Great Guys Weblog

Price to Earnings Ratio

2011-11-23T10:11:00.000-08:00

I happened to see the following chart of the Price to Earnings ratio of the S&P 500 and thought it was interesting (click on it to enlarge):

After each of the previous periods with poor economic performance, the P-E ratio had to get down into the neighborhood of 10 for an extended period of time before rapid economic growth resumed. I sure hope that's not the case this time or we have a long, long ways to go before growth resumes.

Pulchritudinous

2011-11-16T21:30:00.000-08:00

There are lots of ways to describe the relationships between words. They can be synonyms, antonyms (I've always enjoyed the fact that "synonym" and "antonym" are antonyms), homonyms, and oxymorons. There's words to describe how words sound together or by themselves such as alliteration and onomatopoeia.

But what I think is missing is a word that describes when a word looks and/or sounds completely different than its meaning.

For example, it's always bothered me that "pulchritudinous" means "physically beautiful" because it's such an ugly word; it looks ugly on paper and it sounds harsh and ugly to hear it. It almost gags me to say it with the "pul" opening and stretching my mouth and tongue which then slams into the hard "ch" causing a bit of nausea and the rest of the syllables aren't much better.

And a related word, "pretty", isn't very pleasant to hear either, though I do find the word "pleasant" to be rather pretty; and "lovely" is simply lovely to see, say, and hear.

Have a lovely day!

Greek Edition of Don't Worry, Be Happy

2011-11-10T17:30:00.000-08:00

I think they're singing the following (to McFerrin's "Don't Worry, Be Happy" tune) in Greece right now...

Here is a little song I wrote
You might want to sing it note for note
Don't worry be happy
You know in Greece they have some trouble
Their interest rates are gonna double
Don't worry, be happy

The problem will soon come to a head
Hide your Euros in your bed
Don't worry, be happy
The Germans say your payment's late
They will own your welfare state
Don't worry, be happy

Look at me I am happy
Don't worry, be happy

Here, I give you Sarkozy's phone number
When you worry call him
His wife will make you happy
Don't worry, be happy

Ain't got no Euros, ain't got no style
Ain't got a future to make you smile
But don't worry, be happy
Cause when you worry
Your face will frown
And that will bring the Euro down
So don't worry, be happy.....

Matt Ridley's Angus Millar Lecture

2011-11-02T10:00:00.000-07:00

An excellent lecture delivered by a skeptic of global warming is available here.

We All Agree

2011-11-01T08:21:00.000-07:00

Scientists continue to be surprised at the "denialism" of "non-scientists" regarding global warming: "I am surprised at the way some of the scientific findings have been rejected in an unscientific manner."

I'm surprised they're surprised (why are they such slow learners?), but I've given it some thought and I've formulated the problem in a way we can all agree:

The world has warmed by some amount, human activity is responsible for some part of that warming, human emissions are responsible for some portion of the human related warming, human emissions of CO2 in particular are responsible for part of the warming due to human emissions in general, and since humans will continue to release CO2 into the atmosphere and there is some amount of warming "in the pipeline", some amount of warming will occur in the future.

Without assigning specific numbers to each bit, this view does not in any way contradict the "scientific consensus". In fact, this covers everybody from those who deny any sort of warming (just fill in zeros for everything) all the way to the most rabid warmenist who is certain that the seas will rise 100 meters and boil us all to death.

Isn't it wonderful that we can all agree? Oh sure, the devil's in the details, and we still have to argue about those pesky percentages and amounts of warming. But the other fun thing is that if you ask any two scientists to independently pick numbers, they'll most likely pick somewhat different numbers.

Therefore, we have an overall general agreement of everybody and a specific consensus of nobody. Perfect! Science can progress once again.

Improved Quality, Reduced Cost - NOT!

2011-10-06T09:26:00.000-07:00

Just in case you think that the government has an interest in doing things efficiently:

We could have improved the quality and reduced the cost of the healthcare system by $900 billion…I said we would do it for free to prove that it works. They turned us down.

–Samuel J. Palmisano, the Chairman of the Board and CEO of IBM

Hat Tip (and video link for quote): John Goodman's Health Policy Blog

Economic Creation Myth

2011-09-28T08:00:00.000-07:00

From the dawn of man until just a couple hundred years or so ago, humans lived a hand-to-mouth existence, with average global per capita consumption about $3 per day (in today's dollars). While there were important inventions over the millennia like the plow, paper, and gunpowder, and some of those inventions did boost production, they came relatively infrequently, and population growth kept humanity limited to its meager rations.

Suddenly, somewhere around 1800, the rate of innovation exploded, catapulting humanity away from the Malthusian limit and the average global per capita consumption is now $30 per day. And in the west, we've done far better, so much so that we consider consumption limited to a mere $30 per day to be mired in poverty!

The rapidity and magnitude of material progress can't be stated often enough or too strongly. At least an order of magnitude increase in average per capita consumption in less than a dozen generations! It's astounding and yet most people rarely consider it.

So how can we explain the creation of the goose that laid this golden egg of prosperity? Incredibly, nobody really knows and many narratives really don't fit history very well. As a result, we're each entitled to our own economic creation myth about where this prosperity came from. In fact, more than that, it's imperative that we form a framework to explain it because the Soviet Union and Communist China proved beyond a shadow of a doubt that it's possible to kill the golden goose.

Nobody knows what caused the exponential explosion of entrepreneurial endeavors, but there are a lot of things that we know didn't cause it. For example, it wasn't government funded education because there wasn't any; it wasn't government funded social safety nets because there weren't any; it wasn't socialism of any kind - Marx hadn't been born yet; it wasn't government funding of infrastructure - no increase (from very low levels) there; it wasn't government funding of research or development - no increase there either; it wasn't that suddenly civilization became stable or that urban population density reached a critical mass because China had both those characteristics for millennia; it wasn't because of an increased savings rate or capital accumulation - there's just no evidence for that; it wasn't just one or a handful of critical inventions - it was instead a massive number of incremental innovations in business process, trade, and lastly technology; it wasn't sudden discovery of natural resources as this was again very incremental; and it wasn't imperialism or slavery, in fact both waned as innovation exploded.

So what's your Economic Creation Myth?

Not Free to Die

2011-09-20T08:39:00.000-07:00

Recently, a friend sent me the following email containing a link to a article by Paul Krugman:

Bret, as you know, I often find myself well-aligned with Krugman's thinking. Here's a recent article by him that invokes Hayek, so I immediately thought of you: http://www.nytimes.com/2011/09/16/opinion/krugman-free-to-die.html?_r=1&ref=opinion .

Glad to have your thoughts when you have time.

The following is my response.

In the past I've mentioned to you that I don't have a big problem with government (possibly even the federal government) covering at least some classes of catastrophic health expenses. My wife (who works in health care administration) calls this the "doughnut" approach where the government covers some preventative care (the "hole" of the doughnut), each individual is responsible for routine expenses up to some maximum (somewhere between $5k - $20k per year and this is the main part of the doughnut) that can be either paid directly out of pocket or covered by auxiliary private insurance purchased by the individual, and the government covers expenses beyond that (the "outside" of the doughnut). It's as if everybody has one of the high-deductible plans with some preventative care (e.g. vaccinations and the like) thrown in.

I would do this for an overwhelming practical reason. As my wife also points out regularly, some people have health insurance, others have sufficient assets to pay, and others have "coverage" such as medicaid. Whether or not you have insurance, assets, or coverage, if you show up at an emergency room with a life threatening condition, they will treat you, regardless of ability to pay. Why? Because in the seconds or minutes that action needs to be taken to save you, there isn't the minutes, hours, or days to determine ability to pay so they have no choice but to go for it. This is a strictly practical consideration and really has nothing to do with compassion.

If, during the treatment, you end up in the ICU for 6 months, nobody will pull a life support plug, even if you can't pay. Not me, not Ron Paul, not the crowd, and certainly not the medical staff. As a society, we have a hell of time pulling the plug on someone who's in a brain-dead coma for ten years, much less someone conscious with terror in his eyes as you go for the plug. Not going to happen.

Because it's not going to happen, and absolutely everybody has this access regardless of ability to pay, the money ought to come from a public source. Currently, it comes from the hospital increasing fees on everybody else. This means that a relatively poor person who plays it safe and buys health insurance (or who is paid less to fund health insurance out of their compensation package) is subsidizing the relatively high earning 30-year-old man in the example. Whether or not the poor should carry their own weight, I certainly don't think that they should be subsidizing higher-income people, so funding catastrophic health care (i.e. very high deductible health care) from the progressive tax system makes sense and is the only solution that I see that makes sense. That may make me a bad libertarian, but I don't much care.

On to Krugman's column. Clearly, Blitzer, Krugman, and Paul all assume that it is possible to deny life saving coverage in the emergency room and ICU, so let's assume that from here on out, even though it's not true. You wrote that you "often find [your]self well-aligned with Krugman's thinking", but you didn't mention if you were aligned with his thinking in this particular article. I'm trying to imagine which of the attitudes and opinions he expresses in this article that you might agree with.

The first opinion expressed is that one ought to demagogue issues and demonize and ridicule opposing viewpoints. His "Free to Die" title initiates the demagoguery from the very start and is an eerie echo of the "Death Panels" quip by that great demagogue of the right, Sarah Palin. Everyone is "free to die" and indeed we all will die at some point, though ironically, as I've described above, in the hypothetical example the 30-year-old man isn't free to die. Both Palin and Krugman are referring to the unavoidable fact that some entity somewhere, whether individuals or government departments need to decide how to allocate non-infinite resources. That does mean that some people will die at different times than they might have otherwise if there were unlimited resources. "Free to Die" and "Death Panels" are just demagoguery meant to appeal to passion and stifle rational debate. Is demagoguery the part of Krugman's (and Palin's) thinking that you're aligned with?

The second opinion expressed is that "American politics is fundamentally about different moral visions." I don't think the visions are fundamentally moral visions, rather they are visions of the capabilities and motivations of the human animal. Sowell does a good job describing the visions from a fundamental perspective in "A Conflict of Visions". Have you read that book yet now that summer has passed? The optimal level of government involvement in the decisions of individual citizens is inextricably linked with the different visions. From reading Krugman's articles over the past years (especially within the past decade), it seems he's never met a government intervention in personal affairs that he didn't like and he seems to call for ever expanding regulation - not only for business, but for personal affairs as well. Is this the thinking you're aligned with? Should the government limit risky activities like parachuting, driving a car, motorcycling, bicycling, playgrounds for children (it's already doing this), or poor eating habits (think Bloomberg's salt reduction regulation in NYC) or should individuals be allowed to weigh the risks with benefits and make their own decisions, both for themselves and their children?

Or is it just for the specific area of health-care? Should the 30-year-old man (why does it matter that it's a man?) in the article be required to buy health insurance in order that he's forced to do the "right thing"? (I argued above that as a practical matter, there's really no choice but for publicly supplied catastrophic health insurance, but now we're back to the theoretical/philosophical argument in the hypothetical which can have a completely different answer). Should the federal government intervene if he then gets sick and can't afford to pay for care required to save his life? Only a little more than 1 in 1,000 30-year-olds die in a given year from all causes. The other 999 that didn't buy health insurance had money to do other things like make or save for a down-payment on a house, go out to dinner more with family or girlfriend or date a prospective wife, travel, enjoy entertainment, etc. Is it really the government's place, or Krugman's, or yours, to balance the trade-offs and make the decision for each and every individual? Should everyone be required to cling to a relatively mediocre life or might it actually be rational and beneficial to some to decide to take the risk, even if there's some small chance of death? Clearly, according to Krugman, the answer is no. Is that where you agree with Krugman?

From the articles of his that I've read, Krugman also has never met an excuse for raising taxes and/or increasing government size that he didn't like, and certainly extending government health care entitlements fits in this category. In other words, it's impossible to tell whether he actually cares about health care or whether it's just an excuse to give the government yet more money and power. Perhaps this is the thinking you're aligned with? What if, instead of specifically subsidizing healthcare, we simply gave the money to the poor such that they could buy health insurance if they wanted, or they could spend it on other things? I wonder how many would choose to spend it on health insurance? My guess is that a very low percentage would get the health insurance - even those with children. Why? Because they might think it better to buy other things for their children like piano lessons, some travel to see the world, nicer clothes, better food, better and more entertainment, college education, etc. The trade-off is a more mediocre, safer life or a most probably better life with some risk. And since we've decided that everybody must have health insurance, a greater slice of GDP will go to health care, even if many or most of the poor would've preferred it went to other things.

Lastly, I completely disagree with Krugman's definition of "compassion" (and yours if this is where you agree with his thinking). First, the mechanism is inherently not compassionate. When group A takes from group B to give to group C, it matters little if group A is marauding bandits taking from townfolk to give to their favorite prostitutes or the government taking non-voluntarily from one group using its full force and authority to give to another group it favors. It's only compassionate and charitable in my definition if group B gives voluntarily to group C. It may be necessary for the government to force redistribution (and as I wrote in the beginning of the response I think that's the case), but it has nothing to do with compassion. Second, Krugman says he cares about children in Texas (color me skeptical since he seems to dislike everything about Texas), yet he doesn't mention children in South America, Africa, South-East Asia, etc. Why not? Why are Texas children more important? By increasing government involvement in health care, we're likely going to slow down innovation that would eventually help the billions of existing and future poor children and adults, both within the United States and elsewhere. How is that compassionate? Krugman writes "the weak economy continues to wreak havoc on American lives". Isn't it possible that Obamacare is one of the reasons for the weak economy?

In summary, I'm wondering which of the following you agree with Krugman: the imperative to demagogue issues and demonize opposing viewpoints; the intrusion of the government into the private resource allocation decisions of individuals, whether universally or just for health care; the dishonest use of emotional issues to facilitate higher taxation, more regulation, larger government, and greater redistribution even if the those receiving the benefits would rather have other kinds of aid; that forcibly taking resources from people is somehow compassionate; or that the lives of poorer Americans (who are relatively well-off compared to much of the rest of the world) are more important than the poor elsewhere in the world?

On to the Hayek quote. Here's the encompassing paragraph:

"Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provisions. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance -- where, in short, we deal with genuinely insurable risks -- the case for the state's helping to organize a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to supercede it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective..."

I'll have to admit I didn't recall that paragraph and had to look it up. I'm also somewhat surprised by it. Nonetheless, there are some important caveats. The first is the concept of "genuinely insurable risks". That would imply significant limits to the health care provided and I think this aligns with the "doughnut" plan I described above. It doesn't look like Hayek believes that all medical expenses should be covered (or covered with a copay).

Also note that the case is for the "state's helping to organize" the system. I'll admit that I'm not sure what he had in mind, but he doesn't advocate for the state to run said system.

Last, he notes that those "wishing to supercede" "the competitive system" will want to use this system of social insurance as an excuse to do so and may "make competition more or less ineffective". From my perspective, a lot of the effort looks like it's specifically aimed at make competition more ineffective.

I'm not sure what his view of Obamacare would be, but I doubt it would be favorable as it goes well beyond an insurance function, the state will likely end up running the system, and it will make competition in health care yet more ineffective.

Thanks,
Bret

Flying on 9/11/11

2011-09-12T11:54:00.000-07:00

I was on three flights on the 10th anniversary of 9/11: Adelaide to Sydney, Sydney to Los Angeles, and Los Angeles to San Diego. Every flight was completely full, there was no extra security or any sign of worry, and the immigration and customs lines into the United States seemed faster than usual.

The memory of 9/11 seems to be mostly faded as far as travelers are concerned.

Consent of the Governed

2011-09-01T22:29:00.000-07:00

Some people think that the survival of a democracy becomes questionable or should be questioned if it loses the consent of a substantial majority of the governed.

"Governments are instituted among Men, deriving their Powers from the Consent of the Governed, that whenever any Form of Government becomes destructive of these Ends, it is the Right of the People to alter or to abolish it, and to institute a New Government....it is their Right, it is their Duty, to throw off such Government, and to provide new Guards? for their future Security."
-- Thomas Jefferson

I rather doubt that at this point westerners of any sort could summon the energy to follow Jefferson's advice and redo government, regardless of whether or not the government has the "Consent of the Governed." As a result, I don't think the survival of our government is in danger. However, I do think it's harder for a country to thrive without the "Consent of the governed" (depending a bit on the exact definition of "consent").

A recent Gallup poll finds that 84% of Americans disapprove of the job Congress is doing and I think that approval is a plausible proxy for "consent", or at least close enough that it's worrisome.

The problem is that roughly half of those disapproving think that the government isn't anywhere big enough (i.e. "doing" enough) and that the other half think the government is Way. Too. Big. There is such a wide chasm between the two sides that, as a result, I don't think America will ever again have the consent of the vast majority of the governed.

I'm confident America will survive, at least for a while, but I question whether or not it will thrive.

Update: Apparently congressional approval was a very good proxy for consent of the governed.

Instapundit's Fingers to Lance Armstrong's Tweet

2011-08-31T07:39:00.000-07:00

On August 30th, Instapundit asks: IS IT PARENTAL NEGLECT to let your kid bike to school?

Within 24 hours the story is around the globe and Lance Armstrong, the famous Tour de France winner, tweeted his opinion about the story: "That's ridiculous. I'm glad I was so "neglected". #thanksmom"

And mainstream media is gonna compete with the reactive ability and rapid, targeted, viral dissemination of these alternative information channels how?

Ever More Taxation

2011-05-20T08:51:00.000-07:00

Recently, a friend pointed me to an article that made the rather surprising claim that "by historical standards, what we pay in federal taxes - rich, poor and everyone in between - has gone down."

Surprising, and not true.

I conveniently happened to have a table lying around that shows historical federal tax revenue. In constant 2005 dollars, 50 years ago (in 1960), federal government revenue was $631 billion. In 2010, it was $1,919 billion (i.e. $1.9 trillion) or three times as much. So by historical standards, we're paying a hell of a lot more on average.

There are more people now, so I also did the calculation on a per capita basis. In 1960 the federal government revenue per capita was $3,518, while in 2010, it was $6,215, or nearly double. Again, these are in constant 2005 dollars. I graphed per capita revenue and it basically shows relentless increases in per capita (and total) collected taxes. There is a bit of chop (i.e. the trend is not perfectly smooth), but it's definitely clear what the trend is - up, up, and up.

So while we spend about the same or less per capita for most goods and services due to increasing technology and efficiency, my question is why do we need to be taxed twice as much per person to fund government as we did 50 years ago? Why is the baseline assumption, even among tea partiers, that we should be taxed a constant percent of GDP, which means increasing taxes forever (assuming GDP keeps growing), instead paying the same amount of taxes per person over time (adjusted for inflation, of course)? Why is the base assumption that government should expand (beyond population growth) forever? Do we really need ever more taxation, ever more government regulation, ever more government intrusion, and ever more government redistribution?

Just wondering.

Musical Trespassing

2011-05-06T11:05:00.000-07:00

A while back, I was trying to explain to my daughter why illegally copying music was stealing. To my surprise, she simply could not see why it was considered stealing. Since she's an intelligent, fairly sophisticated, and reasonably honest person, her response made me question my assumptions.

I've since decided she's right. Copying music may be somewhat like trespassing, but it's almost nothing like stealing.

The intangible property of value that you own when you create music is the copyright, not the song itself. The copyright can be bequeathed in your will, sold, etc., much like tangible property. On the other hand, you don't directly have ownership in any of the copies of the song.

When I copy a copy of a copy of a copy of a copy of a song, I'm not stealing or directly affecting your ownership of the copyright in any way. This is very similar to when I walk across your land uninvited, I'm not stealing your land or directly affecting your ownership of the land in any way. I merely trespassed, which while illegal in the US (but not other countries such as Sweden), is a much different level of moral and legal breach than theft.

Indeed, unlike laws against stealing which are derived from fundamental western morals ("thou shall not steal"), copyright is only a legal issue, has no objective or traditional moral component, should only exist only to further the arts and sciences (according to the U.S. Constitution), and is really only even relevant if a substantial majority of people believe it has a net benefit to society (which, to the dismay of the record companies is becoming less and less true by the day).

I think that calling copyright violations stealing is derived from the legal marketing of the recording industry and other stakeholders in monopoly rents from copyright. After all, what better way to get the public on your side than to try to assign an erroneous but much morally stronger word to the violation of a law you strongly care about.

My daughter and her friends are right, copying is somewhat like trespassing, but not at all like theft.

Ponderance

2011-04-29T10:56:00.000-07:00

The vast majority of people have an above average number of legs.

Faster Than The Wind

2011-03-24T19:15:00.000-07:00

In my opinion, One Man's Quest to Outrace Wind is a great article. It's well written, tells a great story with plenty of suspense, and is educational.

The core topic is "DDWFTTW", which stands for "Directly DownWind, Faster Than The Wind" and refers to a vehicle or vessel powered only by the wind. Until recently, it had always been thought to be impossible to build a wind-powered vehicle that could go faster than the wind while going directly down wind. That's because once the platform reaches the same speed as the wind, it seems like there would not be any wind forces acting on it, so how could it go faster if it's powered only by the wind?

Someone figured out how to do it and proposed his concept on the Internet.

And he was promptly ridiculed and called an idiot by almost everyone including physics professors.

He built a small prototype that proved the concept.

And he was promptly ridiculed and called a fraud and an idiot by almost everyone including physics professors.

He and a very small group of supporters managed to raise $15,000 to build a full size version that could carry a person. They demonstrated it to the Land Sailing Association where it clearly went directly down wind much faster than the wind.

Finally, most people believed him!

What's interesting to me is that the approach is very, very clever, but it's not really that complex, yet a lot of people just refuse to believe it, even after it's been clearly demonstrated.

No one is so blind as those who refuse to see.

Ahoy Matey

2010-09-19T10:14:00.001-07:00

The really important news of the day is that it is International Talk Like a Pirate Day! Arrrrrrr!

Higher Education Loan Bubble

2010-09-16T21:05:00.000-07:00

Instapundit has had a number of posts regarding the supposed higher education bubble. However, to me, the most disconcerting part is the massive amount of student loan debt that exists (it exceeds total credit card debt now) and the onerous terms that are attached to that debt as shown by the graphic below.

Infographic by College Scholarships.org

A whole generation has mortgaged their future (literally). Where are tomorrow's entrepreneurs going to come from if nobody can afford to take risks?

So you want to be simpleminded?

2010-09-16T14:00:00.000-07:00

The world is very complex. It generally pays to look at things from many different perspectives drawing upon history, data and theory. My experience is that very few people are willing to do that, especially in a political discussion. Well, if anyone insists on being simpleminded...

via redstate

h/t instapundit

Flawed Metrics

2010-09-15T20:43:00.000-07:00

One of the repetitive debates throughout society is when to leave things to individual action and when to have government intervention. Eric Raymond points out that flawed and incomparable metrics are sometimes used to compare private and government action. In his post he focuses on an example of a "collective-action problem" which anti-statists often have to answer for.

Our key insight is a pessimistic one: this is the sort of situation which, though individuals and markets don’t handle it well, isn’t actually handled well by governments either. The fundamental mistake of statist thinking is to juxtapose the tragically, inevitably flawed response of individuals and markets to large collective-action problems like this one against the hypothetical perfection of idealized government action, without coping with the reality that government action is also tragically and inevitably flawed. [...]
The second level of error, once you get this far, is to require that the market action achieve a better outcome without including all the continuing, institutional costs of state action in the accounting. So, for example, other parts of the continuing costs of accepting state action to solve this individual toxic-exposure problem in the Deep Horizon aftermath is that Americans will be robbed every April 15th of five in twelve parts of their income (on average), and be randomly killed in no-knock drug raids. And it’s no use protesting that these abuses are separable from the “good” parts of government as long as you’re also insisting that the prospect of market failures is not separable from the good behavior of markets! [...]

Rational anarchists like myself know that stateless systems will have tragic failures too, but believe after analysis that they would have fewer and smaller ones.

If this seems doubtful to you, do not forget to include all the great genocides of the 20th century in the cost of statism.

In other words, don't take imperfect and possibly even very bad situations and make them even worse because you assume that individuals who act badly in the private sphere will suddenly become virtuous when they are part of the government.

Tea Party Organization Phenomenon

2010-09-15T20:36:00.000-07:00

Whether or not you like the Tea Party's politics, and whether or not they succeed in achieving any of their objectives, I find their "Radical Decentralization" fascinating. Jonathan Rauch has documented the Tea Party's structure in a recent and well written article.

Making it more difficult than it needs to be

2010-08-29T13:12:00.000-07:00

An IBD editorial nails it pretty well right here:

Jobs: Obamanomics has done more than just keep unemployment high during a modest recovery. It may also be keeping high joblessness permanent by raising the costs to businesses of hiring new workers.

