artist, and Moneyball will all receive Academy Award nominations for Best Picture. The Artist may well win.
• The Adventures of Tin Tin and Hugo will both receive Academy Award nominations as Best Animated Feature. Hugo will win.
• An aircraft carrier will not crash into the White House during 2012.

Here’s the prediction of which I’m most confident: my list of predictions does not include the most important events of 2012.

In ancient Rome an augur, pictured above, was a religious official whose responsibility it was to examine natural signs to determine the divine approval or disapproval of a course of action. Yesterday the New York Times put forth its own augurs in the form of its regular economics op-ed contributors, Greg Mankiw, Christina Romer, Tyler Cowen, Robert H. Frank, Robert J. Schiller, and Richard H. Thaler, who have, apparently, read the signs and find the new year not particularly propitious. Rather than summarizing their observations which are reasonably terse, I recommend you read them yourself in their entirety.

I was a bit disappointed by their offerings. The legendary theatrical producer David Belasco once said that if you can’t write your idea on the back of your business card, you don’t have a clear idea. I don’t believe that the NYT’s economics op-ed writers have clear ideas about what produces growth or what we need to do to move forward. The effect is rather as though we were setting out on a journey of exploration rather driving from New York to Chicago. We need a road map not Lewis and Clark.

Under the rubric of fools rushing in where angels fear to tread, I’ll try to put forward some clear ideas of my own. However, first a detour. Paul Krugman is conspicuous by his absence from the list of luminaries above. Since his views are well known they hardly bear repeating.

I think that Dr. Krugman and anyone else proposing fiscal stimulus as such as the remedy for our economic problems is wrong because of the peculiar conditions that face us today. We have just experienced the collapse of an enormous bubble. What was a $10,000 tulip bulb is now worth two bits. How can that not enter into the calculation of the economy’s productive capacity? In the context of today I think that means we are unable to calculate potential production. Keynesian stimulus is intended to fill the gap between present capacity and potential capacity. I see nothing in the General Theory that leads me to believe fiscal stimulus can be used to increase production beyond its potential.

Here are my ideas as simply as I can put them. GDP is about $15 trillion per year. Growth is slow and may be for the foreseeable future. Government spending at all levels is about $6 trillion per year. The deadweight loss of taxation is estimated as being from 15% to 75%. Spending itself causes distortions which results in additional deadweight loss. There are also costs of compliance and avoidance. These are borne by industry but don’t count into government spending.

Deadweight loss decreases growth in the economy. When growth is robust it doesn’t matter a great deal. When growth is slow increasing deadweight loss can absorb all of the potential economic growth.

I don’t mean by this to suggest that government is the cause of all of our problems or that we can eliminate all government spending. My point is that we need to revisit the reasons for the spending, spend what we need and no more, and transfer some spending from areas that will produce little or no growth to areas that will produce more.

Specifically, we need to spend less on defense and security and increase the productivity of healthcare and education. By that I mean get more while spending the same or even less. That’s a tall order. It will require a sea change; a paradigm shift. Without that sort of major change I believe we can expect more of the same in this year and in years to come.

Last week the Congress, presumably unintentionally, did something right. It allowed the subsidies for ethanol and one of the several subsidies for electric vehicle to lapse. I agree with the editors of the Washington Post. Those subsidies should be consigned to the dustbin of history:

THERE MAY NOT have been a party in Times Square to celebrate, but two of the most wasteful subsidies ever to clutter the Internal Revenue Code went out with the old year. Congress declined to renew either the 45-cent-per-gallon tax credit for corn-based ethanol or the 54-cent-per-gallon tariff on imported ethanol, so both expired Dec. 31.

Taxpayers will no longer have shell out roughly $6 billion per year for a program that badly distorted the global grain market, artificially raised the cost of agricultural land and did almost nothing to curb greenhouse gas emissions. A federal law requiring the use of 36 billion gallons of ethanol for fuel by 2022 still props up the industry, but the tax credit’s expiration is a victory for common sense just the same.

Meanwhile, a lesser-known but equally dubious energy tax break also expired when the year ended Saturday: the credit that gave electric-car owners up to $1,000 to defray the cost of installing a 220-volt charging device in their homes — or up to $30,000 to install one in a commercial location. As a means of reducing carbon emissions, electric cars and plug-in hybrid electrics are no more cost-effective than ethanol. What’s more, only upper-income consumers can afford to buy an electric vehicle (EV); so the charger subsidy is a giveaway to the well-to-do.

