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GruberGate's Insider Problem

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Is there anything left to say about l'affaire Gruber? One of the major architects of Obamacare has appeared in a series of embarrassing video clips, musing about the "stupidity" of voters and celebrating the various ways that the law was designed to take advantage of their cognitive shortcomings. Conservatives are crying conspiracy against the public.  

Others, mostly liberals, respond that Jonathan Gruber was really only a tangential figure, and anyway, his remarks were just an infelicitous phrasing of sad truths about Washington: Voters are rationally ignorant, and government accounting is weird and subject to gaming by both Republicans and Democrats. Besides which, this law was incredibly transparent and probably the most extensively covered legislative process of all time. Jonathan Cohn has written the best and fairest of these defenses, but you can turn to any left-leaning outlet for many, many more.

I could try to convince conservatives that the problem is not actually with Gruber, who's basically a smart and, yes, well-meaning guy, for all that we vehemently disagree. The problem is not even really with the Barack Obama administration. The problem is with the system and the way that elites in that system treat others. I could tell them that "conspiracy" is far too strong a word for something that both sides do every time they get the chance. I could also remind them that, no matter Gruber's offenses, he remains a human being, and publishing his phone number and address in order to facilitate harassment is inappropriate, as is the harassment. The problem with Twitter mobs is not that too few of them are conservative-driven.

To liberals, I could point out that Gruber appears in a very large fraction of that extensive media coverage of the Affordable Care Act, which makes the attempt to airbrush him out of Obamacare snapshots one of the dumbest attempts at political retcon in the entire history of dumb American political moves. I could note that many of the same politicians and journalists who are now downgrading Gruber to, at best, a guy who crunched some numbers for the White House had merrily referred to him as an Obamacare architect, the guy who wrote major portions of the law, and so forth in the days before Gruber metamorphosed from brilliant forecaster to unfortunate loudmouth. I could add that the critics of the law who voiced concerns in 2009 about these uncontroversial facts that we can now apparently all agree upon -- the weirdness of the accounting and the ways in which it might hide the true costs of the law from those rationally ignorant voters -- were dismissed, again by many of those selfsame folks, as quibblers at best and, at worst, as paranoid haters who were trying to set their puny intellects against the mighty analytic power of the Congressional Budget Office. I could say all this, but as you can see from the links above, that territory has already been pretty thoroughly covered.

Yet I think there is something else to say about this little controversy, which is that it tells us a lot about the modern system of policy, as well as policy journalism. Before we get to that, however, I want to tell you a couple of stories.  If you'll stay with me, I promise, this is going somewhere.  

First story: Back in 2002, I had a little dinner party for some bloggers. Toward the end of the evening, after the dessert but before one of the guests started suggesting tequila shots, we started talking about something really fascinating: financial accounting.

No, please don't laugh. This was 2002, when the Enron and WorldCom accounting scandals were still making front-page news. And among our merry little band, there were two or three finance people, and me, with my freshly minted MBA. Here's how I told the story more than a year ago -- the last time we started arguing about what "everyone knew" about Obamacare:

“No one reads the buy ratings,” said Blogger No. 1. “You read equity research reports for the notes.”

Blogger No. 2 agreed vigorously. “The buy and sell ratings are obviously meaningless.”

And I was tempted to agree. After all, I’d taken multiple classes designed to teach me how to “back out” the most common accounting dodges from financial statements, as well as a summer trying to employ those skills in the real world. And all my professors, and everyone I dealt with, agreed on certain things. For example, ignore the buy/sell ratings, because “hold” actually meant “sell” and “sell” meant “short.” You read equity research reports for the verbal analysis, not some meaningless rating. “Everyone” also knew that you had to ignore ephemera like “big bath” accounting, in which a company facing a big negative charge loads as many negative changes onto the balance sheet as possible, so that they can later reverse some of those charges and have a happy upside surprise.