July's 9.5% unemployment level was bad enough. But the real problem is that the private-sector jobs machine, which is usually going full tilt at this point in a recovery, now seems to be broken.

To many, it's becoming clear that if President Obama's radical job-killing agenda stays in place, job growth will be nonexistent.

One of America's great advantages has always been its flexible, private-sector labor markets. From 1985 to 2008, U.S. unemployment averaged 5.6%. For the six largest economies in the European Union, the average rate was 34% higher, at about 7.5%.

Yet many of those countries now have jobless rates lower than ours. Why? They've been dropping Keynesian stimulus as a strategy and moving more toward cutting spending and, in some cases, cutting taxes.
Businesses today face rising burdens — from ObamaCare, the financial overhaul, the expiration of tax cuts for entrepreneurs, the threat of new energy taxes or the surge in growth strangling regulations on business — that discourage hiring.

"The real threat to a robust recovery on the labor side," Gary Becker, a Nobel Prize-winning economist, warned recently, "has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits."

It's never been costlier to hire and keep a worker employed. And as ObamaCare kicks in and Bush's tax cuts expire — not to mention the huge tax hikes that will be needed to make Social Security and Medicare solvent — businesses will simply quit hiring.
This Keynes-on-steroids model has been tried before, in Europe. It didn't work. It led to permanently high levels of joblessness — what economists call structural unemployment.

A recent peer-reviewed study in Sweden found that for every 100 new jobs government creates, 114 are destroyed in the private sector. Similarly, a French study of data from OECD countries from 1960 to 2000 discovered, on average, "creation of 100 public jobs may have eliminated about 150 private sector jobs."

In short, it was a disaster that the U.S. is now duplicating. The next Congress should have no greater priority than reversing it all.

If the european statists realize that at some point the state starts to crowd out the private sector in a destructive manner, shouldn't we?

The very nature of an economy

2010-08-29T13:01:00.000-07:00

Arnold Kling gives us his ideas about economic circumstances here: (heavily excerpted)

In the United States, the economic mystery of 2010 is the persistence of high unemployment, in spite of the application of the stimulus treatment that follows the prescription of the prevailing Keynesian orthodoxy. I wish to offer an alternative to that orthodoxy.
For the followers of John Maynard Keynes, economic activity consists of spending. When economic activity slows down, their prescription is to increase spending by government, businesses, consumers, or all three. Instead, what I like to say is that “economic activity consists of sustainable patterns of specialization and trade.” This is my mantra of macroeconomics.

Here is a simple pattern of specialization and trade: Suppose that all of us eat grain and fruit, which we could grow for ourselves. If some of us have land better for fruit trees, while others have land better for growing grain, then specialization and trading can pay off. It is inefficient to waste good tree land by growing grain on it and to waste good grain land by planting trees on it. Instead, economic activity gives all of us more to eat.
What I mean by a sustainable pattern of specialization and trade is that everyone involved would voluntarily continue to follow the pattern. In accounting terms, profits are a sign of sustainability. If the accounts show a profit, then the value of output exceeds the cost of input. If not, then the pattern is not sustainable.

As conditions change, the patterns of specialization and trade evolve. For example, improvements in transportation make new trade patterns sustainable. Recall the changes brought about by ocean-crossing sailing ships, then steamboats, then railroads, then the automobile and the airplane. As new patterns become sustainable, older patterns become unprofitable and therefore unsustainable. The truck replaced the horse-drawn cart.
Patterns of specialization and trade have become more complex over time. The example of fruit pickers and grain harvesters could have been used hundreds of years ago. But many of the jobs that form today's pattern of specialization and trade are less than 50 years old—or younger.
The contemporary pattern of specialization and trade can be described as roundabout production. I first heard the term in a course on capital theory that Alan and I took from Paul Samuelson. Samuelson was explaining the Austrian theory of capital, as articulated by Eugen von Böhm-Bawerk, who developed his analysis more than a century ago.
The idea of roundabout production is to use intermediate activities to increase final output.

The trend is for the proportion of people employed in final-stage production to get smaller and smaller. Two or three generations ago in the United States, agricultural workers and manufacturing production workers made up half of the labor force. Today, that figure is less than 10 percent. However, thanks to roundabout production, we can produce more manufactured goods and more food than ever.

Much of today's American workforce is engaged in roundabout production, which Böhm-Bawerk equated with capital. There is no longer a meaningful distinction between labor and capital. Labor is capital.
If labor is capital, then we have lost the automatic tight connection between spending and employment. Firms can vary their output with little or no variation in employment. This explains how we can have a “jobless recovery,” meaning a large percentage increase in output without a comparable percentage increase in employment. For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently. The return on an investment in workers may take as long or longer to realize as the return on investment in a machine. The return on investing in workers may be at least as uncertain as the return on investing in equipment.
The phenomenon of roundabout production suggests a story for the current recession. The economy was suddenly caught in an unsustainable pattern of production, which involved too much housing construction in the “sand states” of Florida, Nevada, and California as well as too much financial activity related to mortgages and mortgage securities.
The suddenly unsustainable housing and mortgage boom comes atop the ongoing obsolescence of various patterns of specialization, as the Internet and globalization continue to foster new forms of organization and competition. The result of the boom-bust cycle superimposed on the ongoing obsolescence is to overload the market's ability to reconfigure production patterns so that workers are fully employed.

The market needs to undertake a recalculation in order to deploy workers in a new, sustainable pattern of specialization and trade. The process involves gradual, decentralized trial and error. Firms need to be launched by entrepreneurs, who will make risky investments in employees. The failure rate will be high, but eventually the successes will have a cumulative effect that brings about more economic activity.

The challenge is made difficult by the increasing specialization of labor-capital. The problem of matching skills with needs in roundabout production is much more complex than the problem of adding or subtracting workers in final-stage production.
The Keynesian prescription for a recession is to increase government spending. Even if the resulting output is not valuable (the proverbial digging ditches and filling them in again), the thinking is that this will stimulate productive output. Again, this is based on the theory that economic activity is spending. Supposedly, spending will encourage more spending, through the “multiplier” effect.
From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market's recalculation problem more confusing. It will delay long-term recovery, rather than hasten it.
What needs to emerge are new, sustainable patterns of specialization and trade. Government does not have much incentive to create sustainable patterns of specialization and trade. In fact, the political system tends to favor subsidies to outmoded and unsustainable businesses.

Government could reduce the cost of investing in labor-capital. If it can be done in a fiscally responsible way, it would help to reduce the marginal tax rates on investment (the corporate profits tax) and employment (the payroll tax). This may require offsetting tax changes, such as eliminating the mortgage interest deduction or the deductibility of employer-provided health insurance.

On the whole, the best way to help the process of market recalculation and the creation of sustainable patterns of specialization and trade may be for government to get out of the way.

Well there are some things that might help but policy makers have chosen not to do them. Many of the things that have been done are counterproductive.

It's not pretty to watch

2010-08-21T11:47:00.000-07:00

My impression is that the current president is moderately bright and moderately clever in a narrow way. I see little evidence of very high intelligence or impressive breadth and depth of knowledge. Jennifer Rubin captures things rather well:

To be blunt, Obama suffers from a lifetime of others excessively praising his intellect. It insulates him from ideas and facts that conflict with his pre-existing liberal rubric (so “every economist” believed his stimulus would work). It leaves him unprepared to engage in real debate with informed opponents (e.g. the health-care summit). It skews his understanding of how geopolitics works, as he imagines that his own wonderfulness can sway adversaries and override nations’ fundamental interests (the Middle East).

It’s a deadly combination — intellectual arrogance and lack of sympatico with the public — that leads him again and again to stumble. And when his shortcomings lead to embarrassment or failure, he strikes out in frustration — at Israel, at the media, and at the American people. The image of himself clashes with the results he achieves and the reaction he inspires. No wonder he’s so prickly. You’d be, too, if everyone your entire life had told you that you were swell but now, when the chips are down and the spotlight is on, you are failing so badly in your job.

(ht/instapundit)

We the People vs. The Elites, yet again

2010-08-20T13:58:00.000-07:00

Thomas Sowell holds forth:

At the time when it was written, however, the Constitution was a radical departure from the autocratic governments of the 18th century. Since it was something so new and different, the reasons for the Constitution’s provisions were spelled out in the Federalist, a collection of essays written by three of the writers of the Constitution, as a sort of instruction guide to a new product.

The Constitution was not only a challenge to the despotic governments of its time, but has been a continuing challenge — to this day — to all those who think that ordinary people should be ruled by their betters, whether an elite of blood, or of books, or of whatever else gives people a puffed-up sense of importance.

It is no coincidence that those who imagine themselves so much wiser and nobler than the rest of us should be at the forefront of those who seek to erode constitutional restrictions on the arbitrary powers of government. How can our betters impose their superior wisdom and virtue on us, when the Constitution gets in the way at every turn, with all its provisions to safeguard a system based on a self-governing people?

To get their way, the elites must erode or dismantle the Constitution, bit by bit, in one way or another. What that means is that they must dismantle America. This has been going on piecemeal over the years, but now we have an administration in Washington that circumvents the Constitution wholesale, with its laws passed so fast that the public cannot know what is in them, its appointment of “czars” wielding greater power than Cabinet members’, without having to be exposed to public scrutiny by going through the confirmation process prescribed by the Constitution for Cabinet members.

Those ideas are captured rather well in this video:

News You Can Mews

2010-06-09T08:07:00.000-07:00

I wonder if this brain parasite transmitted from cats could literally be the liberal disease:

The parasite, Toxoplasma gondii, has been transmitted indirectly from cats to roughly half the people on the planet, and it has been shown to affect human personalities in different ways.
Research has shown that women who are infected with the parasite tend to be warm, outgoing and attentive to others, while infected men tend to be less intelligent and probably a bit boring. But both men and women who are infected are more prone to feeling guilty and insecure. [...]
Can a common cat parasite account for part -- even if only a very small part -- of the cultural differences seen around the world? [...]
Toxoplasma, he notes, is "frighteningly amazing."
It can change the personality of a rat so much that the rat surrenders itself to a cat, just as the parasite wanted.
The parasite's eggs are shed in a cat's feces. A rat comes along, eats the feces, and becomes infected. The behavior of the rat undergoes a dramatic change, making the rat more adventuresome and more likely to hang out around cats.
The cat eats the rat, and the parasite completes its life cycle.

So the next time you think it's a good idea to appease murderous islamo-fascists or turn over complete control of our lives to the government, perhaps you should see if you're infected by this parasite.

Hat Tip: Tim Blair

That Was Lucky

2010-06-09T08:00:00.000-07:00

Was it a miracle when the fronds of a palm tree broke his fall?

Authorities and witnesses say that a palm tree likely saved the life of Joey Williams, a 4-year-old boy who fell Friday morning from a 17th-floor balcony after chasing a balloon through his apartment home at the Doubletree Grand Hotel Biscayne Bay.
The boy opened a sliding glass door, climbed over a covered balcony railing, bounced off the crown of the palm tree and safely landed on the ``dirt surface'' of an area surrounding the hotel's 10th-floor pool, said Kenia Reyes, a Miami police spokeswoman.

``It's a miracle -- he doesn't appear to have broken a bone,...''

Maybe. In which case, as James Taranto points out, it's good to have fronds in high places.

I just love it when real news sets up for full groan humor!

How Lobbying Works

2010-05-25T08:42:00.000-07:00

Politicians need lots and lots of money for their election campaigns. Corporations want legislation that discourages competitors and boosts profits. Lobbyists, with the help of campaign finance laws, provide the match making between the politicians and corporations.

The executives of a corporation hire a lobbyist. The lobbyist figures out which Senators and Representatives can write and/or get legislation passed. The executives (and underlings) donate money to those Senators and Representatives and even the President in order to further that process. Because these donations are public information, the lobbyist is able to compile a list of donations from the employees of that corporation and calculate a total. The lobbyist goes to the politicians and points out the "generosity" of the corporation. The politicians push legislation through that benefits the corporation.

The politicians, the lobbyists, and the corporations win. The taxpayers lose.

There are some interesting subtleties. The corporation does not demand or require that anybody donate to various campaigns. That would be illegal. Indeed, they may not even suggest it directly. Instead, it's known through the grapevine (but certainly not officially) that your campaign contributions will be monitored (and can be because it's all public information).

When describing corporation strategy and business development in meetings and in company newsletters, the politicians that can help the company are identified. You then donate to those campaigns. You get raises and bonuses that are partly based on reimbursing you for those political donations. Again, not officially, but that's how it works. You don't have to do it, but it will adversely affect your compensation and career if you don't.

It's funny to me that most people think that making donation information public makes politics somehow more fair when, in fact, the whole purpose of doing it this way was to enable corporations to direct their executives and employees to support various candidates. If campaign contributions were secret, it would be much harder to do.

That's why a Media Matters "correction" (via an Instapundit post and Reason article) is so silly. The "correction" was that various articles in the main stream and non-main stream media were incorrect when they stated that Obama received a huge amount of money from BP. According to Media Matters, the money didn't come from BP, but rather from employees of BP.

It's pretty much the exact same thing!

The Warming Phoenix Rises From the Ashes

2010-05-24T14:38:00.001-07:00

The argument for doing something about climate change is, in my opinion largely based on "appeal to authority". In other words, if climate scientists say something is so, then it must be so.

That's why Climategate was so damaging to the warmenist cause. The credibility and therefore the authority of the main IPCC scientists was called into question. Without that credibility, the warmenists main argument was damaged and public support for doing something disintegrated.

The National Research Council was funded by Congress to study climate change and has now produced 3 reports totalling over 800 pages. I've scanned the first 100 pages and it looks to be nearly a complete regurgitation of the IPCC's last report (AR4), except that at the end of many sections the primary conclusion was that new bureaucracies and scientific organizations should be created to continue studying climate change.

How clever! Since the IPCC's credibility was damaged, why not take more or less the same material and have some scientists with reputation intact spout the same old alarmist stuff. Now the warmenists can appeal to authority again and march forward to world domination or whatever their goal is.

The credibility of the IPCC is dead - long live the credibility of the National Research Council!

Mohammed

2010-05-20T09:29:00.000-07:00

My attempt at Mohammed for Everybody Draws Mohammed Day.

The Future of Recorded Music

2010-05-01T11:14:00.000-07:00

Once upon a time, I wrote, arranged, played the instruments for, mixed, and produced 17 songs on two CDs (here and here - they're free!). I really wrestled with whether or not to try and make money from those efforts for, um, well 15 or 20 seconds - 25 seconds top. Okay, maybe "wrestled" is a little too strong, but hey, I did at least contemplate it.

The reason I decided not to even try to make money is that the success of a band (or artist) and its music is only partly dependent on the music. More important is the marketing: the shows the band does (choreography, pyrotechnics, stunts, and other entertaining moments), the persistence of the band staying in the public's consciousness, the news and buzz about the band (personalities, arrests, drug use, etc.), and so forth. Sure, the music of some popular bands is pretty good, but some popular bands have pretty marginal musicians with pretty marginal songs. In any case, the music of popular bands is no better in any objective sense than the music of many unknown bands.

Relatively recently, I stumbled upon an interesting blog called Cerebellum Blues. Jeff Shattuck, the blogger, suffered a brain injury and woke up with a "rekindled" desire to write songs. He's now recorded his first album and is wrestling with how to make money from his efforts. He's spending a lot longer than 25 seconds thinking about it though. That got me thinking about it again as well.

Unfortunately, I've come to the same conclusion: even though his songs are, in my opinion, quite good, he's going to have a tough, tough time of it. Especially since he can't really do the concert thing due to persistent dizziness due to his brain injury.

The standard business model assumes that the demand side of the equation is the people who want to listen to music and the supply side of the equation is those involved in producing the music to satisfy demand.

However, in the case of music, demand and supply are also inverted in some sense. Humans are driven to create, and creating music is particularly fun and satisfying (at least for people like me). It's even more satisfying when people actually listen to your music. For example, I can't imagine that even a single musician or song writer would say something even vaguely like, "I couldn't care less if people listen to my music as long as I make money at it." Everybody wants to write and play for other people. That's a fundamental need.

In the case of that need, the demand is for people to listen to your music. The supply is then those people who are willing to listen to that music. In other words, regarding satisfying the need of the musician or song-writer to have others listen to his or her music, that musician should be paying the listeners, not the other way around.

However, first let's consider supply and demand from the more traditional perspective. Even from this perspective it's tough and getting tougher to make money solely based on recorded music.

Supply

Let's say approx 1 in 10,000 people has wherewithal and motivation to write and record songs with no expectation of generating any income from the recording those songs. Why might these people do that?

1.) Musicians create "demos" to get gigs at various venues (vast majority).
2.) Serious hobbyist (me for example, also silicon-valley entrepreneurs after IPO).

I'm guessing that there are on the order 100,000 such people in the United States alone, and soon there will be 1,000,000 such people worldwide. Let's say each writes 10 songs a year. That's 10,000,000 new songs per year. However, songs are forever (for example, I noticed that my 13 year old daughter has a 40 year old album by the Beatles on her iPod). So there will be around 1 billion new songs created per century.

Cost of Supply

Each song can be replicated for tiny fractions of a penny. With today's equipment, it takes maybe 40 man-hours per song to record and engineer (mix) and the efforts will likely result in a pretty high quality recording. The recording equipment is an iMac (or other computer) with a few hundred dollars of software (or even free if you don't mind some limited functionality and an occasional crash) and a few microphones (for vocals and to mike the instruments, amps and drums). The musicians have instruments which may be quite expensive, but they probably don't need anything special for recording.

So there's very little cost and very little effort involved in recording songs. Other than the musicians' and song writer's effort, the total cost can be almost nothing.

Demand

My guess is that an average person is interested in listening to maybe 10,000 different songs in a lifetime. My personal observation is that about half the people can't even really tell if a recording is in tune or not and another 40% can tell but don't really care very much. As a result 90% of people are happy enough with fairly low quality recordings and certainly today's computer based recording equipment is plenty good for that. Therefore, the vast majority of songs being recorded are good enough for 90% of the population.

With 1 billion songs per century and the need for a total of 10,000 songs, that's an oversupply of 100,000 to one! Even dividing by some large number of genres and even if I'm off by orders of magnitude, that's quite an oversupply for 90% of the population.

Connecting Supply to Demand

One argument against free music in the past is that there may be millions of songs, but how does one find songs that they like? Certainly some intermediary like a recording exec needs to do some filtering, right?

Well, no. One problem is that the recording execs can't get through the millions of songs either, so that route guarantees inferior music being distributed.

Technology to the rescue! With the Internet radios (Pandora, Jango, last.fm, etc.) people rate songs so you'll be automagically fed songs you like!

More on Supply/Demand Inversion

It's actually already nearly gotten to the point where Supply versus Demand has inverted, where the supply is ears to listen and demand is songwriters who want to have their music heard. Jango has a service call Jango Airplay where song writers can pay to have their music heard. It's $30 for 1,000 plays (i.e. a thousand individuals will be fed your song when listening to Jango). Pretty cool really. And the 90% of the population that's not to picky will have no reason to ever pay for recorded music again. Who knows? Eventually they may even get paid to listen to songs.

Back to Jeff. The best chance he has, in my opinion, is that he has a unique and interesting story (at least to me): "Suffered a serious injury and woke up with a rekindled desire to write songs." Seems like that could get him some human interest stories in major media which might bring people to his site and sell his CDs.

However, from what I can tell, he seems determined to "make it" based on the quality of his songs. Though his songs are good, I wish him luck because I think he'll need it.

Great Recession(4): wholesale banking panic

2010-04-28T17:03:00.000-07:00

Eric Falkenstein discusses the ideas of Gary Gorton:

This financial crisis has had two legs: the initial boom and bust in housing prices, primarily in the USA, and the accelerator mechanism that then turned this crisis into a panic, affecting financial institutions almost indiscriminately, and countries furthest away from the USA were among the worst performers.

There is much more there or excerpts of his paper linked to herein:

All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprime‐related bonds. These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) – short‐term, collateralized, agreements
that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the “shadow” or “parallel” banking system) ‐‐ repo based on securitization ‐‐ is a genuine banking system, as large as the traditional, regulated and banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.

U.S. financial history is replete with banking crises and the predictable political responses. Most people are unaware of this history, which we are repeating. A basic point of this note is that there is a fundamental, structural, feature of banking, which if not guarded against leads to such crises. Banks create money, which allows the holder to withdraw cash on demand. The problem is not that we have banking; we need banks and banking. And we need this type of bank product. But, as the world grows and changes, this money feature of banking reappears in different forms. The current crisis, far from being unique, is another manifestation of this problem. The problem then is structural.

There was a banking panic, starting August 9, 2007.

The fundamental business of banking creates a vulnerability to panic because the banks’ trading securities are short term and need not be renewed; depositors can withdraw their money. But, panic can be prevented with intelligent policies. What happened in August 2007 involved a different form of bank liability, one unfamiliar to regulators. Regulators and academics were not aware of the size or vulnerability of the new bank liabilities.

In fact, the bank liabilities that we will focus on are actually very old, but have not been quantitatively important historically. The liabilities of interest are sale and repurchase agreements, called the “repo” market. Before the crisis trillions of dollars were traded in the repo market. The market was a very liquid market like another very liquid market, the one where goods are exchanged for checks (demand deposits). Repo and checks are both forms of money. (This is not a controversial statement.) There have always been difficulties creating private money (like demand deposits) and this time around was no different.

The panic in 2007 was not observed by anyone other than those trading or otherwise involved in the capital markets because the repo market does not involve regular people, but firms and institutional investors. So, the panic in 2007 was not like the previous panics in American history (like the Panic of 1907, shown below, or that of 1837, 1857, 1873 and so on) in that it was not a mass run on banks by individual depositors, but instead was a run by firms and institutional investors on financial firms. The fact that the run was not observed by regulators, politicians, the media, or ordinary Americans has made the events particularly hard to understand. It has opened the door to spurious, superficial, and politically expedient “explanations” and demagoguery.

As explained, the Panic of 2007 was not centered on demand deposits, but on the repo market which is not insured. As the economy transforms with growth, banking also changes. But, at a deep level the basic form of the bank liability has the same structure, whether it is private bank notes (issued before the Civil War), demand deposits, or sale and repurchase agreements. Bank liabilities are designed to be safe; they are short term, redeemable, and backed by collateral. But, they have always been vulnerable to mass withdrawals, a panic. This time the panic was in the sale and repurchase market (“repo market”).

...banking panics continued. They continued because demand deposits were vulnerable to panics. Economists and regulators did not figure this out for decades. In fact, when panics due to demand deposits were ended it was not due to the insight of economists, politicians, or regulators. Deposit insurance was not proposed by President Roosevelt; in fact, he opposed it. Bankers opposed it. Economists decried the “moral hazards” that would result from such a policy. Deposit insurance was a populist demand. People wanted the dominant medium of exchange protected. It is not an exaggeration to say that the quiet period in banking from 1934 to 2007, due to deposit insurance, was basically an accident of history.

The fragility of our unit banks prior to deposit insurance made an interesting contrast to the system of Canadian branch banks which were more stable due to greater diversification and generally more restrained lending practices.

The outstanding amount of subprime bonds was not large enough to cause a systemic financial crisis by itself. ... The issue is why all bond prices plummeted. What caused that? ... Outstanding subprime securitization was not large enough by itself to have caused the losses that were experienced. Further, the timing is wrong. Subprime mortgages started to deteriorate in January 2007, eight months before the panic in August.

He is talking here about the early stages of panic before it became full blown in the Fall of 2008.

... Subprime started significantly deteriorating well before the panic... Subprime will play an important role in the story later. But by itself it does not explain the crisis.

Holding loans on the balance sheets of banks is not profitable. This is a fundamental point. This is why the parallel or shadow banking system developed. If an industry is not profitable, the owners exit the industry by not investing; they invest elsewhere. Regulators can make banks do things, like hold more capital, but they cannot prevent exit if banking is not profitable. “Exit” means that the regulated banking sector shrinks, as bank equity holders refuse to invest more equity. Bank regulation determines the size of the regulated banking sector, and that is all. One form of exit is for banks to not hold loans but to sell the loans; securitization is the selling of portfolios of loans. Selling loans – while news to some people—has been going on now for about 30 years without problems.

... No one has produced evidence of any problems with securitization generally; though there are have been many such assertions. The motivation for banks to sell loans is profitability.

The parallel or shadow banking system is essentially how the traditional, regulated, banking system is funded. The two banking systems are intimately connected. This is very important to recognize. It means that without the securitization markets the traditional banking system is not going
to function.

Institutional investors and nonfinancial firms have demands for checking accounts just like you and I do. But, for them there is no safe banking account because deposit insurance is limited. So, where does an institutional investor go to deposit money? ... The answer is that the institutional investor goes to the repo market.