There are any number of other agricultural and “green energy” subsidies that can and should be abandoned for fiscal, economic, and policy reasons. Unfortunately, I strongly suspect that the new year will see the Congress doubling down on its errors, eager to make new ones in the coming year. They will undoubtedly be abetted in this by an army of lobbyists whose clients are desperate that the mistakes of the past burden us for the indefinite future.

For the first time in nearly 50 years the Anheuser-Busch Clydesdales will not appear in the Rose Bowl Parade:

America’s behemoth brewery decided to spend its money elsewhere. A late November media release by the company, which three years ago was purchased by worldwide conglomerate InBev, noted that it preferred to invest “in other types of sponsorships and events that reach a higher concentration of beer drinkers . . . and where [we] can more directly discuss the Budweiser brand.’’

[…]

A-B’s affiliation with the Rose Parade dates to the years leading up to World War I. The brewery didn’t stable Clydesdales until 1933, bringing them aboard as a corporate symbol/mascot just as Prohibition ended. Twenty years later, Jan. 1, 1953, the gentle-giant Scottish horses made their debut in the Pasadena parade, hauling an Anheuser-Busch float, much as they would for decades to come. Until now.

Back when the St. Louis-based brewery owned the city’s beloved baseball Cardinals, team members sometimes appeared on the Budweiser float on New Year’s Day, sort of a spring training tease. More than a few Red Sox fans in the viewing audience shielded their eyes on Jan. 1, 1968, when Cardinals manager Red Schoendienst and the great Lou Brock were aboard the Spirit of St. Louis float, less than 90 days after beating the Sox at Fenway Park in Game 7 of the World Series.

Later that same day, Southern Cal rubbed out Indiana, 14-3, in the Rose Bowl, and Trojan ballcarrier Orenthal James Simpson was named MVP. Like the Clydesdales, Simpson today will not be anywhere near the Pasadena parade route, unless he is watching from the family room at his publicly funded boys club.

I suppose the decision was inevitable after InBev purchased Anheuser-Busch. However, A-B’s connection with Los Angeles is only a little less close than its connection with St. Louis. Adolphus Busch made his winter home in Pasadena in 1906 and the first Busch Gardens was located there.

Signs of the times. Formerly iconic American brands just aren’t American any more. Or as bound to their old traditions of community support.

It’s apparently been in the works for years and announced more than a month ago but I only became aware of it recently. The American Kennel Club is considering some pretty big plans for reorganizing the AKC group system, certainly the biggest change since the Herding Group was split off from the Working Group in 1983 and possibly the largest reorganization since the Non-Sporting Group was divided in 1925. The details are here.

Essentially, the plan, to be made effective in 2015, is to recognize several dozen additional dog breeds, divide the present Sporting Group into a group for pointers and setters and a group for retrievers and spaniels, divide the present Hound Group into a group for sight hounds and a group for scent hounds, and divide the present Working Group into three groups, a utility group, a Molosser group to include mastiff-type dogs, and a Spitz group for Northern breed and related dogs. There would be a total of eleven groups, an increase of four from the present seven groups (plus the Miscellaneous Class).

The effect of this plan would be to put the AKC’s organization into better alignment with international clubs both in the breeds recognized and the group organization, to recognize a number of distinctly American breeds, and to enable the AKC to compete more effectively with other U. S. registration organizations.

Overall I’m in favor of the changes. Some obvious classification issues have been resolved, some close calls have been made prudently, and in my view the new organization at least opens the possibility for judges with better, more specialized expertise. It will certainly require more judges, which may present a challenge to the AKC.

The one criticism I would have of the plan is that I think the AKC should grasp the nettle and divide the Herding and Terrier Groups as well. By my count they include 30 and 31 breeds, respectively, more than any other group.

I admit that, prior to reading the proposal, I had never heard of Drentsche Patrijshonden, Koolkerhondjen, Azawakhs, Cirnecco dell’Etnas, or Rafeiro Do Alentejos.

I’ve finally done the calculation. 2.5% of my DNA is Neanderthal DNA. That’s a bit lower than the 2.6% Northern European average.

Cf. Barry Ritholtz’s handy summary of the performance of the equity markets in 2011. Volatility helps traders; it doesn’t do a great service to the economy at large.

I thought that one of the benefits of the equities markets was that they produced greater stability. Whatever happened to that?