interesting takes on the mosque debate

firstly, it's pretty clear that the mosque is constitutional. Thus, the question of whether they should be "allowed" to is not germane. America supports freedom of religion and there is nothing wrong with building a mosque in New York City. Perhaps due to its location, it should have been accompanied by a donation to a 9/11 victims' fund as a PR move to assuage victims that the Islam practiced there is not the Islam invoked by terrorists, but that's not a legal or even a moral responsibility - at most it's a social one.

 

 

 

However, the issue of whether they should be building THIS mosque there is a little more interesting. I am most convinced by something written by Michael Weiss at The New Criterion:

http://www.newcriterion.com/posts.cfm/The-9-11-mosque-debate-6332

"I have no problem with a mosque being built near Ground Zero and if that's all that was at stake, I could rest comfortably... But I do have a few unresolved questions about this particular mosque; more pointedly, about the man behind it....

 

Let's also ignore for the time being Rauf's inability to state that Hamas is indeed a terrorist organization. If the good imam feels compelled to hedge his bets on what to term a genocidal, anti-Semitic gang of suicide bombers and rocketeers because he's afraid of offending Muslims who see Hamas as something nobler, then this makes him no different from those pleading against Cordoba House on strictly emotional or populist grounds.

More troubling to me are two episodes in Rauf's career that suggest, if not a practical alliance with Islamism, then at least a strong eagerness to earn the trust of Islamists, whether out of financial or face-saving motive. The first is Rauf's participation in the Perdana Global Peace Organisation, which bills itself as a pacifist lobby group seeking to "criminalize war" but is really the brainchild of former Malaysian Prime Minister Mahathir Mohamad, a man whose greatest compliment to the Jewish people was to credit them with a methodology for world domination that he thought instructive for the forthcoming Islamic attempt at same. To get a sense of Perdana's commitment to ending militarism, consider that it was responsible for convening a portion of the 'Free Gaza' flotilla, whose declared purpose was not to deliver humanitarian aid to Palestinians but rather to break the Israeli naval blockade of the Hamas-controlled territory -- itself an act of war.

The second troubling spot on Rauf's c.v. is his certification of Iran's theocracy. Here he cannot excuse himself with an air of scholarly neutrality since in his own writing he takes the precepts of Khomeinism at face value and describes the clerical oligarchy of Iran as a legitimate form of government...

Rauf published this paean to the captive mind [his memo favorably looking upon the authoritarian nature of Iran's government, listed under Hitchens' link below] just as many hundreds of peaceful democratic activists were being clubbed and shot on the streets of Tehran. According to the Iranian "rule of law," torture and rape are also permissible forms of punishment for people who exercise their right to be incensed at a pantomime of self-determination.

But how curious that Rauf, who believes that the U.S. Constitution is compatible with sharia law, should be encouraging the President of the United States to issue a statement "respecting" the guiding principles of an Islamist tyranny.

Is this really the best that moderate Islam can do?"

 

More links, which I find either less relevant or I agree with less:

 

First, Silver:

http://www.fivethirtyeight.com/2010/08/obama-defense-of-ground-zero-mosque.html

"Essentially, public opinion on this issue is divided into thirds. About a third of the country thinks that not only do the developers have a right to build the mosque, but that it's a perfectly appropriate thing to do. Another third think that while the development is in poor taste, the developers nevertheless have a right to build it. And the final third think that not only is the development inappropriate, but the developers have no right to build it -- perhaps they think that the government should intervene to stop it in some fashion."

 

This is reasonably straightforward, but it more appropriately frames public opinion about the issue.

 

 

Secondly, Douthat [There are parts of his article I agree with and parts I don't]:

http://douthat.blogs.nytimes.com/2010/08/25/imam-rauf-and-moderate-islam/

 

 

Thirdly, Hitchens [Again, there parts of his article I agree with and parts I don't]:

http://www.slate.com/id/2264770

"Imam Feisal Abdul Rauf was no great bargain and... his Cordoba Initiative was full of euphemisms about Islamic jihad and Islamic theocracy. I mentioned his sinister belief that the United States was partially responsible for the assault on the World Trade Center and his refusal to take a position on the racist Hamas dictatorship in Gaza. The more one reads through his statements, the more alarming it gets. For example, here is Rauf's editorial on the upheaval that followed the brutal hijacking of the Iranian elections in 2009. Regarding President Obama, he advised that: "He should say his administration respects many of the guiding principles of the 1979 revolution—to establish a government that expresses the will of the people; a just government, based on the idea of Vilayet-i-faquih, that establishes the rule of law."

Roughly translated, Vilayet-i-faquih is the special term promulgated by Ayatollah Ruhollah Khomeini to describe the idea that all of Iranian society is under the permanent stewardship (sometimes rendered as guardianship) of the mullahs.Under this dispensation, "the will of the people" is a meaningless expression, because "the people" are the wards and children of the clergy. It is the justification for a clerical supreme leader, whose rule is impervious to elections and who can pick and choose the candidates and, if it comes to that, the results. It is extremely controversial within Shiite Islam..."

 

 

From the looks of it, the problem is not simply that a mosque is being built next to the world trade center - that comes back to the idea that the US permits freedom of religion and they'd have every right to build it. But if I were the US government, I'd be keeping a close eye on this particular imam...