But hold on a minute. Why were companies bothering to massage their earnings if “everyone knew” that you had to back out the surplus charges? And why were equity research analysts issuing hold ratings when they actually meant sell? Presumably because not everyone knew that all these things were meaningless. Some people were buying stocks based on these insider tricks. But we never talked about them. We never even thought about them.

By “we,” I don’t mean people writing the reports and financial statements; I mean those of us who were busily selectively revising them to get a truer result. No one in my financial-statement analysis class ever raised a hand and asked why companies engaged in all those gymnastics; we simply took it as a given. Some of my classmates presumably went on to write financial statements and equity research reports. But even those of us who didn’t just sort of ... forgot about the folks all that “useless” writing was supposed to impress. We took it for granted that “everyone” knew which bits to pay attention to, and which bits were high-test horse pucky.

That’s right: We’d moved to Expertopia. And the folks who didn’t live there were so far away that we couldn’t see or hear or even think of them.

In some sense, of course, it's true that "everyone" in financial markets understood these simple and uncontroversial facts; all the professionals were well aware that "buy" ratings don't necessarily mean you should buy the stock, and that financial statements aren't worth much without careful attention to the footnotes. But, of course, many people who buy stocks are not aware of these things. And they were the reason for all the rigamarole with recommendations; it isn't just that the equity research folks preferred the graceful labials of "buy" to the harshly sibilant "sell" on the top of their research reports. They put them at the top of the reports because they it meant they would get a lot less hassle from the companies they covered. And companies wanted "buy" ratings because it increased the chances that some poor cardiothoracic surgeon in Dubuque would buy a stock that he really oughtn't be buying.

Insiders defined "the market" as people like them, and they stopped thinking about its effects on people who weren't like them ... unless they were thinking about ways to encourage those distant outsiders to make potentially unwise decisions. This is not surprising. It is how most groups -- I'm tempted to say "all groups" -- end up working. There is specialized insider knowledge that benefits the insiders, and people inside get to like it that way.

Now, another story. A few years back, I was working for -- well, a company. Said company had a policy about e-mail: All mailboxes were limited to 250 MB worth of mail. Because most of the people in my division spent a lot of time sending and receiving images, along with huge research reports, sizable data files and so forth, in practice this meant that people had to be constantly archiving and deleting their e-mail, or their mailbox would start refusing to send any more mail. This policy applied to everyone from the lowliest intern to the head of the company, which was a phenomenal waste of time and resources, compared to the costs of using another mail server or putting bigger hard drives in the existing servers. But it was policy, and it was firm.  

Somewhat quixotically, I embarked upon a lengthy campaign to get the size of my hard drive increased, which culminated in a conversation with someone rather senior in the IT department.

"Why can't I have a bigger mailbox?" I asked.

"It's impossible," he told me. "Exchange caps mailboxes at 250 MB."

Now, there are two things that are worth noting at this juncture:

  1. Before I went to business school, I built Microsoft servers for a living, including Exchange servers.
  2. He was lying.

There followed a hostile conversation in which I fake-sincerely asked if he would like me to come give a seminar on changing the default mailbox limits in Exchange, and then on easy fixes for the many subsequent spurious reasons that he suggested my mailbox could not be increased in size, and he fake-sincerely pretended that he didn't hate me. Eventually, they increased the size of my mailbox.

But that is not the point of this story. The point is that he was doing something that I had probably done myself a dozens of times: telling users that something they wanted was impossible when, in fact, it was merely forbidden. And I, too, had gotten caught at it -- though the nice thing about being caught in this particular form of deception is that anyone who knows enough to catch you is virtually certain to have committed the same crime once or twice. 

I would venture to say that all technical people do this from time, and not because they are bad people. Sometimes what they are saying is "I don't want to be bothered," but very often what they are saying is "This policy has been decided on for complicated reasons, and the explanation of those reasons is also long and complicated, and if I take a lot of time to walk you through it, there's a good chance you still won't understand it."