A problem with the new banking system is that it depends on collateral to guarantee the safety of the deposits. But, there are many demands for such collateral. ... The demand for collateral has been largely met by securitization, a 30‐year old innovation that allows for efficient financing of loans. Repo is to a significant degree based on securitized bonds as collateral, a combination called “securitized banking.” The shortage of collateral for repo, derivatives, and clearing/settlement is reminiscent of the shortages of money in early America, which is what led to demand deposit banking.

...There’s another aspect to repo that is important: haircuts. ... Prior to the panic, haircuts on all assets were zero! For now, keep in mind that an increase in the haircuts is a withdrawal from the bank. Massive withdrawals are a banking panic. That’s what happened. Like during the pre‐Federal Reserve panics, there was a shock that by itself was not large, house prices fell. But, the distribution of the risks (where the subprime bonds were, in which firms, and how much) was not known. Here is where subprime plays its role. Elsewhere, I have likened subprime to e‐coli (see Gorton (2009a, 2010)). Millions of pounds of beef might be recalled because the location of a small amount of e‐coli is not known for sure. If the government did not know which ground beef possibly contained the e‐coli, there would be a panic: people would stop eating ground beef. If we all stop eating hamburgers for a month, or a year, it would be a big problem for McDonald’s, Burger King, Wendy’s and so on. They would go bankrupt. That’s what happened.

Faced with the task of raising money to meet the withdrawals, firms had to sell assets.

The development of the parallel banking system did not happen overnight. It has been developing for three decades, and especially grew in the 1990s. But bank regulators and academics were not aware of these developments. Regulators did not measure or understand this development. As we have seen, the government does not measure the relevant markets. Academics were not aware of these markets; they did not study these markets. The incentives of regulators and academics did not lead them to look hard and ask questions.

There are some interesting summary points there in conclusion. Also a book based upon the authors earlier papers is mentioned here.

Eric Falkenstein offers a comparison: Gorton vs Lewis

His main evidence that this was a system-wide crisis was that securities backed by autos, credit cards, student loans, and financial companies of varied focus all declined, even though default rates in these other classes were not changing much. A financial crisis is when all finance becomes suspect, created a self-fulling prophesy because the system is always insolvent if there is no confidence in the system.

It's very interesting to think of financial crises, and recessions they cause, this way, as overreactions caused by people not being able to suss out the essence of a crisis in real time. Gorton notes crises occurred regularly in the US (1819, 1837, 1860, 73, 84, 90, 93, 1907, 1914, 1931-33), and every time, people are befuddled. When a a drastic change occurs, such as the change from Free Banking era (1837-62) to the National Banking era, or the creation of the Federal Reserve, after about 10 years they think they have eliminated business cycles. They put in new institutions, but because they don't fully understand the old institution, they fail in totally unappreciated new ways.

Gorton notes that fixes are perhaps futile. Indeed, he has some recommendations, one that the government insure 'approved AAA' paper, to help reduce the risk of a panic, but given their role in the reduction of credit underwriting standards (documented on page 66), it is then likely they would have made the essential mistake worse, because one thing government does not do well is admit mistakes, because they don't have to (unfortunately, no government agency has gone bankrupt).

I would suggest that the US financial system was also insolvent in 1975,1981,1990, and that if you had to mark their books to market, (indeed we had new accounting, FAS 157 that tried to apply market prices to accounting during the crisis), this would basically cause massive dislocations. Why not increase bank capital rates from 4-8%, to 20+%? I don't see a consistent risk premium in financial markets, so the cost is rather low. That is, the market does not require a 6% return premium to bank equity, so one does not need that kind of leveraged return.

Alas, most people will find Gorton a bit too dry, too many references, too much math (there are a handful of algebraic equations). Michael Lewis, in contrast, takes the Gladwellian approach to big problems, which is always well received. Indeed, I have seen him an on TV with several different interviewers discussing his latest book, The Big Short [I expect Russ Roberts at econtalk to interview him and totally agree, notwithstanding the 5 other authors with orthogonal diagnoses he also totally agreed with]. Lewis is considered an expert because he worked on Wall street for 2 years and wrote Liar's Poker, an insider's view of the bluster of rich young men. As anyone who has worked in an industry for a couple decades knows, after only 2 years in the business, the impressions of a kid right out of college, no matter how smart and eloquent the sojourner, are invariably quite naive. ... Ultimately Lewis blames everyone, but especially greedy bankers, and so in a banal sense he is correct.

But Lewis will most assuredly sell more books than Gorton, part of the reason these crises are endogenous.

Stephen Spruiell & Kevin Williamson offer some ideas on shadow banking reform:

The really offensive thing about the bailouts was the prevailing sense of adhocracy — that Congress and the White House and the Treasury and the Fed were more or less making things up as they went along. This bank got rescued, that one didn’t. This firm got a bailout on generous terms, that one got the pillory.

Before we can get our economy fully un-TARPed, un-Fannied, and un-Freddied, we need an FDIC-style resolution authority that can do for the shadow banking system what the FDIC does for banks: police safety and soundness and, when necessary, take troubled institutions into custody and disassemble them in an orderly manner.

The institutions that make up the shadow banking system are a diverse and complicated lot: If traditional banking is a game of checkers, this is 3-D chess on dozens of boards at the same time. It is therefore likely that the regulators will lack the expertise to establish appropriate, timely resolution programs for the complex institutions they are expected to govern. The solution to that problem is found in Columbia finance professor Charles Calomiris’s proposal that every TBTFI — Too Big to Fail Institution — coming under the new agency’s jurisdiction be required to establish and maintain, in advance, its own resolution plan, which would be subject to regulatory approval.

Such a plan — basically, a pre-packaged bankruptcy — would make public detailed information about the distribution of losses in the event of an institutional failure — in other words, who would take how much of a haircut if the bank or fund were to find itself in dire straits. This would be a substantial improvement on the political favor-jockeying that marked the government’s intervention in General Motors, for instance, or the political limbo that saw Lehman doing nothing to save itself while waiting to be rescued by a Washington bailout that never came. The authority’s main job would be to keep up with the resolution plans and, when necessary, to execute them.

Taking a fresh regulatory approach would give us the opportunity to enact some useful reforms at the same time. At present, capital requirements — the amount of equity and other assets financial firms are required to hold in proportion to their lending — are static: X cents in capital for every $1 in, for example, regular mortgage loans. This makes them “pro-cyclical,” meaning that, during booms, banks suddenly find themselves awash in capital as their share prices and the value of their assets climb, with the effect that they can secure a lot more loans with the assets they already have on the books. But the requirements are pro-cyclical on the downside, too: During recessions, declining share and asset prices erode banks’ capital base, hamstringing their operations and making financial contractions even worse. Instead, we should use counter-cyclical capital requirements: During booms, the amount of capital required to back each dollar in lending should increase on a pre-defined schedule, helping to put the brake on financial bubbles and to tamp down irrational exuberance. During downturns, capital requirements should be loosened on a pre-defined schedule, to facilitate lending and to keep banks from going into capital crises for mere accounting reasons. But these counter-cyclical capital requirements should begin from a higher baseline: The shadow banking system exists, in no small part, to skirt traditional capital requirements, and its scanty capital cushions helped make the recent crisis much worse than it had to be.

As always, the devil is in the details. Furthermore, the prepackaged bankruptcy features must be credible. Any framework that might work will require considerable thought and deliberation.

As with some of the matters highlighted in earlier posts in this series, this is getting very little emphasis in the public arena.

Returning to the contributing factors and events relevant to the panic, Reuven Brenner offers:

Confusing the responsibilities of the private markets and the government leads to misguided policies. Some analysts draw the dangerously wrong conclusion that the crisis of 2008 simply was a failure of capitalism. Judge Richard Posner, for example, recently argued that “the key to understanding is that a capitalist economy, while immensely dynamic and productive, is not inherently stable.” Whether a capitalist economy is stable or not might be a worthwhile topic for abstract speculation. But the events of 2008 shed no light on it, since what they actually tell is the story of what happens when governments neglect their responsibilities.

In a well-functioning market, the chances of all the players making the same mistake in the same direction is negligible. But systemic errors—errors in which a plurality of the players all err in the same direction—can and do occur when governments forget what makes a commercial society tick. This can occur suddenly, as in a communist revolution. Or it can occur imperceptibly over years, as during the past decade in the United States. Such governmental neglect of responsibilities prepared the ground for the present day, the worst American financial crisis since the Great Depression.

The financial technology of the past decade created trillions of dollars’ worth of structured bonds—in effect, attempting to do a magic trick by turning the inherently uncertain cash flows of junk bonds into the predictable cash flows of high-grade debt. Subprime mortgages, for example, are a kind of junk bond. Households with insufficient incomes, and often without prospects of securing good ones in the future, were not just granted entry into the market but were also helped (actively, though indirectly, by the mortgage agencies Fannie Mae and Freddie Mac) to speculate in housing on an unprecedented scale.

Home-mortgage debt relative to disposable personal income stood stable around 80 percent between 1957 and 2000 but jumped to 140 percent by 2007. The availability of adjustable-rate mortgages at very low interest rates prevailing in the early part of the decade allowed households to carry these much higher debt levels for a while. However, once the Federal Reserve raised the federal-funds rate from 0.5 percent in 2002 to 5.25 percent in 2007, households no longer could pay the higher debt burden. Meanwhile, financial institutions resold about 65 percent of the face value of the mortgages in the form of AAA-rated securities. This means that they sold the other 35 percent to investors who would absorb losses before any losses accrued to the AAA-rated securities.

Individuals and firms thought money-market funds to be reliable substitutes for bank deposits: always available and invested heavily in structured securities as well as corporate commercial paper. Once it became clear that supposedly AAA-rated securities were in fact prone to default, money-market funds faced a run by fearful depositors, and the market for corporate commercial paper crashed as well.

The collapse of the structured securities market in July 2007 led to the collapse of Bear Stearns in March 2008, the failure of the government-sponsored mortgage guarantors Fannie Mae and Freddie Mac, and eventually the Lehman Brothers bankruptcy in September 2008, followed by the bailout of the nation’s largest commercial banks and the reincarnation of the remaining investment banks and of GMAC as bank-like institutions, with access to funds from the Federal Reserve. Capital markets, as we knew them, shut down. And asset prices predictably then crashed. Too many mistakes, too much mispriced debt.

When this happened, there was no alternative but for the government and the Federal Reserve to step in and become a financial intermediary. The intervention was needed because the mistakes suddenly exposed the fragility of the financial institutions’ funding mechanism. To restore it, the government had to insure the counterparty risks.

Whatever the reasons, at first the government did not, and it allowed Lehman Brothers to fail. Then the government suddenly did: Correcting this blunder of letting the edifice of counterparty claims collapse led then to the dramatic expansion of the Federal Reserve balance sheet and the Treasury’s bailing out the banks.

In truth, the government had no choice: Depositors had to be convinced that they were secure. Otherwise, the government would have failed in its responsibility of providing the default-free assets that are the foundation of commercial banking. We would have had a massive run on the system, and the vanishing liquidity would have been much worse than what we experienced. By guaranteeing bank deposits as well as a great deal of bank debt, and by purchasing more than a trillion dollars’ worth of securities, the government prevented a collapse of the financial system. That was not a matter of ideology or politics but of necessity.

The spending and managing powers of the government have limits. If the government abuses its financial power to buy political support and does not restore the eroded responsibilities, it will eventually fail in its function of providing default-free assets. Without such assets, a commercial society cannot exist, no matter what the constitution of the country says. The words would lose their meaning, and the traditional institutions would be much weakened, becoming a mere façade.

Anyone longing for days gone by in the world of banking should be aware:

Consider the savings-and-loan (S&L) debacle of the 1980’s. The crisis, which erupted only two decades ago but seems all but forgotten, was almost entirely the result of a failure of government to regulate effectively. And that was by design. Members of Congress put the protection of their political friends ahead of the interests of the financial system as a whole.

After the disaster of the Great Depression, three types of banks still survived—artifacts of the Democratic party’s Jacksonian antipathy to powerful banks. Commercial banks offered depositors both checking and savings accounts, and made mostly commercial loans. Savings banks offered only savings accounts and specialized in commercial real-estate loans. Savings-and-loan associations (“thrifts”) also offered only savings accounts; their loan portfolios were almost entirely in mortgages for single-family homes.

All this amounted, in effect, to a federally mandated cartel, coddling those already in the banking business and allowing very few new entrants. Between 1945 and 1965, the number of S&L’s remained nearly constant at about 8,000, even as their assets grew more than tenfold from almost $9 billion to over $110 billion. This had something to do with the fact that the rate of interest paid on savings accounts was set by federal law at .25 percent higher than that paid by commercial banks, in order to compensate for the inability of savings banks and S&L’s to offer checking accounts. Savings banks and S&L’s were often called “3-6-3” institutions because they paid 3 percent on deposits, charged 6 percent on loans, and management hit the golf course at 3:00 p.m. on the dot.

These small banks were very well connected. As Democratic Senator David Pryor of Arkansas once explained:

You got to remember that each community has a savings-and-loan; some have two; some have four, and each of them has seven or eight board members. They own the Chevy dealership and the shoe store. And when we saw these people, we said, gosh, these are the people who are building the homes for people, these are the people who represent a dream that has worked in this country.

They were also, of course, the sorts of people whose support politicians most wanted to have—people who donated campaign money and had significant political influence in their localities.

The banking situation remained stable in the two decades after World War II as the Federal Reserve was able to keep interest rates steady and inflation low. But when Lyndon Johnson tried to fund both guns (the Vietnam war) and butter (the Great Society), the cartel began to break down.

If the government’s first priority had been the integrity of the banking system and the safety of deposits, the weakest banks would have been forced to merge with larger, sounder institutions. Most solvent savings banks and S&L’s would then have been transmuted into commercial banks, which were required to have larger amounts of capital and reserves. And some did transmute themselves on their own. But by 1980 there were still well over 4,500 S&L’s in operation, relics of an earlier time.
Why was the integrity of the banking system not the first priority? Part of the reason lay in the highly fragmented nature of the federal regulatory bureaucracy. A host of agencies—including the Comptroller of the Currency, the Federal Reserve, the FDIC and the FSLIC, state banking authorities, and the Federal Home Loan Bank Board (FHLBB)—oversaw the various forms of banks. Each of these agencies was more dedicated to protecting its own turf than to protecting the banking system as a whole.

Adding to the turmoil was the inflation that took off in the late 1960’s. When the low interest rates that banks were permitted to pay failed to keep pace with inflation, depositors started to look elsewhere for a higher return. Many turned to money-market funds, which were regulated by the Securities and Exchange Commission rather than by the various banking authorities and were not restricted in the rate of interest they could pay. Money began to flow out of savings accounts and into these new funds, in a process known to banking specialists by the sonorous term “disintermediation.”

There is much more banking and financial history in that article. The key point is that prior financial arrangements were abandoned not for ideological reasons but because they were no longer tenable.

Just to reiterate the point:

There is a widespread but erroneous belief that the financial crisis has its origins in deregulation dating all the way back to the late 1970s. Therefore any steps to restore the pre-Reagan regulatory system are to be welcomed. This is really bad financial history.

... in the more controlled capital markets of the 1970s, borrowers generally paid more for their loans because there was less competition. Lousy managements were protected from corporate raiders. Savers earned negative real interest rates because of high inflation. Deregulation—such as lifting restrictions on the interest rates banks could pay and charge—and financial innovation delivered real benefits for the U.S. economy in the 1980s and '90s.

One last point. Once asset markets like this experience a pricing blackout, conventional attempts to help the economy with any kind of fiscal stimulus are worthless. Visibility, transparency and activity must be restored to those asset markets for the economy to recover. Asset markets are an order of magnitude greater in value compared to annual economic output. So far corporate bond market issuance has recovered nicely. Other areas have shown partial recovery and some very little even with help from available Fed lending facilities. Things are getting better, but there is a long way to go. Of course a war on wealth creation won't help.

Great Recession(3): rules and regulations

2010-04-22T13:34:00.000-07:00

You've probably heard about the role of the credit rating agencies in the GR, in an interview with Steve Horwitz:

FMM: Returning to “The Great Recession,” it is interesting that you, essentially, charge the SEC with creating adverse information problems in securities markets.

“In the late 1960s, after some investment scandals, the SEC created a cartel by authorizing only a limited number of these agencies to be officially-designated raters. With that government-created cartel in place, the agencies slowly shifted from serving investors to serving the issuers of bonds.”

Can you elaborate on the nature of the SEC-created cartel and in what ways it is serving the issuers of bonds rather than the investors?

SH: The SEC authorized those agencies to have privileged status in the wake of some financial problems in the late 60s and early 70s. The thinking, I guess, was to more closely oversee the officially approved firms. The SEC then said that banks could only hold fancy securities rated by one of these three agencies. Once that happened, the big shift occurs. Before that, the agencies served the buyers by, like Consumer Reports, giving them information and ratings about the instruments. But once their approval was needed in order for the securities to be marketed, the sellers started going to them to get the ratings they wanted. The raters then had an incentive to provide good ratings so as to not lose the business to their other two co-cartelists. They also then had reason to eliminate the costs of inter-firm competition by coming to more agreement on how to do things. The results, as you can see, were not pretty.

In the absence of free entry into this market, there was no way to correct the mistakes of the cartelists. There was no Hayekian learning process in place.

We read in The Sellout:

At the same time, government-anointed credit raters were assigning triple-A ratings to mortgage-backed securities that in no way deserved them. The Federal Reserve's so-called Basel capital standards gave banks more credit for owning mortgage-backed securities than many other assets, and in 2004 the SEC applied those standards to investment banks, with dramatic results. In 2003, Lehman Brothers held roughly equal amounts of U.S. Treasury bonds and mortgage- and other asset-backed securities. By 2006 the firm's Treasury holdings had barely budged while its mortgage- and asset-backed holdings had almost tripled. Meanwhile, the Fed's easy money policies of the early 2000s subsidized credit and sent the banks looking for higher yields. Mortgage bonds offered high returns and the "safety" of AAA ratings.

As credit spreads began to widen in 2007 and then continued to widen in 2008 it was clear that distress was increasing in the financial system. It wasn't that difficult to understand how investment banks heavily involved in mortgage backed securities were having problems. What didn't make sense was the level of distress I was hearing about at many regular commercial banks. The role of the little known but rather significant recourse rule is explained at some length here: (and in a more limited version here)

There is little evidence that deregulation or banks' compensation practices caused the financial crisis. What did seem to cause it were capital regulations imposed on banks across the world. These regulations explain why bankers who are commonly seen as having recklessly bought risky mortgage-backed bonds in order to boost earnings--and bonuses--actually bought the least-risky, least-lucrative bonds available: those that were guaranteed by Fannie Mae or Freddie Mac or were rated AAA. These securities were decisively favored by capital regulations, raising the question of whether regulation actually increases systemic risk. By definition, regulations aim to homogenize the otherwise heterogeneous behavior of competing enterprises. Since one set of regulations has the force of law, it homogenizes the entire economy in that jurisdiction. But regulators are fallible, and if their ideas turn out to be wrong--as they appear to have been in the case of capital regulations--the entire system is put at risk.
...why did the bursting of the housing bubble cause a financial crisis, that is, a banking crisis?
This might not seem so puzzling at first: commercial banks made many of the mortgage loans that were financed by the Federal Reserve's low interest rates. But the financial crisis was not caused by mortgage defaults directly: it was caused by a sharp drop, in September 2008, in the market price of mortgage-backed bonds, in anticipation of their declining value as the bubble deflated. The first victims of the falling price of mortgage-backed bonds were Fannie and Freddie; in quick succession came the investment bank Lehman Brothers; and finally came the commercial banks--because they held so many mortgage-backed bonds, not mortgages. The question, then, is why the commercial banks held so many mortgage-backed bonds. If deregulation or the quest for high earnings, hence high compensation, did not cause the banks to buy these bonds, what did?
To answer this question, we have to turn in a direction that has been overlooked by the conventional wisdom: an obscure regulation called the recourse rule. The recourse rule was enacted by the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Office of Thrift Supervision in 2001.[14] It was an amendment to the international Basel Accords governing banks' capital holdings, and all over the world, these regulations appear to have contributed significantly both to the housing boom and to the financial crisis.
But under the recourse rule, "well-capitalized" American commercial banks were required to spend 80 percent more capital on commercial loans, 80 percent more capital on corporate bonds, and 60 percent more capital on individual mortgages than they had to spend on asset-backed securities, including mortgage-backed bonds, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Specifically, $2 in capital was required for every $100 in mortgage-backed bonds, compared to $5 for the same amount in mortgage loans and $10 for the same amount in commercial loans.
One can readily see that the recourse rule was designed to steer banks' funds into "safe" assets, such as AAA mortgage-backed bonds. The fact that 93 percent of the banks' mortgage-backed securities were either AAA rated or were issued by a GSE shows that this is exactly what the rule accomplished.[16] Unfortunately, these bonds turned out not to be so safe. Without the recourse rule, however, there is no reason for portfolios of American banks to have been so heavily concentrated in mortgage-backed bonds.
The recourse rule did not apply outside the United States, but the first set of Basel accords on bank capital, adopted in 1988,[19] included provisions for even more profitable forms of "capital arbitrage" through off-balance-sheet entities such as structured investment vehicles (SIVs), which were used extensively in Europe. Moreover, in 2006, a second set of bank-capital accords, "Basel II," began to be implemented outside the United States. Basel II took essentially the same approach as the recourse rule, encouraging foreign banks to acquire mortgage-backed securities, just as in the United States.[20]

Here, then, we may have the genesis of the global financial crisis. If so, it turns out to have been caused by the very device--regulation--to which most people now, as they did throughout the twentieth century, look for the "reform" of capitalism. But is it really capitalism when it is so heavily regulated?
In a complex world like ours, nobody really knows what will succeed until it is tried. Competition, which pits entrepreneurs' divergent ideas against each other, is the only way to test these ideas through anything but the highly unreliable process of verbal debate (in which the debaters' competing ideas cannot be simultaneously tested against each other in the real world, instead of in the imaginations of their audience).
Capitalism will probably always be prone to asset bubbles and other manifestations of homogeneous behavior, but only because it is part of human nature for people to go along with the crowd. This is a risk that can be mitigated but not eliminated. But capitalism has a unique feature, competition, that does mitigate it by both encouraging and taking advantage of heterogeneous behavior, that is, innovation.
Homogeneity, on the other hand, is the ineradicable curse of socialism, in which the community as a whole, through its elected (or self-appointed) representatives, decides on the allocation of resources. One plan is imposed on all, as thoroughly as if everyone spontaneously decided to join a herd.[22] And we maintain that homogeneity is also the problem with regulation. Regulations, by their very nature, align the behavior of those being regulated with the ideas of those doing the regulating. Regulations are like mandatory instructions for herd behavior, automatically increasing systemic risk.
The recourse rule, Basel I, and Basel II loaded the dice in favor of the regulators' ideas about prudent banking. These regulations imposed a new profitability gradient over all bankers' risk/return calculations, conferring 80 percent capital relief on banks that bought GSE-issued or highly rated mortgage-backed bonds rather than commercial loans or corporate bonds, and 60 percent relief for banks that traded their individual mortgages for those "safe" mortgage-backed bonds. Only bankers with the most extreme perceptions of the downside, such as JP Morgan's Jamie Dimon, escaped unharmed.
Bank-capital regulations inadvertently made the banking system more vulnerable to the regulators' errors. But this is what all regulations do. Whether by forbidding one activity or encouraging a different one, the whole point of regulation is, after all, to change the behavior of those being regulated. And the direction of change is, obviously, the one the regulators think is wise.
The whole system crashed when the financial regulators' ideas about prudent banking backfired, but such failures are inevitable unless modern societies are so ¬simple that the solutions to social and economic problems will be self-evident to a generalist voter, or even a specialist regulator. That modern societies really are that simple is, in truth, the hidden assumption of modern politics. This is why political conflicts get so ugly: neither side can understand why their adversaries oppose what "self-evidently" should be done, so both sides ascribe evil motives to each other. But the financial crisis has exposed this simplistic view of the world for what it is. In the wake of the crisis, nobody can plausibly deny anymore that modern societies are bafflingly complex. The solutions to social and economic problems are thereby unlikely to be self-evident. The theories that seem so obviously true to voters or regulators may turn out to be disastrously false--unless regulators or citizens are infallible.
That surely would be magical. But there is no more magic to politics than there is to markets. The question raised by the ongoing intellectual contest between socialism and capitalism, and the ongoing practical battle between regulation and competition, is how best to guard against human frailties: By putting all our eggs in one politically decided basket? Or by spreading our bets through the only practical means available: competition?