 

Three very interesting links on regulation

The first two deserve a H/T to MarginalRevolution, the last is Scott Sumner

 

http://www.economist.com/blogs/democracyinamerica/2010/08/liberaltarianism_and_regulation?fsrc=scn/tw/te/bl/swimmingandfreedom

What is the difference between good and bad regulation?:

 

"This, I think, outlines a useful distinction between different kinds of regulation. I am perfectly capable of assessing for myself the risks of swimming across a small pond in Massachusetts, or the risks of swimming in the Amstel when lots of boat traffic is around. I don't need regulations to protect me; I have common sense. What I can't assess for myself is the risk that the water is contaminated by raw sewage. For that, I need a regulatory agency that stops households and businesses from polluting the river. To generalise: for risks I can assess myself, I don't want regulations that prevent me from doing as I please just because I might end up suing the government. For risks I can't assess myself, I do want regulations that give me the confidence to do as I please. One kind of regulation stops me from swimming in a pond in Massachusetts. The other kind lets me swim in a river in the Netherlands. One kind of regulation makes me less free. The other kind makes me freer."

 

http://www.ncpa.org/pdfs/What-Does-Health-Reform-Mean-for-You-A-Consumers-Guide.pdf

A reasonably clear and interesting view on what health reform means for consumers.

 

http://www.themoneyillusion.com/?p=6593

Some interesting history on what liberals have been learning from libertarians over the years (painfully slowly, but still in the right direction).

 

choice quotes:

 

"1.  In the US, they believed the prices of goods and services should be set by the government.  Ditto for wages.  This took the form of the NIRA in the 1930s.  It took the form of multiple industry regulatory agencies like the ICC and CAB.  By the late 1960s and early 1970s they favored "incomes policies" which were essentially across the board wage and price controls.  Today they generally favor letting the market set wages and prices.  Very liberal Massachusetts recently abolished all rent controls.

2.  In the US, they believed the government should control entry to new industries.  They have abandoned that belief in many industries, and based on recent posts by people like Matt Yglesias, are becoming increasingly disillusioned with remaining occupational restrictions."

 

Patenting the phrase

"Ba-Rack Bottom".

 

Just in case it hasn't been used, it was thought of here first.

 

 

My issues with Michael Pollan

http://www.nytimes.com/2010/08/20/opinion/20budiansky.html?_r=1&scp=1&sq=math%20lesson&st=cse

as described wonderfully by the New York Times.

 

 

What Is It About 20-Somethings?

I've been sent the NYT article on 20-somethings twice:

http://www.nytimes.com/2010/08/22/magazine/22Adulthood-t.html?src=me&ref=general

I wonder (and this is the child-of-immigrants-who-think-Americans-are-a-little-nuts talking) if by categorizing something, you normalize it. I've long had this objection to parts of psychiatry, but it also applies to adolescents - when you explain away bad or immature behavior by "they're adolescents", they never are forced to stop being adolescents and when they hit their 20s they're less mature and less ready for adulthood. There's obviously a balance to be struck (itd be wholly inappropriate to hold 14 year olds to adult standards because they're "not kids anymore") but i wonder if we created a new category of 20-somethings in which it becomes societally ok to not be adult, in a couple generations, how would the 30-year olds' generation change?

 

Of course, there's more to life than becoming part of "the system", so if twenty-somethings are happier exploring and not being adult, then to each their own - no need to be judging one another.

 

I told this to my brother, and his response was interesting, too. I quote: "There's also a drive in America with the whole "self-esteem" movement that's relatively unique to our country. Most first world countries no longer beat children in public schools, but only in America are bullies sent to the guidance counselor to talk about feelings, eat candy, and feel better about themselves. And unfortunately, this constant bombardment of "you are special, you are unique, you can do anything" is actually remarkably counterproductive; it doesn't prepare us for the hardships and failures that come with simply being alive. In the "real world," not everybody is a winner, and you don't automatically get a trophy. Furthermore, the link between low self-esteem and failure in life is pretty much nonexistent. Kids in general have more self-esteem than anybody else ever; they think they can be an astronaut, rock star, and president and still make it home for dinner with the spouse and kids. If we're not being trained to deal with hardship earlier on, we're not going to be able to deal with it later on, and thus may prefer living under the shelter of mom and dad. (I refer you to Towards a State of Esteem, published by the California Self-Esteem Task Force in 1990 for the exact data and numbers - and if any state is likely to believe self-esteem is the be-all-end-all of societal woes, it's California, and even their evidence refuted it)."

Imperfect analysis and high speed trains

http://edition.cnn.com/2010/TRAVEL/08/18/us.high.speed.rail/index.html?hpt=Sbin#fbid=zpFrIZobPYs&wom=false

 

I've heard some very good arguments against high-speed rail projects -

 

- many are being undertaken in areas without the population density required for them to be worth their cost

- buses are more flexible and cost-efficient

 

but the article's objections don't seem to pass muster.

 

When you get someone off the road and into a faster railcar, it does 3 things:

1) it gets them to their destination faster

2) it allows them to spend time on the train doing other things rather than driving

3) it clears the roads for other drivers

 

The article focuses entirely on the (limited) first benefit, when I'd argue that the second piece is the most important and the third is as important as the first.