The IT guy I sandbagged wasn't a bad guy, and he wasn't being lazy. I am virtually certain I know what his reasoning was: Our organization had given him a set budget, not an overlarge one, and a lot of needs had to be filled out of that budget. Adding more hard drives to the server, or adding another server, was expensive, and it would come at the expense of other priorities. It made more sense to the IT department to put that money toward other needs.  So they capped the size of everyone's mailboxes (though I'd guess not the mailboxes of people in IT), to make sure they didn't overload the servers we had.

Now I could argue -- and I will -- that this sort of nonsense is in fact very bad IT policy, because it values an employee's time at zero. I've seen this in a lot of companies, and it's stupid, and I think it often reflects an IT organization that doesn't really understand the company's mission or its role in enabling it.

But what's important to realize is that the folks who told users it was impossible to raise their mailbox limits were not thinking of themselves as defending bad IT policy. They thought of themselves as shortcutting a lot of useless conversations with users who didn't really understand what happened inside all the pretty flashing boxes. 

As someone who has been on both sides of the table now, I can testify that an IT department usually has a strong insider mentality, and it views users as something between a fractious herd animal to be farmed for new electronic toys, and a carnival sideshow. And this is not entirely unfair, because users are often childish and uncooperative, and they file help-desk tickets for things like major violations of the laws of physics. (True story: The president of a pretty large bank once summoned me to his office to fix his voice-recognition software, which seemed to be working fine to me. But not to him, because, in his words, "I wanted something like the computer on 'Star Trek: The Next Generation.'") Users do not merely get the contempt of their IT people; they actively earn it.

But Megan, I hear you cry, why are you telling us all this? Very funny, I'm sure, but what's your point?

Well, let's draw some lessons from these parables.

To start with, insiders create specialized technical knowledge that excludes outsiders -- and specialized technical knowledge creates insiders. Both group dynamics and that technical background make it increasingly difficult to hold a conversation with people outside the group, and the insiders pretty quickly stop trying unless they're forced to.  

As insiders begin to use that technical knowledge as the criteria for being admitted to serious conversation, they start losing a lot of important information about what the nonexperts know and are doing. But they don't know what they don't know. So they come to see themselves as the embodied will of the whole group. They forget, in other words, that they are insiders; instead, they think of themselves as the brains of the whole organism. If they know something, then It Is Known. If they do not fully communicate what is happening, this is not an exercise of power to their own ends; it is simply an efficiency measure.  One major feature of this dynamic is that insiders rapidly begin to use their specialized technical knowledge to make the outsiders more pliable for their own purposes, without ever really being conscious that this is what they are doing, or how self-serving and dangerous it is. 

So let me finish by noting what I actually find disturbing about the whole Gruber episode. It is not that voters aren't particularly well-informed; voters could not possibly be well-informed about all the issues that our government deals with. No one can be, which is why, when people ask me my opinions about foreign policy nowadays, I say, "I don't know. Looks like a hard problem to me."

Nor is it that politicians lie to voters. We reward them for lying, because we want to be told that we can have everything we want, plus a pony, and the only cost will be that some undeserving layabout will get their benefits cut off, or some very rich person we don't like will have to sell the second yacht and pay higher taxes instead. We should not be surprised when they tell us exactly that.  I'm not saying that I approve of this, mind you; I'm just saying that the way to stop it is not to tut-tut at the politicians, but for voters to stop demanding that they give us the pretty moon.

No, what really disturbs me is the sight of so many journalists acting like insiders.

I don't subscribe to the mythical ideal of journalist-as-crusader, "afflicting the comfortable and comforting the afflicted." There's a lot of necessary journalism that doesn't fit that model, for one thing; for another, when people do adopt this motto, the targets for afflicting and comforting tend to map a little too easily onto the cultural preoccupations of the journalist demographic. But I do subscribe to the ideal of journalism as fundamentally responsible to readers, not to the governments, businesses or organizations they cover. When it comes to the policy process, we're ultimately supposed to be outsiders, not insiders.  