The complicated interaction of all of the pieces of the puzzle are discussed further in a podcast with Charles Calomiris (notes available but no transcript).

Jeffrey Friedman co-author of the article linked to above, offers a briefer version with some slightly different points in A Perfect Storm of Ignorance.

Economist Brian Wesbury informs us of the significant problem of MTM here:

In November 2007, the Financial Accounting Standards Board (FASB) reinstated mark-to-market accounting for the first time since 1938. This rule uses bids (exit prices) to value assets. So far, so good. However, in 2008, the market for asset-backed securities dried up. The prices of bonds that were still paying in full fell by 60 or 70 percent, and these losses often were driven through income statements. This wiped out regulatory capital, caused bankruptcies, and created a vicious downward spiral in the economy.

In retrospect, it is clear that this accounting rule was a potent pro-cyclical force behind the 2008 panic.

Finally, on April 2, 2009, the FASB allowed banks to use “cash flow” to value bonds when the markets are illiquid — the same sentiment that Bernanke expressed before Congress. This fixed the immediate problems in the system, and the economy and financial markets have been on the mend ever since. In fact, the stock market bottom of March 9, 2009, came on the very day news broke that Reps. Barney Frank and Paul Kanjorski would hold a hearing to force the FASB to change the misguided accounting policy.
Mark-to-market accounting does not solve problems; it creates them by acting as a pro-cyclical force. Milton Friedman understood this, and he wrote about the devastating link between mark-to-market accounting and the Great Depression bank failures. Franklin Delano Roosevelt finally figured this out in 1938 — he suspended the rule and the Depression ended soon thereafter. Coincidence? We think not.
But as long as bank regulators still impose mark-to-market-style rules — indeed, as long as such rules remain even a threat to the system — the system will not fully heal.

More on the role of mark-to-market accounting in Bob McTeer's post here and Bill Isaac's testimony linked to within is worth a read:

I use the term “mark to market accounting,” rather than “fair value accounting.” Everyone’s goal is a fair and descriptive accounting system. There is nothing “fair” about the misleading and destructive accounting regime promoted by the Securities and Exchange Commission and the Financial Accounting Standards Board under the rubric “fair value accounting.” MTM accounting has destroyed well over $500 billion of capital in our financial
system. Because banks are able to lend up to ten times their capital, MTM accounting has also destroyed over $5 trillion of lending capacity, contributing significantly to a severe credit contraction and an economic downturn that has cost millions of jobs and wiped out vast amounts of retirement savings on which millions of people were counting.
...we believed that MTM accounting would make it very difficult for banks to perform their fundamental function in our economy, which is to convert relatively short-term money from depositors into longer-term loans for businesses and consumers. Banks necessarily have some mismatch in the maturities of their assets and liabilities – it is up to bank management, regulators, and investors to make sure the mismatch is not excessive. Accounting rules made to influence behavior are no substitute for good judgment and can interfere with appropriate business conduct.
...we felt that MTM accounting would be pro-cyclical (which is never a good thing in bank regulation) and would make it very difficult for regulators to manage future banking crises.
The accounting profession, scarred by decades of costly litigation, keeps forcing banks to mark down the assets as fast and far as possible. This is contrary to everything we know about bank regulation. When there are temporary impairments of asset values due to economic and marketplace turmoil, regulators must give institutions an opportunity to survive the temporary impairment. Permanent impairments should be recognized, but assets should not be marked to unrealistic fire-sale prices. Regulators must evaluate the assets on the basis of their true economic value over a reasonable time horizon.
The current world-wide crisis in the financial system demonstrates conclusively that major principles of accounting are much too important to be left solely to accountants.
It is extremely important that bank regulation be counter-cyclical, not pro-cyclical. The time for banks to create reserves for losses is when the sun is shining, not in the middle of a hurricane.

Having trading entities such as proprietary trading desks or hedge funds mark-to-market may be appropriate. Requiring lending institutions which hold assets with a longer term orientation to do so is simply asking for financial instability.

Peter Wallison has some thoughts on deregulation here:

There has been a great deal of deregulation in our economy over the last 30 years, but none of it has been in the financial sector or has had anything to do with the current crisis. Almost all financial legislation, such as the Federal Deposit Insurance Corp. Improvement Act of 1991, adopted after the savings and loan collapse in the late 1980s, significantly tightened the regulation of banks.
The repeal of portions of the Glass-Steagall Act in 1999--often cited by people who know nothing about that law--has no relevance whatsoever to the financial crisis, with one major exception: it permitted banks to be affiliated with firms that underwrite securities, and thus allowed Bank of America Corp. to acquire Merrill Lynch & Co. and JPMorgan Chase & Co. to buy Bear Stearns Cos. Both transactions saved the government the costs of a rescue and spared the market substantial additional turmoil.
None of the investment banks that got into financial trouble, specifically Bear Stearns, Merrill Lynch, Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc., were affiliated with commercial banks, and none were affected in any way by the repeal of Glass-Steagall.

In a more extensive article here he concludes:

The causes of the financial crisis remain a mystery for many people, but certain causes can apparently be excluded. The repeal of Glass-Steagall by GLBA is certainly one of these, since Glass-Steagall, as applied to banks, remains fully in effect. In addition, the fact that a major CDS player like Lehman Brothers could fail without any serious disturbance of the CDS market, any serious losses to its counterparties, or any serious losses to those firms that had guaranteed Lehman's own obligations, suggests that CDS are far less dangerous to the financial system than they are made out to be. Finally, efforts to blame the huge number of subprime and Alt-A mortgages in our economy on unregulated mortgage brokers must fail when it becomes clear that the dominant role in creating the demand--and supplying the funds--for these deficient loans was the federal government.

If you don't know about the recourse rule, the Basel Accords and mark-to-market accounting rules at a minimum, you can't begin to understand the regulatory failure which gave us the Great Recession.

see also The Myth of Financial Deregulation

Great Recession(2): government and moral hazard

2010-04-15T10:15:00.000-07:00

Shannon Love at Chicago Boyz gives her take:

The current financial crisis definitely resulted from government generated moral risk. The massive federal-government-created and -managed enterprises, Freddie Mac, Fannie Mae and the Federal Home Loan Banks, aka Flubs, (henceforth, collectively the GSEs) are ground zero for the crisis. They were simply too big not to dramatically impact the market. Collectively, the GSEs purchase half of the mortgages issued in the U.S. Collectively, they issued most of the mortgage-backed securities (MBSs) currently in circulation. By design, these institutions created a vast moral hazard that built up over four decades until the system collapsed under the weight of risky behavior.

The GSEs created moral risk in several ways.
(1) By design, the GSEs separated the profit earned from a particular mortgage from the risk of issuing that mortgage. ...
(2) By design, the GSEs hid the hazard of buying their MBSs by using their implied government guarantee. ...
(3) By design, the GSEs had much better credit ratings than did any private actors. ...
I can’t repeat this often enough: By design, the GSEs were intended to distort the markets in favor of more-risky lending and that is exactly what we got. The private institutions that failed did so because they (a) mimicked the business model and practices of the GSEs, (b) bought GSE-issued MBSs, and GSE stock, based on their high ratings and/or (3) issued insurance against the default of the GSEs’ MBSs based on their high ratings.

Even a little bit of restraint on the GSEs would have helped.

Here are some thoughts from Steve Horwitz:

FMM: A phrase currently en vogue among politicians attempting to expand government power is “systemic risk.” Does such risk exist? If so, where does it occur and what (if anything) should be done to protect against it?

SH: It exists, but it’s largely created by government! The biggest systemic risk is when government policies cause firms to be tied together in ways that are problematic. The implicit guarantees to Fannie and Freddie created huge systemic risk that markets never would. Same with “too big to fail” in general, as well as Greenspan’s promise that the Fed would clean up the results of any asset bubble. Those policies created risks that run through the whole system.

Charlie Gasparino describes the interaction of public and private players resulting in subsidized risk: (by all means read the whole thing)

Mr. Forstmann knows a thing or two about greedy investment bankers: He's been calling them on the carpet for years, most famously during the 1980s when he fulminated against the excesses of the junk-bond era. He also knows that blaming banking greed alone can't by itself explain the financial tsunami that tore the markets apart last year and left the banking system and the economy in tatters.

The greed merchants needed a co-conspirator, Mr. Forstmann argues, and that co-conspirator is and was the United States government.

"They're always there waiting to hand out free money," he said. "They just throw money at the problem every time Wall Street gets in trouble. It starts out when they have a cold and it builds until the risk-taking leads to cancer."
Easy money wasn't the only way government induced the bubble. The mortgage-bond market was the mechanism by which policy makers transformed home ownership into something that must be earned into something close to a civil right. The Community Reinvestment Act and projects by the Department of Housing and Urban Development, beginning in the Clinton years, couldn't have been accomplished without the mortgage bond—which allowed banks to offload the increasingly risky mortgages to Wall Street, which in turn securitized them into triple-A rated bonds thanks to compliant ratings agencies.

The perversity of these efforts wasn't merely that bonds packed with subprime loans received such high ratings. It was also that by inducing homeownership, the government was itself making homeownership less affordable. Because families without the real economic means to repay traditional 30-year mortgages were getting them, housing prices grew to artificially high levels.

This is where the real sin of Fannie Mae and Freddie Mac comes into play. Both were created by Congress to make housing affordable to the middle class. But when they began guaranteeing subprime loans, they actually began pricing out the working class from the market until the banking business responded with ways to make repayment of mortgages allegedly easier through adjustable rates loans that start off with low payments. But these loans, fully sanctioned by the government, were a ticking time bomb, as we're all now so painfully aware.

All of which brings me back to Mr. Fortsmann's comment about policy makers helping turn a cold into cancer. What if the Fed hadn't eased Wall Street's pain in the late 1980s, and again after the 1994 bond-market collapse? What if policy makers in 1998 had allowed the markets to feel the consequences of risk—allowing LTCM to fail, and letting Lehman Brothers and possibly Merrill Lynch die as well?

There would have been pain—lots of it—for Wall Street and even for Main Street, but a lot less than what we're experiencing today. Wall Street would have learned a valuable lesson: There are consequences to risk.

In this manner financial players are incented to misprice risk to the detriment of the financial system and everyone else in the real economy.

More on moral hazard ... here

I'm no economist, but the problem is that deregulation is being seen in a vacuum, without reference to the bigger picture, and I think the bigger picture was influenced -- possibly even dominated -- by something worse than regulation.

I refer to the complete absence of any standards. Not long ago, Glenn Reynolds made a nostalgic reference to the stuffy uptightness of old-fashioned bankers:
You know, we may just find that all those "stuffy" and "uptight" traits that old-fashioned bankers used to be mocked for were actually a good thing. . . .
Truer words have never been spoken and I've blogged about this before. It used to be that you had to actually qualify for a loan. You had to demonstrate income, creditworthiness, equity in the home, that the downpayment wasn't borrowed, etc. before the stuffy uptight pinstriped guys would even think about giving you a loan. It was good that they were uptight. The "system" (for lack of a better word) worked.
So, what made these stuffy uptight guys decide they could get away with ditching the old uptight unfair standards that said (among other things) that some people are more worthy of getting loans than others?

The answer, as most of us know, is the government. It wasn't as if these guys just stripped off their pinstripes and dove into the economic orgy room; they did something that's really perfectly in character for stuffy uptight guys -- they did as they were told. And they were told not to ever under any circumstances do anything that might in any way be interpreted by anyone at ACORN to have so much as a smidgen of an appearance of anything resembling discrimination. (A word denoting pure, unmitigated evil.)

Bad as the loss of banking standards might be, it's not what I think is the overarching problem.

In my view, the biggest the loss of standards came in the form of the all-encompassing government guarantee. It was a gigantic blank check, and it operated to cover all sins. That no bank could ever be allowed to fail, and every mortgage would be backed by big daddy at FANNIE and FREDDIE meant that there really was no downside to anything, whether deliberate irresponsibility or government-mandated irresponsibility. The taxpayers would be responsible.
It is the height of dishonesty to characterize their behavior as the "free market." There is nothing free about being underwritten by the government, and because taxpayers are forced to foot the bill, it is in fact a profound distortion of the market. A market operating on money which people were forced by the government to pay in cannot be called free. And on a personal level, if I am given a financial guarantee that the taxpayers will be forced to bail me out of anything I do, nothing I do with that money (a guarantee is virtually money) is free, and it is absurd to characterize my behavior as the result of "deregulation."

Just in case it still hasn't sunk in, here again:

Bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.
Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with "100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns." Credit counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

The volume of highly risky loans facilitated by the GSEs continued to grow dramatically each year, even after 2003.

More reiteration of this point and the moral hazard aspect here

In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges.

and here

“Without [the GSEs’] commitment to purchase the AAA tranches” of the bulk of the subprime mortgage-backed securities issued between 2005 and 2007, “it is unlikely that the pools could have been formed and marketed around the world.”

To be sure, the investment banks were more than happy to buy up the rest of the toxic debt, but one reason these banks took on too much leverage was their confidence that, in the event of a downturn, the Fed would cut interest rates — and keep them low — to stimulate the economy. They called this “the Greenspan put” after former Fed chairman Alan Greenspan (a “put” is a financial option purchased as protection against asset-price declines).

If the media were honest...

This was completely foreseeable and in fact many people did foresee it. One political party, in Congress and in the executive branch, tried repeatedly to tighten up the rules. The other party blocked every such attempt and tried to loosen them.

Furthermore, Freddie Mac and Fannie Mae were making political contributions to the very members of Congress who were allowing them to make irresponsible loans. (Though why quasi-federal agencies were allowed to do so baffles me. It's as if the Pentagon were allowed to contribute to the political campaigns of Congressmen who support increasing their budget.)

Isn't there a story here? Doesn't journalism require that you who produce our daily paper tell the truth about who brought us to a position where the only way to keep confidence in our economy was a $700 billion bailout? Aren't you supposed to follow the money and see which politicians were benefiting personally from the deregulation of mortgage lending?

I have no doubt that if these facts had pointed to the Republican Party or to John McCain as the guilty parties, you would be treating it as a vast scandal. "Housing-gate," no doubt. Or "Fannie-gate."

Instead, it was Senator Christopher Dodd and Congressman Barney Frank, both Democrats, who denied that there were any problems, who refused Bush administration requests to set up a regulatory agency to watch over Fannie Mae and Freddie Mac, and who were still pushing for these agencies to go even further in promoting sub-prime mortgage loans almost up to the minute they failed.

Even the New York Times reported in 2003 that attempts were made to reign things in:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

This attempt was thwarted by political protectors.

Just recently we read:

Last Tuesday, Rep. Barney Frank (D-MA) finally got around to it. With Treasury Secretary Tim Geithner as the guest star, the House Committee on Financial Services convened to ponder “the future of housing finance” — specifically, how to clean up in the aftermath of the collapse of Fannie Mae and Freddie Mac. So-called government-sponsored enterprises, or GSEs, Fannie and Freddie have now drained hundreds of billions of taxpayer dollars with no end in sight.

But while the GSEs went belly-up, costing Americans dearly, the fortunate few sitting on their Boards of Directors got filthy rich. These same directors — some of the biggest names in Democratic Party politics and business — failed spectacularly to fulfill their fiduciary obligations.
A federal report by the Office of Federal Housing Enterprise Oversight condemned the boards of both Fannie and Freddie, calling their actions contributing to the housing meltdown “malfeasance.” Freddie Directors like Emanuel were blasted for failing to confront the “management issues that were root causes of many of the problems that led to the ongoing restatement of the financial reports of the Enterprise,” and permitting management to profit from cooking the books to the tune of $5 billion in 2003 alone.

But even a brief stay on the Fannie or Freddie Boards was its own source of fat profits. Among the rewards for Democratic Party “public service,” a lucrative board membership on Fannie and Freddie was considered the Taj Mahal of plum positions. Now, as the housing market limps forward and there are warnings of a new wave of foreclosures, the culpable coterie remains largely anonymous.

What’s more, this group of lifetime political hacks puts the Obama administration at risk, just as it struggles to forge a way forward through the financial wreckage wrought while America’s wealthiest, most powerful Democrats made their careers.
Geithner specifically pinpointed the beginning of Fannie and Freddie’s abuses “in the late 1990s and in the last decade,” when boards permitted “a dramatic increase in risk on their balance sheets and a substantial erosion in underwriting standards more broadly.” These actions “caused a huge amount of damage,” Geithner concluded.

The secretary did not name names, but they are public record: a litany of Clinton associates and friends whose success in propelling themselves and one another into the stratosphere of American high society has earned them a reputation as crony capitalists.

If you still haven't had enough, here's "fun with Barney."

Update: Roger Lowenstein writes in the NYT:

Fannie and Freddie developed as tools of credit enhancement; direct handouts offended laissez-faire sensibilities, whereas loan guarantees were nearly invisible. The practice of disguising government aid dates to the rescue of farmers and homeowners during the Depression. Mortgage capital barely existed and so, in 1934, the New Deal chartered the Federal Housing Administration to stimulate mortgage lending. Within a generation, the government was operating 74 separate programs to bolster credit through guarantees, insurance or outright loans, according to Sarah Quinn, a Ph.D. candidate at the University of California, Berkeley, who researched these programs. The point, Quinn says, was nearly always the same: “to camouflage, hide, or understate the extent to which [the U.S. government] actually intervened in the economy.”

No organizations epitomized the charade so well as Fannie and Freddie. Fannie was created in 1938 to purchase mortgages and allow lenders to write more loans. In the ’60s, when the mortgage industry sputtered, the Johnson administration began to use Fannie to sponsor securitizations — that is, to guarantee pools of mortgages and sell them to investors. A House committee in 1966 saw what was, then and now, the fundamental hazard with such guarantees: to investors “it makes no difference what the quality of these assets are.”

President Johnson was perfectly willing to let Fannie backstop investors, but he had a problem. Every mortgage Fannie purchased went on the government’s books, which were already strained by the Vietnam War. After valiant efforts to manipulate the budget, Johnson hit on a solution — privatize Fannie, so that its expenditures would be somebody else’s problem.

The clever twist was that Fannie, which exited the public sector in 1968, wasn’t wholly separate. Investors viewed Fannie, and its new sibling, Freddie, as having the implicit backing of the Treasury. This lowered the companies’ costs and arguably led to lower interest rates for borrowers.

As long as Fannie and Freddie stuck to conservative underwriting, the arrangement seemed to work. But Congress was eager to use the twins for political purposes, like increasing homeownership and affordable housing. As Dwight Jaffee, a professor at the Haas School of Business at Berkeley, observed, legislators persuaded themselves that Fannie and Freddie could further such causes “basically at no cost.”

When Fannie and Freddie began to face competition in their business of securitizing loans and providing liquidity to the mortgage market, their profits and stock prices took a nosedive. Seeking to recoup, the firms took more risk. And thanks to their implicit Treasury support, they could borrow virtually at will. Eventually, their debts reached the absurd level of 100 times their capital. When mortgage values tanked, a bailout was unavoidable.
Are the firms really so indispensable? Unlike during the Depression, a private market for mortgages does exist (albeit, it is dormant now). The government might consider making a calculated exit. A strategy proposed by Jaffee is for Fannie and Freddie to gradually raise the fees they charge for guaranteeing the value of mortgage securities. At some point, private companies would be able to securitize mortgages for less, and the business would shift to the private sector. Functions the market will not support (like helping affordable housing) are best transferred to the government, financed on-budget.

America may want a private mortgage market, or it might want the security of a subsidized market. What every administration since L.B.J.’s has coveted and what has always been a lie is that we can get a subsidized market free.

Violent Hooligans

2010-04-14T09:46:00.000-07:00

I was doing a quick scan of posts and news and saw some quoted material to which my reaction was, "What bunch of violent hooligans wrote that?" Here are some of the quotes:

"Unfortunately, nothing will preserve [liberty] but downright force. Whenever you give up that force, you are inevitably ruined.”

“Liberty must at all hazards be supported. We have a right to it, derived from our Maker. But if we had not, our fathers have earned and bought it for us, at the expense of their ease, their estates, their pleasure, and their blood.”

"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants."

Force and Blood! Yeesh!

Upon closer inspection, the quotes were from Patrick Henry, John Adams, and Thomas Jefferson in an article by Bill Whittle.

The founding fathers of the United States were brilliant and innovative, but they certainly didn't shy away from violence, did they?

Great Recession (1): Crisis overview & bad loans

2010-04-07T14:13:00.000-07:00

Many factors contributed to the Great Recession: unchecked GSEs(Fannie and Freddie), monetary policy in a few ways, moral hazard in several ways on several levels, regulatory problems - not so much deregulation but poorly conceived changes and failure to deal with a changing financial environment and innovations as well as assorted lesser factors.

The general key point is captured here:

Our point isn't that bankers didn't make stupendous blunders. It is that the roots of the mania and panic are so much larger than any single financial security, compensation practice or regulation. And those roots are found as much in Washington as on Wall Street.

Start with the Federal Reserve, which for years kept interest rates below the rate of inflation and thus created a global subsidy for credit. Bankers and investors had an incentive to sell and take on more debt. A Journal survey of economists this week found that a majority now think Fed policy was a major culprit. Providing a rare source of wisdom at yesterday's hearing was FDIC Chairman Sheila Bair, who explained how the Fed's monetary policy helped inflate the housing bubble.

If the commissioners are looking for historical guidance, they might consult the late Charles Kindleberger's classic, "Manias, Panics, and Crashes: A History of Financial Crises." On page 10 of the Fifth Edition paperback, the good professor declares that "The thesis of this book is that the cycle of manias and panics results from the pro-cyclical changes in the supply of credit." (Our emphasis.) An inquiry that ignores the sources of credit that fed the mania is like a history of the Civil War that ignores slavery.

Also missing this week was anyone from Fannie Mae and Freddie Mac, the mortgage giants that turbocharged the housing boom. With their implicit taxpayer backing, Fan and Fred held or guaranteed more subprime and Alt-A loans than anyone—much more than the combined holdings of the four bankers represented this week.

So long as Fan and Fred kept increasing mortgages to low-income borrowers, the dynamic duo's political protectors kept fighting off efforts to cap the size of Fan and Fred's mortgage portfolios. The pair would ultimately hold or guarantee mortgages amounting to more than $5 trillion. That sum is greater than the annual GDP of Japan, the world's third largest economy, and yes, a whole lot bigger than the balance sheet of Goldman Sachs. A serious inquiry will examine the business practices of Fan and Fred, the long battle to rein them in, and the Members of Congress who blocked reform.

There is more of an overview here and a rebutting of blame on EMH:

But is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low. The fact that the best and brightest on Wall Street made so many mistakes shows how hard it is to beat the market.
This does not mean the EMH can be used as an excuse by the CEOs of the failed financial firms or by the regulators who did not see the risks that subprime mortgage-backed securities posed to the financial stability of the economy. Regulators wrongly believed that financial firms were offsetting their credit risks, while the banks and credit rating agencies were fooled by faulty models that underestimated the risk in real estate.
From 2000 through 2006, national home prices rose by 88.7%, far more than the 17.5% gain in the consumer price index or the paltry 1% rise in median household income. Never before have home prices jumped that far ahead of prices and incomes.
This should have sent up red flags and cast doubts on using models that looked only at historical declines to judge future risk. But these flags were ignored as Wall Street was reaping large profits bundling and selling the securities while Congress was happy that more Americans could enjoy the "American Dream" of home ownership. Indeed, through government-sponsored enterprises such as Fannie Mae and Freddie Mac, Washington helped fuel the subprime boom.
Our crisis wasn't due to blind faith in the Efficient Market Hypothesis. The fact that risk premiums were low does not mean they were nonexistent and that market prices were right. Despite the recent recession, the Great Moderation is real and our economy is inherently more stable.

But this does not mean that risks have disappeared. To use an analogy, the fact that automobiles today are safer than they were years ago does not mean that you can drive at 120 mph. A small bump on the road, perhaps insignificant at lower speeds, will easily flip the best-engineered car. Our financial firms drove too fast, our central bank failed to stop them, and the housing deflation crashed the banks and the economy.