 

Let's say it takes T minutes to drive from point A to point B with no rail option. There are N people who try to do this. A rail option reduces travel time for those people who use it by Y%, and they can work e% as efficiently on the train as they can when not traveling. If X% of people take the train instead, your net benefits end up as follows:

 

Effect 1:  X% * N * T * Y%

Effect 2: X% * N * T * (1-Y%) * e

Effect 3 is the hardest to calculate and actually requires a functional form assumption, but presumably the first derivative of X on effect 3 is positive and the second derivative is negative. The reason for this is somewhat intuitive - when you go from 1 car to 2 cars on the road, congestion isn't much worse, but when you go from 1000 cars on the road to 1001, it can slow things up a lot for everyone else (a product of limited space - clearing the road for other drivers even a little bit is particularly important in crowded areas.).

 

for Y = 33% (from the article) and a reasonable e (If I have internet, my efficiency working on trains is not much less than my efficiency in real life - sometimes higher because i'm forced to sit there, but usually maybe 80%), effect 2 is actually going to be larger - with those numbers, over 60% higher.

 

Effect 3 is even more interesting. Without an explicit assumption (which I'm not qualified to give), you can't calculate the exact number, but because of the derivative behavior, even at small X%, you can end up with large net benefits for the other (1-X%) via effect 3. If taking 10% of the cars off the road made car travel 33% faster, then effect 3 would be 9 times as important as effect 1.

 

 

I'm not supporting or opposing high speed rail, I'm criticizing the method of analysis. Any analysis needs to ballpark all three of those effects. I guarantee the DoT has data on effect 3, and some psychologist has an estimate of e for effect 2.

Wilson was a horrible president and Keynes was a horrible investor (and arguably overrated economist)

http://www.themoneyillusion.com/?p=1652

Sumner makes the interesting case. H/T Marginal Revolution

On Carbon Taxes Spurring Innovation

A few days ago, Megan McArdle wrote this:

http://www.theatlantic.com/national/archive/2010/08/how-much-will-a-carbon-tax-spur-innovation/61202/

 

responding to Ryan Avent:

http://www.ryanavent.com/blog/?p=2330

 

who was responding to Jim Manzi:

http://theamericanscene.com/2010/07/29/re-innovation-is-the-only-answer

 

 

Jim Manzi argues that carbon taxes aren't likely to solve our climate problems, and we need innovation more directly, while Avent and McArdle argue that a carbon tax (or equivalent cap-and-trade or fuel taxes, etc) can be what stimulates innovation.

 

Both sides make thoughtful arguments, but there's a structural problem involved that I've mentioned before but is worth rehashing.

 

This is a problem with three dimensions: Supply-side (how our energy is sourced), distribution (how our energy gets from source to end-user), and demand (how our energy is used).

 

Demand-side solutions like carbon taxes and cap and trade a) have big negative economic shocks, b) don't necessarily reduce carbon use because energy-intensive production shifts (a la Reliant moving steel factories from Britain to India, or even simply production of British goods decreasing and Chinese goods increasing - McArdle makes this latter point wonderfully), and c) are not, by themselves, permanent solutions, because we still haven't changed how energy is sourced.

 

In a two-dimensional process (supply and demand), demand-side programs would, by necessity, feed back into the supply side and give incentive for innovation.

 

The problem is that nasty distribution step can obfuscate or even remove the price-feedback effect due to both technical limitations and fixed cost investments with unsubsidized positive externalities.

 

To be more specific, two major areas that need upgrading are a smart grid (i've seen cost estimates at $1.5 Trillion to get the grid renewed over 20 years) and a system of battery-charging stations to help us transition away from gasoline-based motor vehicles.

 

Current infrastructure severely limits how much innovative energy can come in on the supply side because there's no distribution. A plug-in car would have to significantly outperform a gasoline-based car in order to even be considered for purchase by consumers, because the gasoline infrastructure is so well-developed and battery charging, right now, is very, very inconvenient.

 

Furthermore, the demand-side sees distribution costs as part of their end costs, so a weak distribution system functionally serves as the anti-carbon tax by increasing the cost of innovative energy.

 

Thus, the economic effects of a carbon tax (increasing the relative cost of dirty energy) and equivalent infrastructure improvement (decreasing the relative cost of innovative energy, which can now be delivered on equal terms), should be equal in terms of shifting consumption, but the latter drives economic development (as opposed to the former, which slows it down).

 

The problem, of course, is that a smart grid and battery charging stations have such high positive externalities that without significant subsidy, they don't get built because the builder sees too few of the gains.

 

For whatever fixed sum we have to spend on energy, isn't it counterproductive to be arguing about carbon taxes/cap-and-trade and targeted technological grants when the very obvious, potentially productive, and massive distribution investment exists? Carbon taxes and cap-and-trade have nasty second-order effects on the economy and are subject to some political favoritism, and targeted technological grants are subject to significant political favoritism. Building out infrastructure functionally lowers the price of innovative energy sources without actually having to pick the winners.