This ideal is complicated in practice, because the only way to get a lot of information is to be pretty cordial with your sources. There are of course journalists who only deal with outsiders -- whistle-blowers and activists who are at war with some institution. But this introduces the mirror-image problem, because now you know all about the problems that the whistle-blowers are concerned about and don't understand anything about why the organization does what it does. All journalists are to some extent captured by their sources, whoever they are, simply because that's where we get our information, and the information we get is always shaped by someone else's agenda. But I think you can understand that without embracing it; you fight it as best as you can, with broad sourcing and a soupcon of skepticism about everything you are told.  

All of which is to say that on every story we report, we should always be the outsiders; most important, we should always, always identify with our readers over the insider experts. That doesn't mean we can't root for a political party, or a policy, or a company.  We are customers and citizens as well as writers, and we have a rooting interest in our own society.  But it does mean that we should not think of ourselves as part of the policy elite; we should identify ourselves with our readers, who are not only less informed than the insiders, but also less informed than we are.

So when I see journalists saying that Gruber's revelations don't matter because he's just kind of awkwardly saying something that everyone knew, I get a little jittery. I am not "everyone," and neither are any of those journalists. We're a tiny group of people with strange preoccupations who get paid to spend our time understanding and explaining this stuff. The fact that we may have mentioned it once to our readers, in the 18th paragraph, does not mean that readers read it and understood what it meant. (In fact, if you actually interact with your readers, you'll be astonished at how little they remember of what you told them, especially if you didn't go out of your way to headline it. Their minds are already crammed full of information that they need to, you know, live their lives. So they tend to take away a few big bullet points, not the piddling details.)

Obamacare was designed -- as many laws now are -- to exploit this lack of understanding.  It is huge and complex for a reason, and that reason is that this complexity is an effective thicket in which to hide what you are doing. Don't want to go after the tax subsidy for employer-sponsored health insurance? Pass the bizarre and unwieldy Cadillac tax instead. Don't want to talk about rationing care? Create the Independent Payment Advisory Board, with a complicated mechanism for defunding certain treatments and a far-off start date. Use mandates instead of cash payments and taxes. Delay the start date so that the arcana of CBO accounting allow you to claim that it costs less than $1 trillion over 10 years. Strap on unrelated provisions, such as a student loan bill that was due to pass anyway, or unworkable provisions, such as the CLASS Act and the 1099 rule, so that you can claim it is deficit-reducing. The list goes on and on and on, but I am trying not to, so I will stop here.

The net effect of this was that the administration could make claims that were impossible to effectively refute in debate, because doing so required voters to follow lengthy technical discussions, and the readers had whole lives to live and didn't have time to master the arcane art of CBO budget rules.  So politicians gamed the CBO process, and then wielded the numbers as a weapon against critics.  Many journalists also used the CBO score pretty uncritically, because that was a lot easier than walking readers through an abstruse argument.  So stuff got done that couldn't survive public scrutiny, and highly contestable "facts" about things like deficit reduction entered the media stream.  Jonathan Gruber comes along and tells us that this was deliberate, which was obvious to anyone who was paying attention, but not actually much remarked upon in many quarters. 

That politicians should try to exploit the accounting rules was inevitable; that is what people do with accounting rules. I'm not saying that's what the rules are for, or that they do no good; I'm just saying that about eight seconds after your rules are made, some bright Johnny will start figuring out a way to game them.  

What is not inevitable is that journalists should effectively sanction this by saying it's no big deal. We don't have to get elected, after all. And those politicians and policy makers aren't our bosses; the reading public is. We shouldn't act like we're part of the insider clique that decides what other people need to know -- no, worse, that decides what other people do know. If we knew this all along and voters didn't, that doesn't mean voters don't have a right to be outraged. It means that we've lost track of whose side we're on.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net