Important lessons were ignored as relayed in a conversation with Vernon Smith:

Money is a problem both in the world and in the asset trading markets in the laboratory.
So the laboratory results make it very clear that it’s cash flopping around in the system that tends to give you these runaway asset market bubbles.
I think of the housing bubble as the asset bubble that blindsided the economy. If you look at bubbles in stock markets they do not cause general problems in the economy. We had the dot com stock bubble that ran all through the nineties and peeked out in 2000 and crashed and you had about 10 trillion dollars loss in asset market value as a result of that stock market bubble and it had a minor affect, small affect on the banking system and the economy generally. On the other hand, if you look at 2007 when we lost about three trillion dollars in value in the housing market it devastated the banking system and the reason for this is really I think quite clear.
And so what that means is that bubbles in the stock market if there is a problem the problem is borne by the investors in the market. On the other hand if you have people buying houses with very low or zero down payments and the prices of homes starts to decline right away those homes, those loans that the banks have made are underwater, the banks start then to get into trouble. They have a balance sheet problem and as soon as the banks are in trouble it puts all kinds of people into difficulty that may have had nothing to do or they may not have had anything to do with what was going on in the stock market. So if the banks are under pressure and not making loans all sorts of people may be hurt and they may not even be homeowners. They rent and they haven’t been contributing to the problems, but they nevertheless may suffer. So there is a big difference here between asset market bubbles where people are required to collateralize all of their borrowing and cases as in the housing market where they’re inadequately collateralized and so there is no cushion, no nothing to protect sort of the systemic risk in the banking system if those asset prices decline.
I don’t think there is anything you can do to prevent bubbles. I think we’ve had frequent stock market bubbles that have self corrected and the burden of those bubbles and the pain is basically borne by the investors in those markets and you do not have collateral damage to the economy from bubbles in stock markets like you have in bubbles with housing and generally with consumer durables and I think the solution in the housing and the consumer durables markets is the same as the solution that we’ve worked out institutionally in stock markets and that is require these purchases to be reserved, collateralized.
We learned all about amortizing loans. We learned about having 25 or 30% down payments for homes. We learned that in the 1920s and 1930s because if you go back to the 1920s there were lots of bank loans being made. The state banks were making loans on real estate that were interest only loans. They tended to be short term loans, three and four years. You paid only the interest and then when they came due you rolled them over and that turned out to be part of the difficulties, certainly not all of them. A lot of them the problems in the twenties were not only credit financing of home sales, but all sorts of consumer durables. You had for the first time in the twenties the development of buy now pay later for all sorts of durables like furniture and automobiles and that credit binge in the twenties was an important part of the collapse that took place in 1929 and 1930. And one of the things that you saw in the 1930s was the disappearance of the unamortized housing loan. If you compare for example 1928 and 1938 mortgage loans by banks. In 1938 they’re amortized and in 1928 many, half of them were not amortized, so there is an example where we had institutional learning, but somehow that memory faded. We forgot that lesson in the case of the housing markets and that’s what gave us a recurrence you see of a lot of the same conditions of the 1920s and ’30s. We’ve seen repeat of that from about 1997 to 2006 was the boom period in the housing market and then the collapse since then. And you know we have kind of a nice controlled experiment in one of the states. I don’t think it’s generally realized that Texas law (and this law dates back I think to about 2001 or 2) prohibits lending, making unamortized loans on a home. They prohibit balloon payments. There is a provision requiring that whatever the payment and loan stream conditions are the principle has to rise. That is as you pay of a loan you more and more of the money is going in to reduce the amount of the loan and what is interesting is that when if you look at the Case-Shiller Housing Index and how it blossomed up from 2000 to 2006. It was rising 75 or 80%. In Texas prices only rose 30 percent. And so it’s clear that this Texas law made a substantial difference there and it seems to me those are very reasonable kind of property type regulations in which you say that people don’t have a right to buy homes without putting up some, a reasonable cash down payment and that the loan be amortized. And so that’s not a heavy handed regulation. It’s a very reasonable benign type of regulation: give people rights to take action that are consistent with sustainability and stability.
Well the evidence that the Federal Reserve System, the Federal Open Market Committee and Bernanke did not anticipate the kind of trouble we were in is indicated by looking at the difference between the press release they put out in August 7, 2007 and the one three days later on August 10^th. On August 7^th they were reiterating that they would hold the federal funds rates steady and I think at that time it was five and a quarter percent and that they still anticipated the possibility of inflation and then three days later the press release points out that a number of financial markets are likely to experience considerable stress. And well, tell me about it. The mortgage market had completely collapsed and it was the derivatives market that was the tipoff. And its collapse was the first indication that the whole mortgage market was in serious trouble and no one has I think better expert econometric and economic analysis than the Federal Reserve, but it doesn’t mean that they can predict was is not predictable and so it’s clear that the experts were surprised and blindsided by that development, but I think it’s to Bernanke’s credit that he moved in what seemed to be a pretty decisive way at that time to dramatically enhance the liquidity of the banking system.
The problem is that what was happening I think in the mortgage market indicated that what the banks faced was a solvency problem, not just a liquidity problem. Now sometimes of course it’s hard to tell the difference. You have a solvency problem you see if the fundamental value of your assets are less than the value of your obligations that’s different from a liquidity problem in the sense that you just have a short term need for funds and of course you can have if you have a short term need for funds and a lack of liquidity that can cause distress sales and create a solvency problem, but and I think that’s the way that Bernanke saw the situation he was in, in August 2007 and it’s also I think pretty much how he saw the developments in the early thirties, in the early part of the Great Depression that the Federal Reserve System had simply not supplied sufficient liquidity to keep the system from creating an insolvency problem. I don’t really agree with this. I think in both cases that both in 1930 there is evidence that the banks had a solvency problem because of the loans that had been extended on residential and also commercial properties and those prices had started to, had come down and in fact that had been developing for already for three or four years in the late 1920s just as it had been developing, the defaults were starting to move up in our economy already by 2005, 6 and 7. It started to become then critical in 2007.
A lot of the knowledge in the economy is this kind of can do practical knowledge learned by practice and the same thing is true at the level of experts and formulating central bank policy. It’s a matter of practice and you can have a good understanding of say the 1930s about what happened then, but it doesn’t mean that when you’re in the middle of a storm you will recognize that it’s happening around you because it’s just a different kind of understanding based upon practice and not necessarily the kind of academic analysis and knowledge that we get through econometric analysis and studies. And I think that’s basically a problem, and it means that you shouldn’t have too high expectations as to what the ability of our experts to deliver is. They’re going to be fallible and what we’ve seen I think and throughout this crisis is both in the Federal Reserve and also in the U.S. Treasury and other agencies of government you’ve had people learning as they go and a lot of the policies are being made up as they go. And that’s I think and inevitable consequence of the imperfection of our knowledge and the limits of our ability to practically manage complex systems like the U.S. economy.

Various devices were used to encourage private lenders to more aggressively make loans on homes to be purchased by people of modest income and what we got from that was a particularly strong demand for homes at the low end of the pricing tier. If you look at the Case-Shiller Housing Index and if you divide that index into three tiers, the low price tier, the middle price tier and the high price tier from 2000 to 2006 the prices that went up the most were the low price tier. The low price tier of homes rose the most, the greatest percentage and fell by the greatest percentage after the collapse and so those policies didn’t actually help those people in the sense that it ended up in many ways we hurt the people we most had a most heartfelt desire to help and the middle price tier homes rose less rapidly than the low and the higher priced tiers rose the least. So the impact of the housing bubble was felt disproportionately in the lower income buyers of homes, so I think I would begin not with any notion that we need a radical reexamination of the regulatory framework, but just introduce some of the institutional learning that we’ve already achieved and let that institutional learning stand and not interfere with it.

Compare the path of a US home price index with the path of a Canadian home price index see here . A less radical undermining of lending standards requiring meaningful down payments matters.

Shake, Rattle, & Roll

2010-04-05T10:20:00.001-07:00

It's been fun!

For those of us in San Diego, earthquakes are sort of like virtual reality motion simulator rides - except for the "virtual" and "simulator" parts. They're not strong enough to cause any damage or injury or even be particularly scary.

The big fault line that runs through Los Angeles splits about 60 miles north of here and goes around San Diego, both to the East and West. The latest earthquakes were on the Eastern (and larger) fork of the fault, about 110 miles from San Diego, in a very sparsely populated area of the Mexican and California deserts.

I'm on vacation for the next little bit, so blogging and commenting will be sporadic.

That's a rap!

2010-04-02T07:00:00.000-07:00

As I've probably mentioned before on this blog, Hayek and Keynes were personal friends but intellectual rivals.

Video producer John Papola and economics professor Russ Roberts teamed up and did a nice job on this video, now over a million hits on youtube.

More information, lyrics and many relevant links here:

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there's a "boom and bust" cycle in modern economies and good reason to fear it.

Glad to see more attention on Hayek.

More here on the totally relevant credit and real estate cycles which are the ultimate in booms and busts.

Lottery Democracy

2010-03-26T05:29:00.000-07:00

William F. Buckley, Jr. once quipped, "I'd rather entrust the government of the United States to the first 400 people listed in the Boston telephone directory than to the faculty of Harvard University." Given that Congress currently has an approval rating of a mere 14% (76% disapprove!), we can bet Mr. Buckley would prefer those 400 Bostonians to the current Congress as well. I know I would. I don't think I could feel less represented by our representatives than I do now.

Even if the system were working well, either a large minority or even a majority of people still wouldn't be well represented. If, for example, you're a Democrat living in a majority Republican district, it's very possible that you'll go your whole life without having a representative that has views similar to yours. The same goes, of course, for a Republican in a majority Democrat district.

So I think we should adopt a variant of Buckley's approach.

Instead of the first 400 names in the phone, let's have our representatives be chosen at random from the adult population. The selection process would be sort of like jury duty for a very long trial.

There are some details to be worked out, but I think it could be quite straight-forward. I would propose something like four-year terms with one-quarter of the representatives cycled in and out each year. I believe that we would want more representatives, perhaps five times as many, to provide better representation of a wider cross section of the population.

This approach has a huge number of advantages. No more disruptive and divisive elections for representatives. No more election fraud. Since there are no more campaigns to fund, it weakens the lobbyist and big money connections to the representatives. Representatives will have less conflict of interest between their career and representing their constituents since after their four-year term, it's time to go back home. More people will have a representative that reflects their beliefs, even those who are of minority political persuasions in their district. A wider range of skills from far more professions will be available when debating legislation: scientists, doctors, engineers, economists, etc.

Are there any downsides? I don't think so. At first I was thinking that there might be to many undesirable representatives, but given the crazy (Pelosi), stupid (Boxer), and unscrupulous (Dodd) politicians we have now, I don't think we'd do much worse. It would clearly be disruptive for those chosen to be representatives, but I'm sure insurance companies would come up with products to help them.

To start, I would only do this for the House of Representatives. I would keep everything else (Senate, etc.) the same.

The ancient Greeks did this sort of thing at one point and it worked reasonably well. There's no reason it wouldn't work for us.

Elections and Violence

2010-03-25T09:46:00.000-07:00

In numerous old legends, prior to two armies engaging in battle, the two kings or a champion for each king would first fight in single combat. Based on the result of that combat between the two individuals, one side might retreat or otherwise sue for peace. An example of such a legend is the biblical story of David and Goliath, where David, who was essentially an unarmed child, slew Goliath, the largest, most powerful, and most skilled of the Philistine warriors. The Philistines were so freaked out by this turn of events that they beat a hasty retreat.

From one perspective, an election is similar to a single combat preceding such a battle. The basis is, of course, somewhat different. In this case, it's assumed that the larger army would win. The votes are counted, the "larger army" is identified, and the minority begrudgingly "surrenders" and allows the representative(s) from the "larger army" to rule them for a while. This approach is obviously less costly than having a total war every 4 years.

However, part of the reason that the minority allows themselves to be ruled by the majority, is that the majority implicitly and explicitly agrees that oppression of the minority is to be limited by tradition, institutions that have resulted from tradition, and the constitution. There's also the implicit assumption that the minority will be better off living under the rule of the majority as opposed to taking up arms and fighting.

If any of these implicit and explicit bounds on ruling are breached by the majority, the minority may be better off resorting to violence or any other approach that can make the lives and/or the lives of their families and communities better. Note that revenge is a significant component of making lives seem better.

With the passage of Obamacare, there are a significant number of angry people. There are claims of violence and threats of violence by those who oppose Obamacare against those who supported and passed it. This is not surprising and fits the above narrative perfectly. It's an inherently subjective analysis for each member of the minority to determine whether or not the majority has exceeded its bounds, so some people will be ready to resort to violence and subversion before others. Assuming the claims of threats and violence are substantiated and significant (a handful of such incidents is meaningless), we may be seeing the beginning of the minority moving towards violent confrontation.

There are many who are calling on Republicans/Conservatives/Libertarians to condemn the threats and violence.

Not me. I can't imagine why I would. It's part of the deal of ruling.

Obama...

2010-03-24T14:17:00.000-07:00

...at least he makes the gravy trains run on time.

Health Care Reform Passed

2010-03-21T21:20:00.000-07:00

Damn. Damn. Damn. Damn.

Minimum Insight

2010-03-18T06:14:00.000-07:00

Whenever someone I know makes a statement to the effect that the minimum wage benefits the poor, I always ask, "if a minimum wage of $7.25/hour helps the poor, why not make the minimum wage be $1,000/hour and really help the poor?"

Nobody has ever been able to answer that question and stick to that answer with further questioning. Oh sure, some have said, "because who could afford to hire anybody for $1,000 per hour?" So, then I ask, "how about $500? No? $100? No? $50? No? $40? No? ... $10 ...". Somewhere in this string they promptly either change the subject, create and knock down straw men, get irate and insist that my questions are absurd and have no merit, or otherwise indicate through their behavior and speech that they know perfectly well that some people who are employable at a lower wage are never going to find work at $7.25 per hour.

In other words, pretty much everybody knows that minimum wage laws don't help the poor. In fact, they are currently devastating the young poor:

Obviously, I think that minimum wage laws are really a bad idea. However, it has now crossed the line, in my opinion, into severely immoral. The government is now telling a large class of people that they are not allowed to legally work. These people, who can't find jobs, are going to be adversely impacted their whole lives because they are unable to gain experience that would've helped them find better jobs later.

Happy Pi Day!

2010-03-14T23:12:00.000-07:00

My older daughter (13) was aghast that it was Pi Day (3/14) and she didn't have any pie (she's eaten pie every Pi Day for the last few years). So she scoured the pantry and found enough ingredients to make her first pie (blackberry), pictured above.

It was delicious!

Happy Pi Day!

Truuuuust Meeeee!!!

2010-02-28T13:10:00.000-08:00

Climate scientists are becoming concerned that the public no longer holds them in high esteem and no longer finds them trustworthy. It seems that the leaked University of East Anglia emails ("Cimategate") showing scientists in a less than stellar light coupled with numerous revelations of mistakes in the IPCC's reports has enraged much of the public, especially in Britain.

As a result, many scientists are trying to reach out to the public in order to restore that trust. An example is Dr. Judith Curry's essay that was posted on several skeptics blogs. Here's an excerpt:

Rebuilding trust with the public on the subject of climate research starts with Ralph Cicerone’s statement “Two aspects need urgent attention: the general practice of science and the personal behaviors of scientists.” Much has been written about the need for greater transparency, reforms to peer review, etc. and I am hopeful that the relevant institutions will respond appropriately. Investigations of misconduct are being conducted at the University of East Anglia and at Penn State. Here I would like to bring up some broader issues that will require substantial reflection by the institutions and also by individual scientists.

Climate research and its institutions have not yet adapted to its high policy relevance. How scientists can most effectively and appropriately engage with the policy process is a topic that has not been adequately discussed ... The interface between science and policy is a muddy issue, but it is very important that scientists have guidance in navigating the potential pitfalls. Improving this situation could help defuse the hostile environment that scientists involved in the public debate have to deal with, and would also help restore the public trust of climate scientists.

The problem is not so much that the scientists are untrustworthy (some are, some aren't just like all other humans), but rather that the system itself is untrustworthy. The interface between science and policy is not "muddy" at all. It's crystal clear that interfaces like that are ripe for corruption and distortion, and not at all amenable to seeking and finding truth.

I decided to write Dr. Curry an email to point that out:

Dear Dr. Curry,

I read your excellent post regarding "Rebuilding Trust" with the public. You are certainly to be commended for being one of the first (and bravest) to attempt to begin a dialogue between an at least somewhat disillusioned public and the Climate Science Community.

However, I believe you've overlooked a critically important question:

Can the overall political-social-scientific system itself be trustworthy when it comes to Climate Science?

If that overall system is untrustworthy, it makes no sense to trust the output of anybody that's part of that system.

From my days of studying Economics and Political Choice Theory, any time you have a mix of big-government, big-advocacy, government funded science, and the possibility of using the output of that science to further big-government and big-advocacy ends, ClimateGate is exactly what you’ll get.

Every time.

It’s not the fault of anybody or even any group. It’s inherent in the system.

I believe that we cannot trust climate scientists because they are part of an utrustworthy system. And there is no way to make the system trustworthy.

Where there is money and power, there is corruption.

Power corrupts. Absolute power corrupts absolutely. (Lord Acton).

You (and many other scientists) may be saints, but unfortunately, we can't trust the system.

Thanks,
Bret

She actually responded:

Bret, thanks for your email. You may be right, but somewhere in there science needs to be science, and the institutions that support science need to do much better job. Not sure how all this will play out, but hopefully reason will play a role somewhere in all this!

If reason plays a role, I suspect she won't like the result.

Post-Normal Science

2010-02-23T05:07:00.000-08:00

Climate scientists have not been shown in a particularly favorable light lately. The "Climategate" emails, a number of high-profile mistakes and retractions by the IPCC, and the continued inaccuracy of the predictions of the climate models have shown the climate scientists to be all too fallible, biased, and not particularly trustworthy human beings.

An Oxford philosopher, Jerry Ravitz, has contemplated the special stresses put on the interface between science and the public and policy makers when there is a situation which can be described as "facts uncertain, values in dispute, stakes high and decisions urgent".

He considers it to be a new paradigm and calls it:

"Post-Normal Science, which until now has not really attracted very much attention in the mainstream. I’ve met people who found it an inspiration and liberation, as it enabled them to recognise the deep uncertainties in their scientific work that colleagues wished to ignore. ... We are not saying that this is a desirable, natural or normal state for science.

"We place it by means of a diagram, a quadrant-rainbow with two axes. These are ’systems uncertainties’ and ‘decision stakes’. When both are small, we have ‘applied science’, which must be the vast majority of scientific work in keeping civilisation running. When either is medium, we have ‘professional consultancy’, like the surgeon or consultant engineer. The basic insight of PNS is that there is another zone, where either attribute is large."

Ravitz, as is the wont of many philosophers, tends to use a thousand words to explain a concept where ten would almost do. The other 990 words are used for nuances that are ornately twisted into pretzels and chained together to embroider and frame the concept (this paragraph is my feeble attempt to directly illustrate the sorts of extraneous prose used by philosophers - did I succeed?). As a result, it's very difficult to know exactly what the hell he's trying to say.

But the gist is that under the "decision urgent" criterion, it is permissible - nay necessary! - for scientists to frame the debate in such a manner that the public and policy makers will come to the "correct" conclusion and therefore take the "correct" actions.

It's no wonder to me that Post-Normal Science "has not really attracted very much attention in the mainstream" since it has some rather serious problems, in my opinion. The most glaring is that if we have "facts uncertain", then in general, and with Climate Change in particular, how can we know that we're in a "decision urgent" state? Especially since "decision urgent" is then used to trump truth, honesty, ethics, legality, and all of the other mores and institutions upon which civilization is built. Especially when the "correct" conclusion involves committing staggering levels of resources, remaking civilization, and consigning masses of humanity to poverty. Other than that, hey, I'm an open-minded kinda guy.

Unfortunately, Post-Normal Science has attracted attention in the Climate Science community. Using Ravitz's logic, Stephen Schneider, a Stanford Climatologist wrote:

...we are not just scientists, but human beings as well. And like most people we’d like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climate change. To do that we have to get some broad-based support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have.

While the above statement is fairly old (1989), at this point it's pretty obvious to me that this attitude is pervasive throughout climate science, especially for those scientists who interact with the media, directly or indirectly. But Schneider left out one thing. Not only are the scenarios scary, but remember, the science is settled, especially if it's Post-Normal Science.

The Wisdom of the Swivel-Eyed Loons

2010-02-22T09:01:00.000-08:00

James Delingpole gives blog commenters a big compliment:

... without wishing to flatter you [blog commenters] too much, you blog-addicted, foaming-mouthed, swivel-eyed loons – I’ve found the comments sections on blogs to be bastions of wisdom, rough-hewn common sense, wit, and often amazingly well-informed insight. And I don’t just mean on my blogs. What I always find equally heartening is when you look up an article online by, say, Polly Toynbee or some crack-papering fraudster from the Met Office and find its inconsistencies and idiocies being torn to shreds by a readership far more intelligent and on the ball than almost anyone in the liberal commentariat.

And this, I think, is the crux of the matter. The main reason so many left-liberals so loathe and fear the internet is that it is a medium that favours the libertarian right.

I don't think that the internet particularly favours the libertarian right. I think that it favours any group with at least some reasonable arguments that has limited or no access to any other media outlet. Libertarians happen to be one such group.

Since I'm feeling particularly loony today (though perhaps not swivel-eyed), I'll take the compliment whole-heartedly.

Affirmative Action Marriage

2010-02-19T11:08:00.000-08:00

The existence of race, or at least the moderately clear delineation between races, is proof that the majority of us are hopelessly racist, and racist where it counts the most. It is one thing to prefer members of your own race when it comes to hiring people, but quite another with far greater impact for racial preferences to come into play when it comes to choosing that special someone to share those lifelong commitments of marriage and raising a family.

If we were all or even mostly all truly colorblind when it comes to love, I would expect that statistically we would see far, far more interracial marriages than we do. Therefore, in the equations of love, race clearly plays a significant role.

Clearly this is wrong, immoral, and a detriment to society. What possible reason is there to give preference to members of your race? All races are equally beautiful, intelligent, compassionate, etc., so there is no possible rational reason to marry someone of your own race.

Since the government already administers affirmative action for employment and education, and since marriage is a legal institution created and supported by the government, and since this proven racism in regards to marriage is clearly irrational and wrong, and since the government has and does get to decide who can marry (gays cannot, siblings cannot, interracial marriage was once illegal but is now legal, etc.) the government has a right - nay a duty! - to correct this egregious wrong.

The solution is obvious. When social security cards are issued, race identifiers are added to the card (and social security database) with the proportion of cards getting marked with each race the same as the proportion of that race in the general population. Then you are legally limited to marry only those people who have the race identified on your social security card.

Then, in a few generations, the problem will be completely solved and we'll have a pleasing continuum of skin color.

Too Big to Fail

2010-02-12T11:09:00.000-08:00

I'm an advocate of providing incentives to entities that are "Too Big to Fail" to split up into smaller, independent components that won't endanger the economy or even civilization itself if they happen to fail. The devil's in the details regarding how to do that, but I think it's probably plausible and desirable for private companies.

However, the Federal Government is the 800 pound gorilla (or rather the $3,800,000,000,000 gorilla) in the room when it comes to entities that are "Too Big to Fail". Failure doesn't necessarily mean a short-term catastrophic failure. An entity that becomes increasingly sclerotic and non-functional to point where it parasitically sucks in an enormous vortex of resources from its increasingly beleaguered hosts also becomes a failure at some point.

Since the Government is "Too Big to Fail" (and therefore "Too Big to Exist"), it should be broken up. Since it is so large it should be broken up into numerous entities. Picking a number out-of-the-air, I'd say that breaking it up into 50 entities (or 57 if you're Obama), would be about perfect. Conveniently, we happen to have 50 mostly functioning government entities to which we can transfer responsibilities and authority. Also conveniently, with the possible exception of a few of those States, none of them are "Too Big to Fail". Problem solved.

Wasn't that what our Founders had in mind? Smart dudes.

Hi Mom!

2010-02-11T08:25:00.000-08:00

My youngest daughter (10) wrote "Hi Mom!" on her hand this morning. I hope she doesn't get in trouble for it at school.

The Writing's on the Palm

2010-02-08T09:15:00.000-08:00

I don't particularly like or dislike Sarah Palin, but I'll have to admit she has comic genius. The Media had a conniption fit and gave widespread coverage regarding her scribbling a few words on her hand (allegedly notes?) during the National Tea Party Convention in Nashville.

Her response? She wrote "Hi Mom" on her palm while campaigning for Rick Perry in Texas. Let's see if the Media gives that one as much coverage. The Media will look foolish whether they do or don't cover it since it has more or less the same level of relevance (i.e. none) as the "notes" at the Tea Party.

These events led one commenter at Gateway Pundit to quip:

Next speaking stop, she will have “John 3:16″ on her hand.

Media goes mad trying to figure out the code; calls for separation of palms and psalm...

Well, you asked for it Mr. President

2010-01-21T13:20:00.000-08:00

Every president inherits the consequences of policies and events from their predecessor. Most people know that and remember to cut a new president some slack. Continuing to blame a prior executive for problems 6 or 12 months beyond assuming office is juvenile and unseemly. It depletes any sense of goodwill afforded by the opposition.