 

Furthermore, by reducing distribution problems, you actually do stimulate innovation on the supply-side (because some things are feasible that aren't anymore, either technologically or cost-effectively), which often leads to a virtuous cycle - a learning-by-doing situation in which we eventually develop energy sources that are efficient enough to export to developing countries that don't have the infrastructure we would have developed.

 

Think structurally, people! Instead of worrying about cap-and-trade, why not subsidies for battery-charging and smart gridding?

 

 

 

Examining Unemployment Numbers for Policy Impacts vs Structural Problems

The notion that this recession has suddenly spiked structural unemployment, and that unemployment will stay at this level for a long time, may be overblown. I'd like to examine whether the unemployment numbers we're seeing are the product of a structural problem (in which case, retraining, education and welfare are important) or more temporary policy problems and uncertainties (in which case, a) Obama and the Democrats have done just as bad a job with the economy as Bush and the Republicans did with the war, and b) unemployment should drop as soon as there's a degree of policy clarity on what the results of healthcare reform, finance reform, stimulus, etc, will be)

 

 

Reason number 1 this may be true comes from behavioral investing: every single time, people believe that "this time, it's different". usually it's not so different. Other recessions ended up with a reasonable employment recovery. But let's at least acknowledge the possibility of "this time it's different".

 

Let's look at some facts.

Firstly, unemployment has spiked to 9.5% from mid 5%s.

 

underemployment has spiked up to as high as 17% or 18%.

 

The ratio of unfilled jobs to unemployed is ~4x higher than in previous recessions, and if it were comparable to previous recessions, unemployment would be 6.8% (source: http://online.wsj.com/article/SB10001424052748704895004575395491314812452.html?mod=WSJ_hps_MIDDLESecondNews)

 

Temp hiring has been off the charts - temp jobs are up 20% year over year, while permanent private sector jobs are down 1%. (source: http://www.ritholtz.com/blog/2010/08/follow-up-on-temp-services-hiring/)

 

 

Complementary and corroborating facts from today's Times: http://www.nytimes.com/2010/08/11/business/economy/11leonhardt.html?hp

 

-"The drop in hiring has been steeper than the rise in layoffs."

 

-"Compare the current slump with that of the early 1980s, which was similar in severity. Over the course of 1980, 18.1 percent of the labor force was unemployed at some point. In 2008, the first year of this slump, only 13.2 percent was, according to the Labor Department's most up-to-date data. That number surely rose in 2009, but it is unlikely to have come close to the 1982 peak of 22 percent. "

 

-"In the deep economic slump of the mid-1970s, the average hourly pay of rank-and-file workers — who make up four-fifths of the work force — fell 6 percent, adjusted for inflation. In the early 1980s, the average wage fell 3 percent. Even in the mild 1990-91 recession, it fell almost 2 percent... But since this recent recession began in December 2007, real average hourly pay has risen nearly 5 percent...This time around, nominal wages — the numbers people see in their paychecks — have risen throughout the slump."

-"The first two years of the downturn were disproportionately blue collar. In 2008 and 2009, the construction industry shed 25 percent of its jobs, and manufacturing lost 16 percent.

This year has been different. Manufacturing — especially of so-called durable goods, like computers and machinery, many of which are purchased by companies — has been adding jobs.

Many white-collar fields, meanwhile, are losing jobs: state and local governments, publishing, telecommunications. Retailers have added jobs, but more slowly than the rest of the economy, as consumer spending has remained tepid. "

 

-"The unemployment rate for college graduates is still just 4.5 percent, and the gap between their pay and everyone else's is larger than it has ever been. For most college graduates, the Great Recession has not lived up to its name. "

 

 

 

The part that most clearly indicates policy is the problem is the temp hiring. If businesses are hiring temps off the bottom of a recession, it means that they're seeing demand pick up but they're too uncertain to actually hire someone full time. This is usually followed by permanent hiring, but in this recovery, it has not been. The only obvious culprits here are a) higher required wages and healthcare costs (minimum wage, housing interventions and Obamacare are prime candidates here) and b) general lack of confidence in the economy and policy (the political climate in general is the prime candidate here).

The underemployment numbers are also reasonably telling here. If people can get jobs but not for enough hours, it means that firms are afraid to hire full time. It's easy to blame full unemployment on a structural shift, but hiring someone to do similar work as they had been doing but for less time is a confidence issue.

The drop in hiring being larger than the rise in layoffs tells you something also - the biggest problem isn't that people are being fired from jobs that are no longer structurally sound, the problem is that nobody will hire. That doesn't indicate a structural problem, that indicates a confidence and policy problem.

Finally, the shift from blue-collar layoffs to white-collar layoffs, and the rehiring of a lot of manufacturing jobs, indicates again that this shift isn't one pool of workers structurally forced out of industries, it's a garden variety (deep) recession that can (garden variety) recover in a situation where businesses feel comfortable. This isn't trivial.

 

So what evidence supports a structural shift?

The ratio of unfilled jobs to unemployed, the rising real wages and smaller share of the population who faced unemployment are all indicators of a structural shift.

However, the most telling number may be the college-graduate vs non-graduate gap, which is the largest it's ever been.

People treat everything structural as the same, but in reality, I can think of two different types of structural unemployment that would lead workers to have a low marginal product.