Well, there you go again:

The same thing that swept Scott Brown into office swept me into office.

People are angry, and they're frustrated. Not just because of what's happened in the last year or two years, but what's happened over the last eight years.

Surely Just Coincidence

2010-01-17T19:49:00.000-08:00

When Obama announced that he would travel to Massachusetts to campaign for Coakley against Scott Brown, her probability of winning the election according to Intrade's prediction markets plunged from 80% to 40% in the approximately 48 hours following the announcement. I'm sure it's just a coincidence. Surely Obama's presence could only help?

Wrongheaded even before the drift

2010-01-17T12:27:00.000-08:00

In response to a comment to the previous post, presenting a David Hogberg review of the latest book by Thomas Sowell:

With his new work, Intellectuals and Society, Sowell has finally made good on his 20-year-old promise to write about intellectuals. He has also made good on his threat. Sowell takes aim at the class of people who influence our public debate, institutions, and policy. Few of Sowell’s targets are left standing at the end, and those who are stagger back to their corner, bloody and bruised.

Sowell defines intellectuals as an occupation, as people whose “work begins and ends with ideas.” This includes academics, especially those in the humanities and social sciences, policy wonks, and, to a certain extent, journalists. This distinguishes them from occupations in which the work begins with ideas and ends with the application of ideas. Physicians or engineers usually start with ideas about how to approach their work, but eventually they have to put them into practice by treating patients or constructing bridges.

As a result, intellectuals are free from one of the most rigorous constraints facing other occupations: external standards. An engineer will ultimately be judged on whether the structures he designs hold up, a businessman on whether he makes money, and so on. By contrast, the ultimate test of an intellectual’s ideas is whether other intellectuals “find those ideas interesting, original, persuasive, elegant, or ingenious. There is no external test.”

An intellectual’s reputation, then, depends not on whether his ideas are verifiable but on the plaudits of his fellow intellectuals.

Intellectuals, of course, have expertise — highly specialized knowledge of a particular subject. The problem, according to Sowell, is that they think their superior knowledge in one area means they have superior knowledge in most other areas. Yet knowledge is so vast and dispersed that it is doubtful that any one person has even 1 percent of the knowledge available. Even the brightest intellectuals cannot possibly know all the needs, wants, and preferences of millions of people. Unfortunately, they have considerable incentive to behave as if they do.

Reinforcing these incentives is what Sowell dubs the “Vision of the Anointed.” Intellectuals’ belief in their own superior knowledge and virtue leads to a belief that they are an anointed elite who are qualified to make decisions for the rest of us in order to lead humanity to a better life. Under this vision problems such as poverty, injustice, and war are not due to inherent human weaknesses, but are the products of society’s institutions. Solving those problems requires changing those institutions, which requires changing the ideas behind the institutions. And who is better suited for that task than those whose work begins and ends with ideas?

“There could hardly be a set of incentives and constraints more conducive to getting people of great intellect to say sweeping, reckless or even foolish things,” Sowell states. He warns that if “no one has even 1 percent of the knowledge currently available . . . the imposition from the top down of the notions favored by the elites, convinced of their own superior knowledge and virtue, is a formula for disaster.”

The most telling portions of Intellectuals and Society are the ones in which Sowell chronicles the disasters that occur when intellectuals succeed in getting politicians, judges, and other policymakers to impose their vision on society.

Sowell writes that it “was part of a long-standing assumption among many intellectuals . . . that it is the role of third parties to bring meaning into the lives of the masses.”

Sowell also emphasizes the fact that intellectuals take their beliefs as axiomatic truths rather than hypotheses to be tested.

Since the 1980s, conservatives and libertarians have pushed back to the point that intellectuals’ “overwhelming dominance has been reduced somewhat.” Yet he warns that the intellectuals’ vision is still dominant: “Not since the days of the divine right of kings has there been such a presumption of a right to direct others and constrain their decisions, largely through expanded powers of government.” But now that Sowell has given us a penetrating analysis of that vision, perhaps it will be easier to fight it.

A previous post dealt with the folly of intellectuals presumed divine right.

Drifting Elites

2010-01-06T21:11:00.000-08:00

The intellectual elites have always lived in their own bubble of ideas, quite apart from the rest of us. That bubble has been drifting away quite rapidly and looks set to continue to do so.

The above graph, courtesy of Charles Murray, shows political attitudes from the General Social Survey of non-Latino whites ages 30–49 in the survey year. What it shows quite clearly is that while most of the country (at least the white part) is mildly trending towards being more conservative, the "intellectual uppers" are heading off the charts on the liberal end (for more details on the chart visit Murray's post).

This ties in well with a recent New York Times column by David Brooks where he whines that, "Every single idea associated with the educated class has grown more unpopular over the past year." Perhaps that's because the "educated class" (or "intellectual uppers") have ideas that are so far removed from the reality that the rest of us experience that those ideas simply don't make any sense to us commoners anymore.

The Foundation of the Blue State Blues

2010-01-04T16:48:00.000-08:00

Some Blue States, like California (my home State), are really hurting. Not only do they face never ending fiscal crises, but people, especially people in their most productive years, are starting to leave these States in droves.

California was once a really great place to live. It had (and still has) great weather, beautiful terrain, and bountiful natural resources.

The typical conservative explanation is that all this wealth attracted leaching liberals who took over the government and taxed and regulated the State from prosperity into its current mess.

There may be a grain of truth to that, but the question is why did everybody else (besides the leaching liberals) let this happen. The answer, in my opinion, is that changes in Federal Tax law deserves a substantial part of the blame.

Let me explain.

From FDR's administration until after Reagan was elected, the top Federal Tax Rates were always above 70% and even exceeded 90% at points. But State Income tax was deductible. During that period, in those States with a preponderance of high income earners, both the earners and the rest of the State could benefit from instituting high State income tax rates for the high income earners and returning part of those taxes as services.

To illustrate, let's consider an example. Let's say your marginal Federal Tax rate is 90%. Then for each dollar the State taxes and receives from you (which you then deduct from your Federal taxable income), your total income tax bill (State plus Federal) rises only 10 cents. The State then provides 15 or 20 cents in services to you, a bit goes to help the poor in your State, and the rest is pocketed by the bureaucrats and lobbyists. Everybody wins! Well, everybody but the poor and middle class in all States who have to pay more to provide the revenue needed by the Federal government.

California leveraged that situation wonderfully well. They built great infrastructure (like the University of California), provided great services and funded fabulous levels of graft and corruption. Everybody assumed this gravy train would run forever.

However, two things happened that ended the free ride fairly abruptly. Federal income taxes were slashed by Reagan and the Alternate Minimum Tax (AMT) scheme was instituted which greatly reduced the ability to deduct State income tax. Suddenly paying State income taxes was a big net negative for the taxpayer. A dollar of revenue to the State was pretty much a dollar out of the pocket of the high income taxpayer.

Suddenly the services to the high income tax payers couldn't possibly make it worth it to pay the tax (that's why high income earners are leaving in droves), the programs for the poor couldn't be lavishly funded, infrastructure couldn't be maintained, and, worst of all, the fabulous levels of graft and corruption to which so many people had become so addicted could only be maintained by massive and unsustainable borrowing. Since graft and corruption are the lifeblood of politicians and lobbyists, the massive and unsustainable borrowing is a given.

This is simply a case of people responding to incentives created beyond their control. Unfortunately, bureaucracies can generally only expand, so it can't really be undone at this point until the Blue States go hopelessly bankrupt. It's a bit like a Roach Motel - or for my State, "Welcome to the Hotel California."

Subjective Warming

2009-12-28T16:32:00.000-08:00

Let's say that scientists determined with certainty that pistachio is the best flavor for ice cream. Pistachio ice cream lovers everywhere would no doubt scream, "I told you so!" and many people might switch to eating only pistachio ice cream. Those of us who dislike pistachio ice might be a little skeptical of the settled science, but we probably wouldn't much care and would continue to enjoy other flavors. The pistachio ice cream lovers might then call us skeptics or deniers and look down on us from their moral high ground.

None of this would much matter, unless pistachio ice cream lovers and scientists latched onto politicians (or vice-versa) to have the government ban (or at least tax and regulate) all flavors of ice cream other than pistachio. This clearly crosses an important line since one group is now limiting the subjective choices and opportunities of the second group. Yet nobody was ever stopping anyone from eating pistachio ice cream.

Now substitute "something should be done about global warming" for "pistachio is the best flavor for ice cream". The substitution, while having elements of absurdity, works surprisingly well.

Even if one accepts that global warming is happening with certainty, and even if one accepts that the scientific consensus is that something should be done about it, once that group forces its subjective preference for doing something on the rest of us, a very serious line is crossed.

It's the line of oppression and totalitarianism.

My Fifteen Minutes of Fame

2009-12-15T21:37:00.000-08:00

Well, more like two paragraphs (and the bottom picture) in The Economist:

Even pruning can be mechanised. Vision Robotics, a company based in San Diego, has demonstrated a prototype vine-pruning robot. Good pruning requires skill to balance the growth of the vine. The vines also need to be trimmed at certain locations and at precise angles to grow the best grapes for winemaking. The robot is a bit slower than a good human pruner, but it will speed up. It should be able to prune vines at about half the cost of manual labour, says Derek Morikawa, the chief executive of Vision Robotics.

The company is also developing apple- and orange-picking robots with multiple arms. These too rely on building 3-D models of trees and the fruit growing on them. Mr Morikawa thinks the crop-scouting ability of such automated machines will prove highly valuable. Supermarkets, for instance, like uniformity so if they want, say, apples of a certain size and in a particular state of ripeness, a farmer could use the model to identify exactly where such apples are growing.

Vision Robotics is the company I founded about ten (long, long, long) years ago.

I was hoping for The Cover of the Rolling Stone, but hey, a couple of paragraphs on page umpteen gazillion of The Economist is a start. It's certainly a step up from Good Fruit Growers Magazine (I'm not kidding - that's actually the name of a magazine) and the numerous other ag rags that you've never heard of and I can never remember that we've been featured in.

I'm rather hoping this isn't my company's entire 15 minutes of almost fame, but we'll see.

Happy Thanksgiving

2009-11-26T06:06:00.000-08:00

My thanks to the free market for delivering my free range turkey:

The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.

Happy Thanksgiving!

Hat Tip: MJ Perry (Carpe Diem)

Hide the Decline

2009-11-25T08:38:00.000-08:00

I'm glad I posted my view of the science, economics, politics, and philosophy of Climate Change before the recent email hack of the Climate Research Unit of East Anglia. It enabled me to be a brave contrarian speaking truth to overwhelming consensus (or something like that), whereas now I seem to be just one of the majority skeptics.

I'm, of course, not even vaguely surprised by the revelations found in the emails, code, and data released by the hack. The revelations in and of themselves are not seriously damaging, in my opinion. However, they completely vindicate skeptical climate folk like McIntyre, Lindzen, Svensmark, Spencer, etc. and make it far more likely that people will listen to them now, and in the future. The tide (so to speak) is turning against climate alarmism, and just might be unstoppable.

I sure hope so.

Smart Phones and Internet Radio

2009-11-16T21:39:00.000-08:00

Before last week, I'd never really used Internet radio. That's because if I'm working, I find music distracting, and if I'm not working, I don't want to be near a computer.

My new smart phone (Motorola Cliq) has changed all that. I'm pretty amazed by the concept: a free and customizable set of virtual "radio stations" that learn your preferences over time, with no (audio) advertising, and can be used with headphones or a home or car stereo system. I love it. It's the best thing since sliced bread.

I'm finding it takes about 100 songs to train a station (by hitting the "love" and "ban" buttons appropriately when various songs that you like or don't like play) and after that I end up liking 80 to 90% of the songs it serves up which is certainly better than standard radio (which I rarely listen to) and even most albums that I own.

The business model is pretty cool too. As the song plays, the album and other identifying information is displayed along with an unobtrusive ad at the top. In addition, if you hear a song you'd like to buy, you just hit the "buy" button and it's automatically added to your library (the cost per song is around $1). Unlike iPods, which need to be connected to a computer to download music, it happens automatically.

I realize that iPhone and other smart phone owners probably are mostly all using the Internet radio feature already, but I'm a slow adopter of technology, so it takes me a while to catch on.

House health care bill and jobs

2009-11-13T13:14:00.000-08:00

William Jacobson had some key observations on his Legal Insurrection blog:

The message of the bill is that whatever you do, if you want to grow your business without paying the health care tax, do not add employees.

Obama does not understand these provisions. Obama gave a speech this morning in which he stated that these provisions are directed at small businesses operating on thin margins. But these provisions have nothing to do with profit margins. This is a wage-based tax.

Obama does not understand the difference between profit margins and wages. This is exactly what you would expect from someone who always has been on the receiving end of wages, and never had to meet a payroll. Wages are not profits and have nothing to do with the success of a business. Just ask the auto companies.

I don't think Obama and the other Democrats are lying about this aspect of the health care tax. They truly do not understand how the private economy works. In their blissful ignorance they are designing job-killings provisions which they do not understand.

Job losses at large establishments have slowed considerably as monetary policy has helped stem panic. Small businesses are still shedding jobs at a high rate or are failing to even form. When we see net job creation some time next year it would help if a bill like this was not in prospect. Otherwise it will be a nearly jobless recovery for longer than many people expect. It might be so anyway if regime uncertainty doesn't abate.

Betsy McCaughey explains several passages of the bill under categories such as:

What the government will require you to do

Eviscerating Medicare

Questionable Priorities

I think this article gives an appropriate overall characterization of the bill as well as the relevant accounting used for scoring versus a more realistic tally:

The bill is instead a breathtaking display of illiberal ambition, intended to make the middle class more dependent on government through the umbilical cord of "universal health care." It creates a vast new entitlement, financed by European levels of taxation on business and individuals. The 20% corner of Medicare open to private competition is slashed, while fiscally strapped states are saddled with new Medicaid burdens. The insurance industry will have to vet every policy with Washington, which will regulate who it must cover, what it can offer, and how much it can charge.
...
Perhaps the most unsurprising news in this drama was the collapse of the Blue Dog "deficit hawks." Enough of them always cave in the end to give Mrs. Pelosi her way. It's nonetheless worth noting the surrender of that most vocal scourge of deficits, Tennessee's Jim Cooper, who voted aye on grounds that the bill can be improved in the Senate.

But Max Baucus's Finance Committee bill includes a similar gimmick of making the numbers look good by using 10 years of new taxes to finance only seven years of spending (six in the House). The deficits explode in the second decade and beyond in both bills.

The House also contains a new government long-term insurance program that starts collecting premiums in 2011 but doesn't starting paying benefits until 2016 and then runs out of money in 2029. North Dakota Democrat Kent Conrad called it "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of" in an interview with the Washington Post in late October. Mr. Cooper has with a single vote made his entire career irrelevant.

I saw an interview of Senator Bob Corker in which he said that a Senate Democrat agreed that if Republicans had proposed this exact same bill, Democrats would all vote it down. Hopefully a bill this bad simply dies in the Senate. Then they can start over again.

Imagine that - creating a distraction

2009-11-04T14:04:00.000-08:00

Bruce McQuain at Q and O points to an Arnold Kling post

I think there is something even more sinister going on. I interpret the pay czar in terms of Murray Edelman's symbolic uses of politics. The idea is to focus on a symbol of the cause of taxpayer losses--bonuses of the executives of bailed out firms--in order to distract attention from the substance. The substantive issue is the extent to which the losses were caused by political actions and the extent to which they are concentrated at Freddie Mac and Fannie Mae.

The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.

Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.

Incidentally, the debate over the "public option" in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.

The aggressive government push for expanded home ownership and affordable housing in the form of easy credit made a huge contribution to the mess:

Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market..
Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

More F&F reform is needed:

All the debate of the last several weeks on changes to the financial regulatory system has omitted any discussion over reforming the entities at the center of the housing bubble and financial meltdown: Fannie Mae and Freddie Mac.
Total losses from the bailout of Fannie and Freddie are likely to exceed $250 billion — as much as the cost to the taxpayer of all bank failures in American history combined.

Note: F & F bailout loss estimates now exceed $350 billion.

Fannie and Freddie infected capital markets and spread through every sector of the banking system. Before the bursting of the housing bubble, holdings of government-sponsored enterprise (GSE) securities — bonds and mortgage-backed securities as well as preferred stock — constituted more than 150% of core capital for insured banks.

It was not only the commercial banking system that was stuffed with toxic GSE holdings; it was also many of the investment banks. More than 50% of Maiden Lane One, the toxic assets that the Federal Reserve guaranteed in order to persuade JPMorgan to buy Bear Stearns, are GSE securities.

Additionally, more than 40% of money market mutual fund holdings were in the form of GSE securities.
At the height of the bubble, Fannie and Freddie purchased more than 40% of the private-label subprime mortgage-backed securities. Between the two of them, they were the largest single source of liquidity for the subprime market.

Interestingly enough, the very vintages of subprime loans that performed the worst — 2006 and 2007 — were the years in which Fannie and Freddie entered the market in force.

With their massive leverage, Fannie and Freddie were levered more than 100-to-1 — a disaster waiting to happen.

Why then were foreign investors so willing to trust their money to Fannie and Freddie? Quite simply, they were assured by U.S. Treasury officials that their losses would be covered.

Ultimately, Fannie and Freddie were not bailed out in order to save our housing market; they were bailed out in order to protect the Chinese Central Bank from taking losses. Without the implicit federal guarantee of Fannie and Freddie, trillions of dollars of global capital flow would not have been funneled into the U.S. subprime mortgage market.
Some might argue that the problem with Fannie and Freddie was fixed with last year's regulatory reform bill. That bill created a new regulator, one with increased supervisory powers, including the ability to wind down a GSE, and independence from the congressional appropriations process, letting the regulator raise additional funding.

Nothing could be further from the truth. As one of the drafters and negotiators for that bill while on the staff of the Senate Banking Committee, I can say that there was a shared awareness by all parties that the bill was insufficient to prevent the failure of Fannie and Freddie.
It was not the best bill that could be crafted. It was the best bill that could pass, given the continued strength of Fannie and Freddie apologists in Congress.

Most of the worst economic and financial crises in American history have involved real estate. Such is likely to be the case in the future. Reform of Fannie and Freddie is imperative so that American taxpayers will not be on the hook for hundreds of billions of dollars for the next real estate bubble.

There were many contributions by private players but there were also other very large contributions from governmental players.

The Burden of Taxes

2009-11-01T13:00:00.000-08:00

A common belief is that levying additional income taxes on those with high incomes has negligible adverse impacts on the poor. In this post, for a hypothetical economy, I will show why this isn't true. In future posts, I will discuss how this result for the hypothetical economy still has at least some relevance to the real world.

Assume the following:

1. All people have exactly equal talent and capabilities.
2. All markets are perfectly efficient and fair.
3. Return on Investment (ROI) for all occupations is exactly equal, where the definition of "Investment" is non-standard and includes the following:

a. Cost (Money & Opportunity Cost) of Education.
b. Difficulty/Stress/Unpleasantness of the job.
c. Negative of the Satisfaction produced by the job.
d. Other similar considerations.

Note that (b), (c) and (d) have a strong subjective component and even (a) has a significant subjective component via an individualized Discount Rate (a rate of interest that relates the value of future income to current income to a given individual). Because of the differing "Investments" required for various occupations, there would be significant differences in compensation for those occupations since the ROI for all occupations is constrained to be equal.

This means that only those occupations that provide adequate value to justify the ROI will exists. In other words, if an occupation requires a great deal of "Investment" and therefore requires a high wage according to the ROI constraint, but nobody is willing to pay for the goods or services that this occupation would provide at that wage level, the occupation won't exist.

The ROI is an after-tax ROI. In this hypothetical world, nobody cares what their compensation is before taxes and instead they focus on their after tax compensation.

Consider the effect of increasing taxes on a given occupation while leaving the taxes on all other occupations the same. It doesn't matter if it's an occupation with high or low compensation, the effect is the same. If everybody with the occupation stayed in it, the after tax ROI for that occupation would be reduced. However, this violates the ROI constraint, so enough people would leave this occupation and do something else until the supply of people working at this occupation is reduced enough so that supply and demand balance to drive the after tax ROI for this occupation back up to nearly its original level.

Since people have left this occupation and are now competing in other occupations, all occupations' ROIs are slightly reduced (including this occupation with its additional tax burden). Taxes and regulation essentially have the effect of reducing our ROI for the work we do.

That's the first interesting effect. All ROIs are reduced by the same amount. Any attempt at making income taxes progressive is completely thwarted. The ROIs for the occupations with the highest and lowest compensations remain equal after the tax increase.

Since the occupation with the new tax burden has similar after tax compensation, the pre-tax compensation must be higher. That means that the production of goods and services dependent on this occupation incur greater cost, which implies that everybody will end up paying a higher prices for these goods and services. Again, any attempt at making income taxes progressive is lost, since everybody, rich or poor, will pay the same increased cost for these goods and services.

In this hypothetical economy, it is impossible for income taxes, regardless how progressive by design, to actually be progressive in effect. Since the poor feel the burden of reduced ROI and higher prices most acutely, the poor feel the burden of higher taxes more than anyone else.

In future posts I'll argue why the real economy bears significant resemblance to this hypothetical economy in regards to taxation.

Gee, just wondering...

2009-10-28T14:10:00.000-07:00

Regarding the latest wrinkle in the health care/insurance debate, Michael Cannon points out:

Like the three “public options” we’ve already got – Medicare, Medicaid, and the State Children’s Health Insurance Program – Fannie Med would drag down the quality of care for publicly and privately insured patients alike. Yet despite offering an inferior product, Fannie Med would still drive private insurers out of business because it would exploit implicit and explicit government subsidies. Pretty soon, Fannie Med will be the only game in town – just ask its architect, Jacob Hacker.

Even those who can maintain their private coverage face this:

The story is largely the same from state to state, though the increases are smaller in the few states that have already adopted the same mandates and regulations that Democrats want to impose on all states. For the average small employer in high-cost New York, for instance, premiums would only rise by 6%. But they'd shoot up by 94% for the same employer in Indianapolis, 91% in St. Louis and 53% in Milwaukee.

A family of four with average health in those same cities would all face cost increases of 122% buying insurance on the individual market. And it's important to understand that these are merely the new costs created by ObamaCare—not including the natural increases in medical costs over time from new therapies and the like.

Can the gubmint do for affordable health care coverage what it did for affordable housing? I'd rather not find out.

That Explains It!

2009-10-20T17:05:00.000-07:00

In case you hadn't seen this:

(Hat Tip: Don Luskin)

Not Evil, Just Wrong

2009-10-18T21:44:00.000-07:00

I just watched the premiere showing of the movie "Not Evil, Just Wrong", a movie/documentary focused on the negative consequences of radical environmentalism.

It's mostly just preaching to the choir, but they were innovative in their approach:

The film highlights the tragic consequences of the first triumph of the environmental movement, the ban on DDT, which has needlessly resulted in the deaths of more than 40 million children and adults in the developing world.

Actually, I'd say the movie more than just highlights the consequences of the DDT "ban". More than 20 minutes were devoted to it with many graphic scenes of children dying of malaria interspersed with seemingly clueless rich white environmentalists saying how important the prohibition on the use of DDT is. While powerful, the case against the environmental movement and the claim of 40 million deaths seems significantly overstated.

Continuing on, the case against Climate Change Alarmism is straight forward. It basically amounts to saying, "See the catastrophe that happened the last time the environmentalist had their way? We'd better stop them from taking action against Global Warming or really bad things will happen again!"

The choir will no doubt eat that up, but those who belong to the Church of Warming are unlikely to buy into this logic since they very likely consider the reduction in the use of DDT a huge success, even to this day.

People who have not yet made up their minds, however, may be swayed because the malaria scenes are compelling. If the Warmenists are not able to produce enough evidence or propaganda in the media to convince those still deciding that much of the movie is untrue, the movie might convert a few more people to the skeptics side.

I hope it does.

Keeping things straight

2009-10-16T12:42:00.000-07:00

The other night I was sitting with my youngest child eating ice cream and talking. He mentioned something, I can't remember specifics, that was germane to the postmodern mindset and blurring of important distinctions. I replied with the lessons from this by Mark Steyn:

Half a decade or so back, I wrote: “It’s a good basic axiom that if you take a quart of ice-cream and a quart of dog feces and mix ’em together the result will taste more like the latter than the former. That’s the problem with the U.N.”

Absolutely right, if I do say so myself. When you make the free nations and the thug states members of the same club, the danger isn’t that they'll meet each other half-way but that the free world winds up going three-quarters, seven-eighths of the way.

But, if you’re on an Indian Ocean island when the next tsunami hits, try calling Libya instead of the United States and sees where it gets you.