1) Industry permanent overcapacity or irrelevance, leading to mass layoffs who are never rehired because no matter how productive a worker is, it's hard for him or her to actually create incremental value in that industry.

2) Workers who don't have enough skills to produce value in excess of their wages, even in industries that aren't structurally overbuilt.

 

The shift from blue-collar to white-collar, the big gap between college graduates and non-graduates, the ratio of unfilled jobs to unemployed, the smaller share of the population who face unemployment (who initially were in concentrated industries but now are no longer), etc. are all compatible with the second explanation. The first explanation is incompatible with the blue-collar/white-collar observations, and to a lesser extent with the temp hiring/underemployment observations.

What does this end up looking like?

A garden variety recession exacerbated by terrible economic policy and 20 years of crappy public schooling leading to a small number of workers with no real employable skills when the economy is at anything less than full capacity (when they get hired because there aren't any other workers worth employing).

This suggests that

a) the Obama administration and the Democrats have been a disaster (spoiler alert! see here: http://tfideas.blogspot.com/2010/07/dirty-dozen-of-economic-mismanagement.html)

b) they may see significant improvements when they lose the Senate and House, because they won't be able to do as much (a benign inertia) and Republicans seem hell-bent on incinerating their own party through social issues instead of focusing on their strengths on fiscal ones.

c) Allowing immigration could actually increase structural unemployment because immigrants may be hired ahead of the 5% least-skilled members of the US population (this isn't an argument against immigration, which I am largely in favor of de-restricting, but an argument that immigration needs to be accompanied by better unemployment policy and better adult educational opportunities)

d) our public schools have been run into the ground. I'm no education expert, but I'd bet you state politicians, teacher's unions, teen pregnancy and anti-abortion policy leading to worse parents, and an anti-intellectual culture spread through a lot of demographic groups all share a lot of blame in that one.

 

 

 

 

 

 

 

Wait... a legitimate NYT editorial?

Most of the unsigned op-eds in the NYT are predictable - anything Democrats do is good and anything Republicans do is bad. This means they're right when Democrats are right, and wrong when Democrats are wrong (I had initially written "right when Democrats are right and wrong when Republicans are right" but there are too many times when both parties are wrong...)

 

However, this morning's Times actually had a pro-derivatives article (for farming commodities). It's not particularly groundbreaking in content, but to record for history the fact that the unsigned op-eds in the NYT can have their own opinion, I present:

http://www.nytimes.com/2010/08/11/opinion/11jensen.html?hp

 

Roles of the President's White House Economic Advisors

Bush's NEC chair (the position Larry Summers occupies now) outlines the vast number of roles advising the president on every issue.

http://keithhennessey.com/2010/08/08/economic-roles/

 

It's pretty clear from the tone that Hennessey doesn't much approve of how Summers is handling his job, but given the incredible complexity of the bureaucracy and what we all know about Larry Summers' personality, those concerns make a lot of sense.

 

It's also interesting which policy did not go through normal advising channels (healthcare and cap-and-trade).

 

 

Higher structural unemployment?

This blog (h/t Tyler Cowen) questions whether many workers are approaching a zero marginal product (in other words, their productivity to a company is less than their wage, so they aren't hired).

 

http://blogs.law.harvard.edu/philg/2010/08/08/unemployed-21st-century-draft-horse/

 

I'll note that I think the "zero-marginal product worker" theme isn't quite as obvious as Cowen and philg make it seem, because (as Cowen noted once), plenty of workers who are zero-marginal product stop being so when demand increases. The example that comes to mind is an autoworker- if you've hibernated half of the factories in a country because of lower demand, then you have a massive excess of autoworkers relative to demand and they're unhirable in other industries in the short term. As auto demand picks back up, those workers are no longer zero-marginal product because you need to produce more cars.

 

However, it is still an interesting issue in some fields that were structurally too big (large parts of residential construction, for example).

 

Some choice quotes:

 

"Most unskilled workers in fact benefited hugely from the Industrial Revolution, but not all:

 

'There was a type of employee at the beginning of the Industrial Revolution whose job and livelihood largely vanished in the early twentieth century. This was the horse...the arrival of the internal combustion engine in the late nineteenth century rapidly displaced these workers, so that by 1924 there were fewer than two million. There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.'

"The cost of a low-skill worker has increased tremendously in the U.S. Let's look at four kinds of costs:

• direct payments for wages and payroll taxes
• health insurance
• mistakes
• employment lawsuits

The minimum wage has increased steadily in the U.S. even as the average skill of a high school graduate has fallen. The federal minimum wage was increased in July 24, 2009, 1.5 years into our current economic depression. More important, perhaps, are the heavy increases in payroll taxes over the years, notably for Medicare and Social Security."

[Note that I think he misses the point on healthcare. He thinks it's a cultural issue of refusing to deny healthcare, which may be part of it, but I doubt it's all of it. Healthcare and wages are reasonably fungible as they're converted into each other, but as minimum wages go up and companies are required to provide health insurance under the new law, that fungibility goes away and forces the functional 'minimum wage' much higher.]