This isn’t a quirk of fate. The global reach that enables America and a handful of others to get to a devastated backwater on the other side of the planet and save lives and restore the water supply isn’t a happy accident but something that derives explicitly from our political systems, economic liberty, traditions of scientific and cultural innovation, and a general understanding that societies advance when their people are able to fulfill their potential in freedom. In other words, America and Libya are defined by their differences.

What happens when you pretend those differences don’t exist? Well, you end up with the distinctively flavored ice cream I mentioned at the beginning. By declining to distinguish between the foreign minister of Slovenia and the foreign minister of, say, Sudan, you normalize not merely the goofier ad libs of a Qaddafi but far darker pathologies.

Ahmadinejad & co aren’t Holocaust deniers because of the dearth of historical documentation. They do so because they can, and because it suits their own interests to do so, and because in the regimes they represent the state lies to its people as a matter of course and to such a degree that there is no longer an objective reality only a self-constructed one. In Libya and Syria and far too many “nations,” truth is simply what the thug in the presidential palace declares it to be. But don’t worry, Obama assures them, we’re not “defined by our differences.” Hey, that’s great, isn’t it? Yet, if you can no longer distinguish between the truth and a lie, why be surprised that the lie metastasizes and becomes, if not yet quite respectable, at least semi-respectable and acceptable in polite society?

He's a pretty sharp kid and he "got it" quite clearly. As a teenager he appreciated the humor as well.

Catastrophic Anthropogenic Global Warming - A High Level View

2009-10-09T10:52:00.000-07:00

Instead of just looking at the science of climate change, I've analyzed it from several different perspectives. In a nutshell, this is what I've found.

Science

Common sense tells me that the fact that we exist and are the result of life having evolved over billions of years indicates that the climate is quite stable as far as life forms are concerned. This is especially true given that "[f]ive hundred million years ago carbon dioxide was 20 times more prevalent than today"[1] and that the climate has been adequately stable to support evolution and ecosystem diversity through catastrophic disasters such as meteor strikes and massive volcanic eruptions.

It is true that common sense isn't always correct. However, when a proposition defies common sense, I require an especially rigorous burden of proof on those making the proposition. That burden of proof is nowhere close to being met.

Global temperatures are affected by the concentration of CO2 in the atmosphere. All else being equal, a doubling of the concentration of CO2 will increase the average global temperature by 1.2 degrees Celsius[2]. An increase of 1.2 degrees Celsius is very unlikely to be catastrophic.

The scientific case for catastrophic man-made global warming rests on a set of computer models called General Circulation Models (GCMs). These models incorporate positive feedbacks that amplify the warming due to CO2. In other words, a little bit of warming due to CO2 becomes much more warming because of hypothesized effects such as increased water vapor (water vapor also traps heat). Instead of 1.2 degrees Celsius for a doubling of CO2, the GCMs, with the positive feedbacks predict much larger warming, in the range of 1.5 to 4.5 degrees Celsius per CO2 doubling[3].

These feedbacks, while plausible, are not proven. Indeed, some of the effects expected by the GCMs from such feedbacks have not been observed in the real world. For example, while the models predict the warming of the tropical troposphere to be 2 to 3 times larger than the warming of the surface, this relationship has not been observed[4]. In fact, recent research[5] based on measured Sea Surface Temperatures and measured outgoing radiation indicate an overall negative feedback which means that there could be substantially less than 1 degree increase in temperature resulting from a double of CO2. Also, using finer cloud simulations within the existing GCMs seems to reduce the predicted temperature increases[6]. The above are just a sampling of numerous articles that cast doubt on the more extreme global warming predictions.

There are other plausible explanations for whatever warming occurred last century. For example, changes in solar activity may have significant impact on cloud formation[7] in addition to its small, direct effect on temperature. To date, relatively little effort has been expended on researching these alternate explanations, but they are, in my opinion, plausible, and not disproved.

In summary, the science of Catastrophic Global Warming defies common sense, has not been proven, and alternate explanations have been neither adequately researched nor disproved.

Economics

Any significant climate change (in either direction) will produce winners and losers, both in terms of life forms in general and human life in particular. However, given the observation that the density of both life and humanity are much higher in very warm climates than very cold climates coupled with the fact that the GCMs predict that most of the warming will occur in colder climates[8] leads me to doubt predictions of severely adverse economic impacts from global warming.

One of the most dire and well known economic analyses of climate change is The Stern Review[9]. It concludes that we should immediately begin investing at least 1% of global GDP in order to reduce CO2 emissions and that an investment of this magnitude (over $400 billion per year) will produce positive future returns by reducing the impact of climate change.

However, in my opinion, the Stern Review and other economic analyses with similar findings are seriously flawed. First, the Review "depends decisively on the assumption of a near-zero time discount rate combined with a specific utility function. The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today’s marketplace real interest rates and savings rates."[10]. In other words, the Review assumes far, far lower interest rates than can be found in the real world. Spending large sums of money on preventing CO2 emissions will adversely affect billions of people now, miring substantial numbers of those in prolonged poverty. Note that this spending, to be effective, also assumes some level of efficiency. Unfortunately, governments are not particularly good at efficiency.

A second problem is that the Review seriously underestimates future innovations which will mitigate the impact of climate change. If one considers the technological progress that has been made in the last century and projects it forward to the next hundred years, it seems nearly certain that humanity will be ever more connected, mobile, and able to cope with the environment. It's also far from clear that CO2 emissions will continue to increase as predicted. Other technologies such as solar, geothermal, nuclear fission and fusion, etc., will continue to become more cost effective and may displace fossil fuels as energy sources anyway.

In addition, there are likely to be some benefits to warming and these benefits are downplayed in the Stern Review. For example, other economic studies conclude "that moderate warming is an overall benefit to mankind because of higher agricultural yields and many other reasons."[11] This fits with the observation that mankind does better where it's very warm rather than where it's very cold.

Politics

Even if the upper end of the predicted warming occurs and even if the economic analyses like the Stern Review are accurate, it's far less clear that it's useful to take action if only a few rich countries are willing to do anything about.

India and China have flat out refused to reduce future emissions with India even questioning the science of global warming[12][13]. As these countries represent nearly ½ the global population, it make little sense for much smaller countries such as the United States to live substantially less well in order to slightly slow the rate of increase of CO2, especially given that the per capita increase in CO2 emissions in the United States is slowing anyway[14].

There is no reason to get governments involved. If taking action is such a good idea, people can act individually and in non-government groups in order to reduce their carbon footprints. If there are only a few skeptics who don't follow, those few skeptics will have limited impact. In other words, if you think reducing carbon footprints is a good idea, by all means, reduce yours.

There's very little evidence that the world will be able to take significant concerted action anyway. For example, Lomborg[15] shows that the Kyoto Treaty (if the signatories had actually lived up to there promises) would have only delayed the climate change due to CO2 emissions by six years out of 100.

Religion

Catastrophic Global Warming has all the trappings of a religion. The god is “Gaia”, the pope is Al Gore, the priests are (most) climate scientists, they know the Truth (with a capital “T”) with certainty, the message is essentially “Repent or the end is nigh!”, Creationism is alive and well since “Gaia” is apparently supposed to have a specific CO2 level and associated climate, and heretics are dealt with nastily.

As such, Catastrophic Global Warming should be subject to the same Separation of Church and State doctrine as other religions. The believers should, of course, be free to proselytize and live their own lives according to their beliefs, but should not be allowed to impose their beliefs on the rest of us via government taxes and regulation, and should not be free to proselytize in our children's schools.

The concept that if we don't take action against CO2 emissions then we're immoral is not fundamentally different than any other religion that claims that you're immoral if you don't believe in God and live your life according to the Dogma of that religion. There is no objective morality here, Carbon Dioxide has no morally correct level, and there is no morally correct global temperature or climate.

Furthermore, when subjective opinions are stated as objective fact with the goal to control the behavior of others, that is a significant evil. When the majority or even a vocal minority imposes its subjective beliefs on others, that is tyranny and is a major evil.

Summary

Taking action to reduce CO2 emissions in the United States in order to prevent the possibility of Catastrophic Anthropogenic Global Warming makes little sense from any rational perspective. The science is not adequately well understood, economically it makes little sense, and it's not politically possible on a global scale. If people wish to choose that as a religion, that's fine, as long as their beliefs aren't imposed on the rest of us.

References

[1] http://en.wikipedia.org/wiki/Carbon_dioxide

[2] Committee on the Science of Climate Change, National Research Council. Climate Change Science: An Analysis of Some Key Questions, pp 6-7.
http://www.nap.edu/openbook.php?record_id=10139&page=6

[3] Intergovernmental Panel on Climate Change (IPCC). Climate Change 2007: Synthesis Report, p 38.
http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf

[4] Lindzen, R.S. (2007) Taking Greenhouse Warming Seriously, Energy & Environment, 18, pp 937-950.
http://www-eaps.mit.edu/faculty/lindzen/230_TakingGr.pdf

[5] Lindzen, R.S., Choi, Y.S. (2009) On the Determination of Climate Feedbacks from ERBE Data, Geophysical Research Letters, Vol. 36, No. 16. (26 August 2009), L16705.
http://www.leif.org/EOS/2009GL039628-pip.pdf

[6] Wyant, M.C., Khairoutdinov, M. & Bretherton, C.S., 2006. Climate sensitivity and cloud response of a GCM with a superparameterization. Geophys. Res. Lett, 33, L06714.
http://eos.atmos.washington.edu/pub/breth/papers/2006/SPGRL.pdf

[7] Svensmark, H., T. Bondo, and J. Svensmark (2009), Cosmic ray decreases affect atmospheric aerosols and clouds, Geophysical Research Letters, Vol. 36 L15101.
http://www.agu.org/pubs/crossref/2009/2009GL038429.shtml

[8] Houghton, J.T., Ding, Y. et al, (2001): Climate Change 2001: The Scientific Basis, Publications of the IPCC, p 384.
http://www.ipcc.ch/ipccreports/tar/wg1/384.htm

[9] Stern, N., (2008): The Economics of Climate Change: The Stern Review, Cambridge University Press.
http://www.hm-treasury.gov.uk/stern_review_report.htm

[10]Nordhaus, W., (2007): The Stern Review on the Economics of Climate Change, Journal of Economic Literature Vol. XLV, pp. 686–702
http://nordhaus.econ.yale.edu/stern_050307.pdf

[11]Happer, W. (2009): William Happer Testimony to Senate Energy Committee, February 25, 2009
http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=84462e2d-6bff-4983-a574-31f5ae8e8a42

[12] Lamont, J. et al. (2009): India Widens Climate Rift with West, Financial Times, July 23, 2009
http://www.ft.com/cms/s/0/c2896b88-77bd-11de-9713-00144feabdc0.html?nclick_check=1

[13] Taylor, P. (2009): China, Russia, Now India: Reject Global Climate Controls,
Los Angeles Examiner
http://www.examiner.com/x-3089-LA-Ecopolitics-Examiner~y2009m7d6-China-Russia-Now-India-Reject-Global-Climate-Controls

[14] Energy Information Administration (2001): World Energy Use and Carbon Dioxide Emissions, 1980-2001, Department of Energy
http://www.eia.doe.gov/emeu/cabs/carbonemiss/index.html

[15] Lomborg, B. (2001): The Skeptical Environmentalist, Cambridge University Press, p. 302

Being There

2009-10-09T09:32:00.001-07:00

Is Nobel Prize winner Obama related to Chauncey Gardiner?

It seems he has only to show up in order to have (once) great prizes bestowed upon him.

As always, the Truth is stranger than Fiction.

Yes We Can!

2009-10-06T14:40:00.000-07:00

Image of the day (week/month/year):

Hat tip: Israel Matzav

How Much Can We Borrow?

2009-09-30T17:00:00.000-07:00

If your left hand borrows $1 billion from your right hand, would you, as a whole, be bankrupt?

Of course not.

You might wonder where your right hand got the money to loan your left hand. Assume that your left hand is able to create money, more or less like our central bank, the Federal Reserve. Your left hand, over time, gave the money to your right hand, which then lent it back to your left hand.

In this closed-system scenario, no matter how much your left hand borrows, no matter what the interest rate, you, as a whole, will never be bankrupt. Your left hand could choose to default on its debt, but it would never have to default.

Large debt and continued borrowing can potentially cause accelerating inflation. However, there is no inherent hard limit at which that occurs because the demand for consumption and investment in the private sector are equally important factors. Those factors will be the subject of another post.

The Politics of the Current Health Care Reform Debate

2009-08-26T16:42:00.000-07:00

This post is a followup to Bret's earlier post.

Opposition to proposed changes to medical care/insurance programs has been growing and getting more and more vocal. Even though most people are at least somewhat satisfied with their circumstances they are willing to consider changes that make sense and don't seem fishy:

Yes, the current health care program does have problems. To fix them requires a series of repairs -- tort reform, portability, elimination of prior conditions as an impediment to insurance, and a safety net for people who don't have insurance or lose their jobs.

Health reform does not require a complete remaking of the system. If all that Obama wanted were to insure those who fall between the cracks, he could put them into the same wonderful program that Congress created for itself by subsidizing their premiums. This would neither require a thousand pages of legislation nor a new series of bureaucracies.

But building a new power base resulting from the mobilization of the political and economic periphery requires redefining the nation's health problems as the nation's health catastrophe.

Health reform is Chicago politics on a national level. Welcome to the city.

Also, when the president talks about competition he seems to mean something different than my notion of competition:

"Choice, competition, reducing costs — those are the things that I want to see accomplished in this health reform bill," President Obama told talk-show host Michael Smerconish last week.
Choice and competition would be good. They would indeed reduce costs. If only the president meant it. Or understood it.

In a free market, a business that is complacent about costs learns that its prices are too high when it sees lower-cost competitors winning over its customers. The market — actually, the consumer — holds businesses accountable and keeps them honest. No "public option" is needed.

So the hope for reducing medical costs indeed lies in competition and choice. Today competition is squelched by government regulation and privilege.

But Obama's so-called reforms would not create real competition and choice. They would prohibit it.

Competition is not a bunch of companies offering the same products and services in the same way. That sterile notion of competition assumes we already know all that there is to know.
Well-meaning politicians have created untold misery by assuming they and their experts know enough already.

The health care bills are perfect examples. If competition is a discovery process, the congressional bills would impose the opposite of competition. They would forbid real choice.

People who would be willing to make changes see all of this and the behavior of the political class and they are getting angry and losing trust:

Americans didn't vote for big government last November. They voted for a guy who looked like he could keep his cool in the heat of battle. If Obama wants to regain that cool, he needs to rein in the power-grabbers in Washington.

Actually they did vote for bigger government without intending to, but that's another subject. Here is how I would describe the growing opposition to any change at this time: they are calling a time-out on the political class until they start behaving in a trustworthy manner.

Irrational Debate

2009-08-22T07:17:00.000-07:00

Many Democrats are upset with the current tone of the Health Care debate. In their opinion, those who oppose Health Care Reform are being noisy, disruptive, and irrational. For example, someone I know wrote the following on another forum I frequent:

"I don't have a problem with rational arguments and debate on these issues. One of my previous posts suggested that Reps [Republicans] choice [sic] to use lies and fear probably guaranteed a poorer final result than the decision for them to present rational arguments and advance the solution in a positive way."

The Health Care debate starts with assumptions about how the world works (for example, what motivates different people) and even more importantly, personal subjective preferences. Rationality and reason have little to do with either of those, especially the latter. Since there is little common ground between liberals and conservatives on these premises, it's no surprise that the conclusions are totally opposite as well.

Just to be clear, both liberals and conservatives want peace on earth, good will to men, prosperity and happiness for all, etc., etc., yadda, yadda. So it might seem like there is substantial common ground, at least regarding the desirability of various Ends.

However, where there is precious little common ground is whether or not it's possible to achieve any of these desirable Ends or anything close. Note that a belief that such Ends are unachievable precludes rational discussion about the path to get there. There often simply isn't one, in my opinion.

My observations of politics coupled with trading futures (which led to a large number of hours studying economics and public choice theory) have completely convinced me that, on average, new and expanded government programs, taxes, and/or regulations hurt me and my family (and others) in the short term and the vast majority of people in the longer term.

As a result, from my point of view, there really isn't any point to "rational" discussion. That's because the rational discussion is inherently limited to those details that can be reasonably foreseen. What can't be rationally discussed is all of the unforeseen problems that will ultimately occur because nobody knows what they'll end up being. The foreseen effects of a 1,000+ page policy are just the tip of the iceberg. It's the huge mass of problems lurking below the surface about which we're currently clueless that will be the real problem and there can't be meaningful debate about that which is unknown by all.

In fact, stooping to rationally debate what's known is counterproductive. It requires a certain level of buy-in to the program that isn't warranted.

I reject the Health Care Reforms being proposed, but I have no rational reason for doing so.

Government Versus Growth

2009-08-17T15:16:00.000-07:00

This chart says it all:

(HT: Carpe Diem)

If want a better future for your children and grandchildren, keep total government expenditures under 25%.

Priests of Warmenism

2009-07-31T09:10:00.000-07:00

In a comment on a totally unrelated topic, Peter Burnet wrote:

Hardly anybody is qualified to build or interpret climate models. We are all beholden to what the experts say. Even if a layman sets out to study the competing claims of climate scientists carefully, he still is pretty much restricted to comparing theories/conclusions and has a hard time critiquing their underlying methodologies systematically by measuring them against experience.

The "experts" want you to be beholden to what they say and Peter has closed his eyes and walked blindly into their trap.

Virtually all of climate science is based on typical everyday experience and a few minor and easily understood bits of physics. We've all noticed that sunlight (also called visible radiation) makes objects warmer when it strikes them and that when those heated objects are moved out of the sun they begin to cool but we can't visibly see the warmth emanating from them. We've all noticed that hot air rises (in a hot-air balloon, thermal, etc.) and that when the hot air is also moist (humid) that clouds form when it cools sufficiently as it rises. Etc., etc.

The climate is difficult to predict not because the physics is difficult, but because it is so chaotic. All the bits of earth, ocean, and atmosphere heating and mixing at different rates and interacting with each other produces really, really complex responses that are impossible to characterize analytically. So scientists make statistical climate models to try and mimic the past and predict the future. They are really little more than software hackers and statisticians and know little more science (physics) of relevance to their task than the average layman.

So no, we aren't beholden to the priests of warmenism unless we want to be.

The Road to Serfdom by VDH

2009-07-31T09:03:00.000-07:00

From an article by Victor David Hanson:

Otherwise we know the ultimate end of the present road: a vast bureaucracy of non-taxpaying incompetents, damning the estranged few for not producing ever more to be taxed, convinced that they are geniuses—and only due to some sort of unfairness have been surpassed by others.

Sounds like he's channeling Hayek's Road to Serfdom. But that does seem to be where it always ends up in the long run. Personally, I'm thinking of joining the vast bureaucracy of non-taxpaying incompetents. It looks like that's where the money will be in the future.

The jobs fairy

2009-07-24T13:27:00.000-07:00

When thinking about practical understandings of economic matters the matter of jobs is pretty meaningful to most people. Shannon Love provides illumination over at Chicago Boyz:

We talk about jobs as if they are physical objects. We find jobs. We lose them. We trade them. We save them. We export them by shipping them overseas. Occasionally, we believe they are stolen. Metaphors are common in language and usually harmless, but sometimes we seem to forget that they are metaphors. This in turn causes us to misunderstand the phenomenon under discussion.

In the case of jobs, the metaphor stops us from asking what physical event actually occurs when jobs “go away” and “don’t come back.” Examining this metaphor tells us something that is very important and ignored in most political discussions.

First, what is a job? A job is a task you perform for someone else’s benefit in return for compensation of some kind. If you mow your own yard it’s not a job. If you mow your neighbor’s for $10 it is. If you grow food for your own consumption, that’s not a job. If you grow food and sell it for money, then it is. A job requires that an economic exchange for the results of labor occur between two or more people.

Here we see the limits of metaphor. In the metaphor jobs are treated as objects, but in reality a job is an event or an action. It is the act of exchanging labor for money. The word job should be a verb instead of a noun.
When we talk about jobs leaving, moving, shifting etc., or being exported, we’re really talking about a particular subset of people leaving, moving, shifting etc. Who are these people? They are the job makers.

For example, a job in a factory does not exist before someone invents the technological item to be manufactured, designs the assembly line, buys the land, builds the factory and does all of the other thousands of tasks necessary to make, distribute and sell a product in the modern world. Until a job maker does all of that creative work, no job exists.

The ugly truth is that although we work hard, most us don’t create jobs for ourselves or others. Instead we rely on a small minority of job makers to create tasks that we can perform in exchange for a living. Only about 20% of us make any jobs at all. Of those 20%, about half, 10% of the total, are self-employed and make a job only for themselves. The remaining 10% make all the jobs for the rest of us. We rely on this small minority to identify solutions to problems and to create organizations that can implement those solutions. They then hire us to carry out the tasks associated with that solution. Without them, the rest of us would still be subsistence farmers.

When jobs “go away” it’s really the job makers, as living and breathing humans, who go away.
It’s easy to see why leftists would eagerly adopt the metaphor of jobs as objects. It lets them ignore the fact that a small minority of economically creative people create jobs for the rest of us. In turn, this lets them advocate policies that drive away job makers, without being held responsible for the loss of the jobs the job makers create.

The leftmost 25% of the American political spectrum do not for the most part consider themselves Marxist but they clearly work from a model strongly influenced by Marxist thought. Marx asserted that the economy and technology were the results of impersonal natural forces. No human created a job or any other economic good. Instead, the jobs and goods just happened, and a minority of evil people unjustly claimed the lion’s share of the benefit of these natural resources for themselves by shear brute force. The entire intellectual and moral argument for Marxism stands upon the idea that business people don’t actually create anything. This is why contemporary leftists honestly don’t understand why taxing and over-regulating the economically creative destroys the jobs of the economically uncreative. They think jobs just happen like the rain, and that the only real decision to be made is how we distribute the benefits of those jobs.

When the job makers leave, and the non-economically creative no longer have work, leftists do not wonder what they did to drive the job makers away. Instead, they treat the loss of jobs-as-objects like some act of God or natural disaster.
The rest of us should have that conversation. We should stop talking about impersonal and abstract “businesses” as creating jobs, and instead make explicit that a small and valuable minority of individual human beings creates the jobs and and wealth that the rest of us depend on. We should make it clear that the proper role of government economic policy is to support the creativity of such individuals, and it should do so mostly by getting out of their way.

The world has become “flat” in the sense that the geographical advantages no longer exist that once made one region inevitably wealthy and another inevitably poor. Today, one can build a factory or almost any job-creating system almost anywhere in the world. Today, prosperity simply requires that you have a sufficient mass of economically-creative job-makers. The great tragedy of Michigan, the other rust belt states and California is that nothing physical or material whatsoever prevents them from becoming economic powerhouses again. All they need do is change their political culture and laws such that instead of vilifying, hounding and looting job makers, they encourage them to create. If the states do that, then nothing can stop their rise to prosperity.

If they do not, then nothing can save them.

In my discussions over the years, most people seem unaware of the importance of the economically creative people who provide them with opportunities. The jobs fairy is my fun little rhetorical device for labeling the vital few but it also captures the common mistaken notion that jobs mysteriously appear out of thin air.

Additional info.: America Runs on Small Business

Did he realize what he said?

2009-07-23T14:16:00.000-07:00

This is a bit old by now in terms of the news cycle. Nonetheless, it's still a teachable moment. (see here also video)

The Administration is "trying to tamp down talk that it didn't get it quite right -- talk created by Vice President Biden," who told ABC's George Stephanopoulos that the Administration "misread the economy." Obama "tried to modulate the impact of the vice president's words." Obama said, "No, no, no, no, no. Rather than say 'misread,' we had incomplete information."

Which is almost always the case on anything of consequence regarding the economy. Fortunately, Hayek is available to help:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

However, only someone with an open mind can grasp this idea if it is in conflict with their existing beliefs!

Self-Healing Bicycle Tires

2009-07-20T13:16:00.000-07:00

I find it funny that often inventions that have a really positive impact on my life come from completely unexpected places. The latest example of this is self-healing tubeless bicycle tires. I'm not what you would call an avid bicyclist, but I probably ride around 1,000 miles in a given year, nearly all of that on a mountain bike.

The Southwestern United States is infested with the goathead thorn (Tribulus terrestris). These thorns are intensely sharp and hard and can penetrate just about anything that you could make a bicycle tire out of including kevlar and steel belts. As a result, for most bicyclists out here, even (or especially) mountain bicyclists with their heavy duty tires, frequent flats are an inescapable part of life.

Or so I thought until a guy at the bicycle shop recommended (and then installed) a kit that turns regular tires and rims into self-healing tubeless tires. Basically, a special rim strip is installed, the tube is removed and discarded (or saved for an emergency), and a liquid sealant is added to the tire. The liquid sealant is distributed all through the outside of the tire while the bicycle is being ridden because of the force due to the rotation of the wheel. When something penetrates the tire, the sealant is forced into the hole by the tire's air pressure, and immediately heals the tire.

The most impressive recovery was when I somehow managed to get more than 10 goathead thorns in both my front and rear tires at the same time (it looked very much like the picture above). I only ever carry one spare tube, I didn't have ten patches left, and I was riding alone, so it would've been a long, long walk home if I had still been using tubes. But I just pulled all of the thorns out of the tires, the holes bubbled for 10 seconds or so then stopped, I got back on the bike, and rode off with no loss of pressure and no problems.

Amazing!

I have to admit that I particularly like the philosophy of the approach¹. The alternative of trying to design impregnable super tires seems rigid and Statist to me. In that case you have to foresee everything that can make a flat and design solutions to protect against them. You end up with somewhat better protection against flats than standard tires, but at higher cost and lower performance (such tires tend to be heavier and more rigid so they don't grip as well). And such tires still are susceptible to flats from goatheads.

On the other hand, Self-Healing Bicycle Tires are a Resilient Approach. Instead of trying to prevent a situation, allow the damage to happen and then recover quickly. It doesn't matter if the damage is from a 3 inch diamond spike or a piece of glass or a tiny sliver or whatever.

Recover and just keep truckin'.
__________________________________

¹Note that this particular approach is apparently not for everybody as shown by a few of the reviewers.

Supreme Court nomination hearings past

2009-07-14T14:12:00.000-07:00

Activity surrounding current nomination hearings make me think back to a past hearing. Michael Barone recalls:

He is a man who says he does not read newspapers and seldom if ever watches newscasts. If true, it’s probably a good thing, because he has been the center of political controversy since his confirmation hearings in 1991 and the object of patronizing and dismissive commentary by many legal scholars. But though he was confirmed by the Senate by a slim 52-47 margin, he holds a lifetime appointment and has said that he intends to serve for 40 years — longer than any previous justice.

Thomas’s confirmation and role on the court are of special interest as the Senate Judiciary Committee begins its hearings tomorrow on the nomination of Judge Sonia Sotomayor to succeed the retired Justice David Souter. The vetting of Sotomayor promises to be a tame affair compared with the tumultuous and controversial grilling of Thomas in 1991, which he characterized as a “high-tech lynching.”

Sotomayor seems to share the views of Hispanic politicians and advocacy organizations and will face a committee controlled by the party of the president who nominated her. Thomas, by contrast, appeared before a hostile committee majority as a nominee who had disagreed with the views of most black politicians and civil rights organizations.

Thomas told the story of his life up to the time he took his seat on the court in his best-selling memoir “My Grandfather’s Son.” It’s a dramatic story, of growing up in the segregated Deep South, raised by a stern and hard-working grandfather (“the greatest man I have ever known”), of rebelling against him and rejecting his church (“I was an angry young black man”), of academic achievement and personal failings. At Yale Law School he took tax and corporation classes and did better than his detractors have suggested; tax law professor Boris Bittker every year set aside several anonymous exam bluebooks as examples of good work, and one year one of those bluebooks was Clarence Thomas’.

Having recently read Justice Thomas's memoir, I'm reminded of the appalling indecency with which the man was treated in his hearing. Fortunately he had the courage and the will to defend himself appropriately.

Text Message: Your Time's Up

2009-07-13T12:37:00.001-07:00

This is kinda cool: the IDF (Israeli Defense Force) is deploying new technology to warn people about incoming rocket attacks:

Code Red (early warning radar system) to your cellular device? This will become a reality two years from now, according to the plans of the Home Front Command. For the past year, the IDF Home Front Command has been working on warning civilians of rocket attacks via cellular devices. [...]

The Cellular Broadcasting Technology works according to the device's location. When a warning about a missile attack is received in a certain area, a warning message will be sent to whoever is in the zone.

Whereas this will clearly be very useful in Israel as soon as it's ready, I think it will be readily adopted in the United States as well given the proliferation of nuclear missiles to regimes such as North Korea. I expect the text message will look something like:

A nuclear missile will land in your vicinity in the next 90 seconds. Please go indoors, sit on a chair away from any windows, place your head firmly between your legs -- and kiss your ass goodbye!

At least we'll have some warning.

(HT: Israel Matzav)

Hurricanes Versus Bill Gates

2009-07-13T07:53:00.000-07:00

Question: What's the difference between Bill Gates and God?
Answer: God doesn't think he's Bill Gates.

Gates' latest area of playing God involves the simple matter of stopping hurricanes:

Recent patent filings have shown Bill Gates and his friends exploring subjects as diverse as electromagnetic engines and beer kegs. Now they're thinking even bigger -- trying to stop hurricanes.

Microsoft's chairman is among the inventors listed on a new batch of patent applications that propose using large fleets of vessels to suppress hurricanes through various methods of mixing warm water from the surface of the ocean with colder water at greater depths. The idea is to decrease the surface temperature, reducing or eliminating the heat-driven condensation that fuels the giant storms.

The filings were made by Searete LLC, an entity tied to Intellectual Ventures, the Bellevue-based patent and invention house run by Nathan Myhrvold, the former Microsoft chief technology officer. Myhrvold and several others are listed along with Gates as inventors.

The idea is actually pretty simple. Large tubes from the surface of the ocean to some depth are attached to floating platforms. Waves slosh over the edge of the platform and the warm surface water from the waves run down the tube to the depths, requiring no external energy source. Build a gazillion of them, stick them in the possible path of a serious hurricane, and presto!, the hurricane is downgraded a couple of notches relative to what it would've been since it no longer has access to that very warm surface water that would fuel it.

Since these could be completely passive devices, it wouldn't cost all that much to build them. The only question is could you actually build and deploy enough of them to make a significant difference.

Oh! And in the long term, there'd be even more heat and energy in the ocean which would mean even more intense and destructive hurricanes. But hey, that's for another generation to worry about.

Where's the Buzz?

2009-07-08T21:06:00.000-07:00

On June 2nd, Richard Lindzen, Alfred P. Sloan Professor of Atmospheric Sciences at MIT, made a presentation at a conference showing empirically that the climate sensitivity to a doubling of CO2 is 0.5 degrees Celsius. Since the climate models show a sensitivity that is 3 to 10 times larger, if Lindzen's findings are accurate, this would simultaneously invalidate the results of the climate models and eliminate the possibility of catastrophic man-made global warming. Indeed, at the end of his presentation, Lindzen states:

However, for the low sensitivity obtained from the actual climate system, we see that sensitivity is narrowly constrained to about 0.5C, and strongly implies that there is little to be concerned about.

In a normal field, these results would pretty much wrap things up, but global warming/climate change has developed so much momentum that it has a life of its own – quite removed from science. One can reasonably expect that opportunism of the weak will lead to efforts to alter the data (though the results presented here have survived several alterations of the data already).

It seems to me like this should be fairly big news. Lindzen is well known, with a long track record, from a relatively prestigious institution, with astounding results.

But there is remarkably little buzz. There's no mention that he's going to submit these results in a paper for peer review. The global warming skeptics don't seem to have much noticed these appealing results. The global warming believers haven't bothered to refute it.

The quiet seems strange to me. The debate has never lacked volume before.

Boy Am I Jetlagged

2009-07-06T07:48:00.000-07:00

We're back safe and sound from London and France with no significant glitches in the entire trip.

The jetlag due to the 9 hour time difference is really bad though. It was bad going the other way too. I'm gettin' too old for that kind of travel.

I'm so jetlagged that I accidently clicked the 'Publish' button instead of the 'Save Draft' button on some notes I was making for a future post. So if your feed aggregator shows you a post titled 'I Shrugged', ignore it, it wasn't meant to be seen and I've since deleted it.

Oops.

Key points in the health care debate

2009-07-02T14:03:00.000-07:00

Much of the public discussion does not even grapple with determining the most important criteria in determining policy changes. That can be the subject of another post. George Newman goes bowling, lining up several nonsensical shibboleths and knocking them down:(here)

The health-care debate continues. We have now heard from nearly all the politicians, experts and interested parties: doctors, drug makers, hospitals, insurance companies, even constitutional lawyers (though not, significantly, from trial lawyers, who know full well "change" is not coming to their practices). Here is how one humble economist sees some of the main arguments, which I have paraphrased below:

- "The American people overwhelmingly favor reform."

If you ask whether people would be happier if somebody else paid their medical bills, they generally say yes. But surveys on consumers' satisfaction with their quality of care show overwhelming support for the continuation of the present arrangement. The best proof of this is the belated recognition by the proponents of health-care reform that they need to promise people that they can keep what they have now.

- "Forty-five million people in the U.S. are uninsured."

Even if this were true (many dispute it) should we risk destroying a system that works for the vast majority to help 15% of our population?

- "The cost of treating the 45 million uninsured is shifted to the rest of us."

So on Monday, Wednesday and Friday we are harangued about the 45 million people lacking medical care, and on Tuesday and Thursday we are told we already pay for that care. Left-wing reformers think that if they split the two arguments we are too stupid to notice the contradiction. Furthermore, if cost shifting is bad, wait for the Mother of all Cost Shifting when suppliers have to overcharge the private plans to compensate for the depressed prices forced on them by the public plan.

- "A universal plan will reduce the cost of health care."

Think a moment. Suppose you are in an apple market with 100 buyers and 100 sellers every day and apples sell for $1 a pound. Suddenly one day 120 buyers show up. Will the price of the apples go up or down?
- "We need a public plan to keep the private plans honest."

The 1,500 or so private plans don't produce enough competition? Making it 1,501 will do the trick? But then why stop there? Eating is even more important than health care, so shouldn't we have government-run supermarkets "to keep the private ones honest"? After all, supermarkets clearly put profits ahead of feeding people. And we can't run around naked, so we should have government-run clothing stores to keep the private ones honest. And shelter is just as important, so we should start public housing to keep private builders honest. Oops, we already have that. And that is exactly the point. Think of everything you know about public housing, the image the term conjures up in your mind. If you like public housing you will love public health care.

There are many more gems in the article!!

Lessons learned

2009-06-24T13:58:00.000-07:00

The late Peter Bernstein had much to offer...

Jason Zweig had this to say (excerpts):

Investing has yielded a few stars so famous they are known by first name. Warren Buffett is one. Peter L. Bernstein -- the economist, investment consultant and prolific author who died on June 5 at 90 -- was another.

In his almost 70-year career, he taught economics at Williams College, worked as a portfolio manager at Amalgamated Bank and ran the investment-counseling firm of Bernstein-Macaulay, co-founded by his father and Frederick Macaulay, who invented the modern discipline of bond investing.

In 1974, as Wall Street was suffering its worst market decline since 1929, Mr. Bernstein co-founded the Journal of Portfolio Management to improve risk management with insights from academic research.

In 1970, he asked rhetorically, "What are the consequences if I am wrong?" and said "no investment decisions can be rationally arrived at unless they are [based upon] the answer to this question." He counseled investors to take big risks with small amounts of money rather than small risks with big amounts of money.

The same focus on the consequences of error was one of the main themes of "Against the Gods," which he published more than a quarter-century later.

Also in 1970, Mr. Bernstein wrote: "We simply do not know what the future holds." Over the ensuing decades, he returned again and again to that phrase in his speeches, articles and books, because he felt it captured the central truth about investing.

Asked in 2004 to name the most important lesson he had to unlearn, he said: "That I knew what the future held, that you can figure this thing out. I've become increasingly humble about it over time and comfortable with that. You have to understand that being wrong is part of the [investing] process."

I've read many books and articles over the years written by Mr. Bernstein and always felt fortunate that he shared his thoughts and insights. The willingness to accept uncertainty in the realm of investing (and life in general) is a valuable lesson.

( re: uncertainty see also here here here and here)

There were many who did not ask the question: what if I am wrong?

I can not predict, but I can observe. The trick is learning what observations are worth making and then using that information to construct workable contingencies.

I See London, I See France...

2009-06-14T21:43:00.000-07:00

Off to London, Paris, and Southern France for three weeks to give the kids a chance to see a bit of the world.

No blogging for me during that period, but maybe my coblogger will step up to the plate.

What's News?

2009-06-11T19:40:00.001-07:00

I'm sorry, but the entire punditocracy has missed the point.

It is NOT news that someone in show business makes an intensely rude, crude, lewd, insulting, disgusting and/or despicable comment regarding an entirely inappropriate subject. Indeed, if we demanded an apology every time that happened, we'd never get anything else done.

The point is that Letterman's comment is a shot across the bow. He is saying, "Governor Palin, if you so much as poke your nose outside the great State of Alaska, we will insult and smear and humiliate and hound you and your family and your community and anybody who thinks or even looks like you until you feel so degraded and miserable that you run back home with your tail between your legs and never, ever come back. We hate you, we fear you, we loathe you, and we will stop at nothing to destroy you."

That's the news.

Fire up the Skeptics

2009-06-11T08:02:00.000-07:00

Everyone is a Skeptic when it comes to religion. There are so many religions that it is impossible to be a believer in all of them so we are Skeptical about at least some of them. For the most part, we keep our Skepticism to ourselves because there is limited downside to letting others believe in whatever they choose to believe in as long as their attempts to convert the rest of us to their beliefs are kept within reasonable bounds.

However, if a religion exceeds those bounds, Skeptics will come out of the woodwork to attack that religion. Nobody wants to belong to a church that they believe is False. The propensity to not belong to someone else's church is so strong that wars have been fought over this sort of thing.

The Church of Human Induced Catastrophic Global Warmenism has exceeded reasonable bounds in trying to convert us all. This Church wants to use the full force and authority of the governments worldwide to force us to join. They want to limit our economic and political freedoms to force us to at least behave as if we believe.

To a great number of people, this is simply not acceptable and, sure enough, there is surge of Skeptics appearing all over the world.

I am one of those Skeptics. The science and economics on which the Church rests is full of holes, and unless that religion is one you wish to subscribe to, it may be safely ignored. If you do wish to subscribe to Global Warmenism, by all means please do so and limit your own energy usage and material consumption as you see fit.

Just don't impose your religion on the rest of us. Thanks.

Radical Christianists

2009-06-01T09:45:00.000-07:00

Though not personally religious, I've argued numerous times that Christianity post-reformation is a peaceful and constructive religion.

Murders like this one undermine my argument.

California's Woes

2009-05-20T09:41:00.000-07:00

I like living in California and I hope to continue to be able to live in California. However, if taxes are raised enough, I will feel compelled to leave for a lower tax jurisdiction in order to better provide for my family.

California is having some serious problems governing itself. As Megan McArdle wrote:

California is completely, totally, irreparably hosed. ... You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money .... You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets. Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!

We had a bunch of ballot initiatives to vote on yesterday, and while I got held up and didn't make it to the polls before they closed, I would've voted with the "uneducated" majority against tax increases had I been more timely. To vote for tax increases would mean that I'd be more likely to have to move so it would seem rather pointless to me.

I feel that the voters should set the budget and then the governator and legislature should figure out how to operate within that budget. They should choose which jobs and services to cut and they should get started now. Far fewer teachers, police, firemen, bureaucrats, etc. That I'm willing to live without.

Puzzle

2009-05-19T11:08:00.000-07:00

Here's a puzzle.

Suppose I made you an offer. I have two check made out to you. One check is hidden in my left hand and one check is hidden in my right hand. One of the checks is for an arbitrary, positive, non-zero amount and the other check is for an amount either ten times larger than the other check or one-tenth the amount of the other check. The amounts have arbitrary precision (i.e., the amounts can contain fractions of a penny). It is random which hand contains the larger check.

Here's the deal.

You can pick the check in either hand. After you look at the check in the hand you picked (but you're not allowed to see the other check), you have to decide which check you want: the check that you've seen in the hand you've picked or the other check that you haven't seen. The game is then over and you walk away with your check.

Here's the puzzle.

Common sense would tell you that since the contents of my hands are random and unknown, it shouldn't matter what you do. Pick the check in either hand and be done with it, or pick either hand and then choose the check in the second hand - shouldn't matter.

Common sense would be wrong.

Let's say you've chosen a hand and find that the check is for $10. The other check is therefore either $100 or $1. The expected value is ($100 + $1) / 2 = $50.50 which is substantially better than the $10 you hold. So you should always go for the second hand after looking at the check in the first.

Which, of course, makes no sense since it's random.

What's the explanation?

The answer to this question is also the key to the secrets of the universe.

Too Big to Fail

2009-05-15T09:32:00.000-07:00

"Power tends to corrupt, and absolute power corrupts absolutely. " Lord Acton

Being too big to fail, if true, couples a concentration of power (bigness) with a corruption of the free market ideal. The same concentration of power seems to inherently lead to other corruption as well. Mancur Olson's research and thought regarding the nature of special interests groups makes it seem inevitable to me that mega-corporations, especially in slow changing industries, will (continue to) form symbiotic relationships with the State that further strengthens both the mega-corporation and the State, to the detriment of the rest of the citizenry. We're seeing exactly that with GM, Chrysler, Steel protectionism, banks, etc., etc., etc.

So, given this seemingly inevitable sequence away from an ideal free market economy and towards Corporatism, exacerbated by the existence of huge business, is there anything that can be done to slow it down?

I think that reducing the number and size of large corporations would be helpful. However, giving the Federal government the directive to do such a thing by fiat would be a cure far worse than the disease. The method of reducing the number of large corporations, in order to avoid even more corruption and waste, would have to be formulaic and not subject to the whims of the President, Congress or regulatory agency bureaucrats.

The devil's in the details, but I'm imagining there might be a way to tax bigness such that the shareholders of large corporations would split the corporations into smaller entities, unless the bigness really was so advantageous, because of some manufacturing efficiencies or something like that, as to outweigh the increased tax burden.

What do you think?

Radical Libertarianism

2009-05-07T09:43:00.000-07:00

I've been pretty disappointed with Cafe Hayek because the bloggers and commenters there purposely ignore both the real world considerations of government and the fact that the vast majority of the people in the United States are not even vaguely interested in Libertarian ideals. Part of my disappointment is that, for at least a while, I fancied myself as "Libertarian leaning", but they've convinced me (and not politely either) that I'm nothing of the sort.

Conveniently, the following excerpts from Libertarian Democraphobia relieve me of the effort of having to describe in my own words what I think are some of the fundamental problems of Libertarianism:

The libertarian non-coercion principle is a good abstract first approximation of the liberal presupposition that persons are free and equal. No one has a natural right to rule over another, and no one has a natural duty to obey. The liberal presupposition sets a high bar for the justification of coercion, and thus the justification of the state. Many libertarians think there is no justification. Therefore the only acceptable rule of collective choice is unanimity or full consensus. This is one focus of the debate between anarchist and limited-statist libertarians. On the anarchist side, political power cannot get off the ground, and thus the design of mechanisms to control political power is a non-issue. On the limited-statist side, political power does get off the ground, and thus so does the design of constitutions and democratic institutions. [...]

In any case, libertarians often display a confusing or confused reaction to democracy as it actually exists. The scheme laid out in most libertarian ideal theory is so distant from actual democratic practice that the whole existing system can seem by comparison a comprehensive injustice. When one’s ideal theory implies that politics is by its nature illegitimate and corrupt, one tends to develop a sharply disapproving attitude toward participation in politics. Lots of libertarians, for example, think it’s morally wrong to vote. (There are many structural reasons the Libertarian Party is hopeless, but here’s one reason libertarians tend to be at best half-hearted political activists.) Likewise, incrementalist approaches to policy can never be adequately pure from the perspective of radical libertarian ideal theory. School vouchers are still tax-financed; a system of mandatory personal retirement accounts has a restriction on economic liberty at its heart; and so on. So, not only is politics corrupt and corrupting. There are few democratically feasible libertarian policies that merit support. The public does not want libertarianism. Which means that the public does not want a system that respects fundamental rights. So much the worse for the public, the thinking tends to go. [...]

If libertarians are going to shift the politics of the countries we live in, we’ve got to get it through our thick skulls that many people have considered libertarian ideas and have rejected them for all sorts of decent reasons. We’ve got to take those reasons, and those people, fully seriously and adequately address them. Otherwise, we should probably just accept that libertarianism is a niche creed for weird people and reconcile ourselves to impotent, self-righteous grousing.

Cafe Hayek (especially blogger Don Boudreaux) is, in my opinion, completely mired in "impotent, self-righteous grousing".

The irony is that The Fatal Conceit by Hayek is proudly displayed on their website, and the fundamental concept of The Fatal Conceit is that sweeping away all of society's institutions in order to remake society according to better principles is a really, really bad idea, yet this is exactly what the Cafe Hayek bloggers would do in an instant if given the chance.

Adolescent moral preening

2009-05-05T13:37:00.000-07:00

Jon Stewart admitted to Cliff May that he was willing to consider Harry Truman a war criminal for giving the order to drop the atomic bomb on Japan. There were a number of revisionist books on this matter many years ago. In doing the homework on the matter it became clear how nonsensical the revisionist notion was on this matter. It requires real historical ignorance and denial of the nature of the moral choice confronted by Truman to fault him.

The video of Bill Whittle fisking of Jon Stewart is extremely well done. Also, a guest blogger at Bookworm Room has a meaningful contribution.

Must see material!

Sustainability Versus Resiliance

2009-05-04T13:37:00.000-07:00

I've never been particularly enthralled by the concept of "sustainability". It seems too static and too pessimistic. It seems to imply we're going to get the world to a certain state, and keep it that way forever, and that's the best we can do. Sometimes you hear the phrase "sustainable growth", but it sounds a bit oxymoronic - either something's sustaining or it's growing, but not both.

Along those lines I noticed an intriguing blurb in Foreign Policy (HT: Virginia Postrel). Here's an excerpt:

Sustainability is inherently static. It presumes thereâ€™s a point at which we can maintain ourselves and the world, and once we find the right combination of behavior and technology that allows us some measure of stability, we have to stay there. A sustainable world can avoid imminent disaster, but it will remain on the precipice until the next shock.

Resilience, conversely, accepts that change is inevitable and in many cases out of our hands, focusing instead on the need to be able to withstand the unexpected. Greed, accident, or malice may have harmful results, but, barring something truly apocalyptic, a resilient system can absorb such results without its overall health being threatened.[...]
Ultimately, resilience emphasizes increasing our ability to withstand crises. Sustainability is a brittle state: Unforeseen changes (natural or otherwise) can easily cause its collapse. Resilience is all about being able to overcome the unexpected. Sustainability is about survival. The goal of resilience is to thrive.

The rest of the article talks about attributes of a resilient system. It's a little short on examples and details, but I like the general concept.

Pros and Cons

2009-05-04T09:01:00.000-07:00

If the opposite of "pro" is "con", does that make congress the opposite of progress?

(HT: Carpe Diem)

I Think Hayek Would Agree

2009-05-01T12:27:00.000-07:00

The Road to Serfdom is best enjoyed in a Chrysler! Or a GM product.

(HT: Jeff via comments in a Vodkapundit post)

Going Galt on American Cars

2009-05-01T08:32:00.000-07:00

Instapundit wrote about "GOING GALT" on your next car purchase.

There is pretty much no way I'll buy a GM car at this point, even if (or perhaps especially because) Obama is guaranteeing the warranty. I'm certainly not willing to support unprofitable and now essentially socialistic companies. And now that the unions basically own the company, I'd like to see the value go to zero.

However, this makes it a sad moment for me. I've always dreamed of owning a new Corvette and now the dream is gone. It obviously wasn't a very strong dream since I could've afforded one if I really, really wanted, but the two seat limitation of the car has made it impractical. In fact, it was probably one of those dreams I would've never acted on, but the dream itself was enjoyable.

On the other hand, I suppose that owning the Tesla Roadster wouldn't be a bad alternative dream...

A Different Never

2009-04-30T16:21:00.000-07:00

In a recent speech, President Obama defined what he means by the phrase "Never Again" when used in reference to the Holocaust:

...our fellow citizens of the world showing us how to make the journey from oppression to survival, from witness to resistance and ultimately to reconciliation. That is what we mean when we say “never again.”

Yeah, well, that's not what "Never Again" used to mean. I'm certain that "reconciliation" wasn't part of it. The idea was to "Never Again" allow a homicidal dictator like Hitler come to power or to let him direct a massive genocide.

Clearly, with rhetoric like this, Obama is not even vaguely interested in standing up to murderous thugs or even attempting to take any real action to prevent present and future genocides. Never Again has unfortunately now completely morphed into Over and Over Again.

Bummer!