"Most subtly, and perhaps most significantly, the potential cost of a mistake by an individual worker has skyrocketed. In industrial plants, the link between individual employee action and billions in losses is fairly obvious, e.g., with the Bhopal explosion. A tiny misstep in a chip factory and a wafer containing hundreds of valuable integrated circuits becomes worthless scrap. Computer networks, however, have made the potential costs of a clueless or careless office worker dramatically higher. Suppose that a company hires a low-skill not-very-alert office worker for $10/hour. This person accepts an email invitation to follow a hyperlink. One click later and the company's network is infected with a virus. Best case: IT department spends $50,000 cleaning up; worst case: customer lists, customer credit cards, and other private data are compromised, costing millions of dollars.

As the government has increased the number of ways in which an employee can sue an employer, the expected cost of litigation from each additional employee has gone up. The cost of trying out a worker who might not work out is much higher than formerly, especially if that worker is older, female, or belongs to a government-recognized minority group. It might be smarter to employ fewer higher skill workers because the chance of litigation is lower with 100 workers than with 200 workers."

 

 

 

 

The Moral Role of Government

A friend agreed with this, and wanted my take: http://online.wsj.com/article/SB10001424052748704388504575419521812183154.html?mod=WSJ_article_MoreIn_Opinion

 

My response:

Hm. I actually think Judge Walker was correct in just about everything he said, and as uncomfortable as it makes me, there's also not a great case against the ground zero mosque except as anti-Muslim. I agree, it's extremely dangerous to have an 'elite' ignoring the desires of the people, but it's also dangerous to have a majority dictate the rights of minorities - a major reason I actually don't believe in democracy but instead believe in a republic is that I think a good system leaves everybody to their own desires as long as those desires don't directly and demonstrably harm others, and democracies suck at dealing with that. The very idea of a vote on gay marriage is repulsive to me because permissible behavior by a minority of consenting citizens amongst themselves is not something we should be allowed to vote on.

 

In short, I have always felt that majorities telling minorities what is morally acceptable is no better than elite governments telling the majority what is morally acceptable. There's clearly a standard we agree upon for the sake of society - no murder, no robbery, etc - but I'm gonna have a hard time with the argument if it goes beyond stability into (functionally) secular or religious proselytization. So I actually disagree with most of the op-ed because by definition, in issues concerning what is permissible for minorities that is distasteful to the majority, you in fact can't trust ordinary Americans.

 

Yes, because this is a limited-role-of-government stance, it does require a lot of becoming at peace with things you're uncomfortable with. If it's not the role of government to tell people what they must do beyond the minimum needed to uphold a thriving society, that means that even things like polygamy have to at least be considered as okay (something social conservatives would disagree with me on as being immoral and social liberals would largely disagree with me on as ignoring the status of women in polygamous relationships) unless there's another case (which there is - a public health case - but I'm not sure it's strong enough to hold). In short, it's a "live and let live" stance and that can't be a code for 'making government just small enough to deal with the morals I think everyone else should abide by and nothing else'

 

This obviously doesn't apply to what he says about the healthcare bill, where I largely agree with him. That was an entirely different type of bill (fiscal rather than social, and one that requires a degree of nuance in setting up the system instead of a simple "yes/no" answer like the others he mentions).

 

I highly recommend De Tocqueville's Democracy in America, or at least the sparknotes, if you're interested in this type of thinking of majority and minority rights.

A perspective on military strategy

http://www.tomdispatch.com/post/175280/tomgram%3A_ann_jones%2C_in_bed_with_the_u.s._army__/

 

This reporter clearly has her agenda, and says a number of things which I think are unprompted and untrue about America. However, she has spent a lot of time with both civilians and the military in Afghanistan, and she makes an interesting observation. Given her perspective (an older lady with an axe to grind), I'm interested in whether it's true:

 

"One drawback is that -- though it's a hard point for American soldiers in the line of fire to grasp -- [using state-of-the-art military machinery] actually undercuts our heralded COIN strategy.  Afghans out there fighting in their cotton pajamas take Western reliance on heavy armor as a measure of our fear -- not to mention the inferiority of our gods on whose protection we appear unwilling to rely.  (By contrast, the watchman at the small Afghan National Army base adjacent to the FOB I was visiting slept on a cot on the roof, exposed to enemy fire with his tea kettle beside him, either trusting his god, or maybe knowing something we don't about the "enemy.")"

 

She also notes that since the US military adopted COIN, civilian casualties have gone up 23%, and notes the cultural difficulties in eliciting cooperation between American soldiers (mostly males between 18 and mid 20s) and Afghan elders who view frat humor very differently.

 

 

 

 

 

 

 

 

Here's a Call to Prosecute Assange and WikiLeaks

http://www.cnn.com/2010/OPINION/07/30/hayden.wikileaks.secrets/index.html?iref=obinsite

 

This article makes a number of excellent points. Julian Assange, the founder of WikiLeaks, has put a lot of lives at risk and made it a lot more difficult to seek peace in the name of some extremist "open-information" ideology. I can't help but lean towards the idea that he is a criminal who should be prosecuted for treason. In what way is what he did NOT treason?

 

Some choice quotes:

 

 

"Most of us in the actual business of secrets know that reports are more often classified because of their source, not their content."

 

"These documents "prove" that war is grittier when viewed by an infantryman than by a policymaker; that Pakistan's intelligence service, the ISI, is a difficult partner; that in war innocent civilians sometimes die; and that the Taliban has been growing in strength over the past several years. Not quite "stop the presses" kind of revelations."

 

"despite WikiLeaks' claim that it had redacted source-identifying information from the military's intelligence reports, it apparently did a half-baked job and real names of real people are being exposed.

Beyond that, even when you effectively mask source-identifying data, the enemy knows who did or who did not know about the historic operation or meeting or rendezvous now being made public in a leaked American document.

I can already see the Taliban or al Qaeda dialogue: "Brother, in whose house did we hold that meeting in 2007?"

"With this release, the enemy now knows about us that which we struggle so hard to learn about him: What we do well and what we do less well, where our thinking is strong and where it is not, where our analysis is incisive and where we have blind spots.

I used to give the graduation address to CIA case officers as they completed their operational training. At every ceremony I would remind them that they would be taking the fate of their future sources into their hands, that in a powerful moral sense, they would be responsible for the well-being of their sources and, very often, their source's families. Without that implied "contract," why would anyone provide information to us?"

What potential sources in Afghanistan will now believe that America can protect them?

Why would anyone in that troubled land bet his family's well-being and future on such a well-intentioned but obviously porous partner, whatever hope or vision for the future this potential source might harbor.

And we will never know who will now not come forward, who will not provide us with life-saving information, who will decide he cannot opt for a common effort against a common enemy. But we can be certain that the cost will be great.

And foreign intelligence services, with whom we have established productive and legitimate partnerships, will ask, "Can I trust the Americans to keep anything secret?"

Finally, I can only imagine what adversary intelligence services worldwide are doing with these documents. If I were the chief of Russia's FSB or China's PLA-2, I would be gathering all of my English-speaking officers and directing them to read all 75,000 documents to learn where the Americans are strong, weak, vulnerable, formidable, to be avoided and to be challenged.

And all of this because of some corrupted view of the inherent evils of the modern state, a pseudo-romantic attachment to the absolute value of transparency, a casual indifference to inevitable consequences and a neurotic attachment to one individual's self importance. Rarely have we seen such a dangerous combination of arrogance and incompetence

 

A note on the role of economics for decisionmaking

Some friends were debating the merits of John Perkins' "Confessions of an Economic Hit Man". I find it hard to take seriously - I think it's just a bunch of crappy conspiracy theories that ignores everything that ever happened in emerging market default scenarios. If you read it, realize it's fiction and you'll enjoy it.

 

 

One friend liked it because it peripherally asks the question "Why do we need to justify development policy decisions (or any policy decisions) based on economics?" To quote her, "While I completely agree that economics can be a valuable lens to view a policy problem through, I don't understand why we use only this lens.  A lot of my econ professors argued that economics is so powerful because it allows one to quantify a problem, compare outcomes in commensurable terms (dollars, or another currency), and is free of value/ethical judgments.  The problem is—at least in environmental and development policy--that this mindset severely limits or even prevents any sort of actual discussion about values and ethics from taking place.  People spend so much time squabbling over numbers and economic analyses that the larger questions of ethics, equity, and fairness are often given a backseat.  Though it was not the main focus of the book, I appreciated Confessions of an Economic Hit Man because it at least attempted to raise this point."

 

My response went something as follows:

Economics is supposed to be a tool, not an end. A hammer can be used to build a hospital or a tobacco factory. In this case, it's a tool to calculate rational decisionmaking, but you certainly need to calibrate what you set as a good or a bad to see what's rational. And I agree that a lot of people lose sight of that in their assumptions. There's almost always some sort of tradeoff between equality of opportunity/growth/future well-being (one bucket) and equality of outcome/ current safety nets (another bucket), and that's something worth thinking about more than a lot of people do. This split underlies a lot of differences of opinion. I admit freely to usually prioritizing the first bucket because I think it helps more people in the long run as long as you've cleared some basic hurdle in the second category. Others think differently. Some would even disagree with the dichotomy, though I think they'd probably be climbing an uphill battle in many cases, given what we know. Admittedly, climate is a very reasonable exception to this dichotomy - it's my generalization, not a rule.
 
That said, maybe my view of economics is more expansive than most - I see economics as the science of decisionmaking and if you're making a decision - any decision - you should be using what I see as economics, and the normative aims are just the inputs into that process.
 
More specifically to climate policy, I can see why it's frustrating as an enviro person to see the debates raging over carbon and climate. Economics is abused by both sides to justify preconceived opinions, but I blame ideology for that, not economics. Bluntly? both sides aren't approaching this very smartly - climate deniers for a million reasons (literally - economy, security, risk/reward, science denial, etc), and climate change activists for not thinking hard enough about whether they're focusing on supply and infrastructure vs demand. (I've talked about this before - I am very skeptical about demand-focused carbon initiatives like cap-and-trade, which is a split nobody ever talks about)
 
Not to harp, the stimulus was the biggest missed opportunity from this perspective. It should have been composed of three things: 1) aid to states to keep teachers and police officers and people functioning, 2) massive infrastructure development to aid a comprehensive energy policy (not just from a climate perspective, but an economic and security one as well) - we're talking a complete smart grid overhaul and subsidizing the installation of battery charging stations nationwide to get gasoline out of cars, and 3) payroll tax cuts to keep the economy going until those very non-shovel-ready infrastructure projects were ready. It's a tragedy and a disgrace that the stimulus put together by Congress and the Administration got caught up in political pet projects. Ironically, the Democratic supermajority (vs a simple majority) may have been the worst thing to happen to the climate in a long time because it facilitated this outcome. (In the US, anyway... emerging markets are a whole different kettle of problematic fish)
 
I wonder if we won't look back on Obama and the climate/economy the way we look at Hoover and the depression or Carter and oil policy/inflation - a man naturally brilliant in his field (in Obama's case, social issues and con law) who means well, but who has incompatible knowledge and priorities with what we needed at the time (which, ignoring Iraq and Afghanistan for a moment, I'd assert is some cross of Teddy Roosevelt-style combat of special interests/partisanship and safeguarding of the environment and Reagan-esque economic vision).

Overthinking and Clutch

from Dan Gilbert in the NY Times: http://www.nytimes.com/2010/08/05/opinion/05gilbert.html?_r=2&ref=opinion

 

"One of the ironies of human psychology is that desperately wanting something can make attaining that thing all the more difficult. When stakes go up, performance often goes down. In one study, subjects practiced sinking a putt and got better as they went along — better, that is, until the experimenter offered them a cash reward for their next shot, at which point their performance took a nosedive.

This is because we pay close attention to what we're doing when what we're doing matters, and though close attention is helpful when our task is novel or complex, it is positively destructive when our task is simple and well practiced. Golfers in another study were told either to take their time and think about their stroke or to step up and swing as quickly as possible. Although novice golfers did better when they took their time, expert golfers did worse.

The lesson from the laboratory is clear: thinking about tasks that don't require thought isn't just pointless, it's debilitating. It may be wise to watch our fingers when we're doing surgery or shaving the family dog, but not when we're driving or typing, because once our brains learn to do something automatically they don't appreciate interference. The moment we start thinking about when to step on the clutch or hit the alt key, our once-seamless performance becomes slow, clumsy or impossible. "

 

 

 

Setting aside personal experience, with which this jibes perfectly, this also could explain "clutchness"  and why so many famed clutch players (Jordan, Bird, Kobe, Brady, Tiger, Pedro, Beckett, Jeter, Ortiz, etc) are described as being "cold-blooded assassins". They have the ability to tune out the size of the moment and just deliver in the way they have trained themselves to. It's a mental detachment that keeps them in "flow".

 

 

Monopolist Regulation

In light of the depressing news regarding net neutrality coming out of Verizon and Google today, I thought I'd expedite a post I've been working on for a long time about how price regulation should work.

 

 Firstly, I should point out that it's ridiculous that the FCC doesn't have the ability to regulate cable companies. They are blatantly natural monopolies, and they're textbook cases for enforced neutrality. It makes no sense to me why congress is working so hard to regulate things that are borderline unfair but really were operating just fine before (debit interchange fees, for example) but are perfectly content to ignore something that's actually within their mandate

 

However, this naturally segues into a discussion about who should be regulated and how. Incentives and the business ecosystem can significantly influence outcomes. For example, US broadband coverage is much lower than France's, because of the interplay between how they're regulated on pricing and such, and the fact that the US is much larger, more geographically diverse and less population dense. I suspect that the regulation structure is probably pretty similar, but because of a different business ecosystem (in this case, a different demographic and geographic spread of customers), the incentives didn't line up properly. The rational calculus for broadband companies is "we should upgrade less frequently because we're so much less dense and can't make money off of new upgrades as easily", so we get screwed.

This is why monopoly pricing mechanisms are so important. A bad monopoly pricing mechanism gives you what we have - an aging electricity grid, crappy cable, etc., because people have all of a sudden forgot that maybe idiots ignore their incentives but CEOs definitely don't.

 

If it were just geographic, then you'd see CA, the northeast and major metroplitan areas be well-penetrated and developed and rural areas not well-penetrated; instead we see a very different outcome because of rate regulation.

 

There are a number of ways that rates can be regulated for a natural monopoly. There's rate-of-return regulation, there's revenue cap regulation, and there's price cap regulation (either marginal cost or average cost).

 

Rate of return regulation is where you are allowed to earn a given percentage (12%, for example) on your equity base or invested capital base. Revenue cap regulation (uncommonly used, I believe) is where a company can only make X revenue. Price cap regulation is where a company is not allowed to charge more than a specific amount, either determined by their marginal cost (cost for adding an additional user to the system) or their average cost (fixed plus variable costs divided by number of customers).

 

In very simplistic short-run theory, marginal cost regulation with government subsidy of fixed costs ensures maximum surplus.

 

However, let's look at these in the real world.

 

Firstly, let's dismiss revenue-caps as stupid in most instances. You don't want companies constricted on revenue because they will do nothing but costcut. Quality will suffer until you reach a point that enough people stop buying that the revenue cap isn't guaranteed to be reached. Unless quality (both service quality and product quality) literally doesn't matter, you don't want revenue caps.

 

Marginal cost and average cost caps, and also rate-of-return caps, are problematic because then the company never has an incentive to cut costs. There are often many ways of making operations more efficient, which would result in cheaper service to consumers, but if producers won't benefit at all, the companies will not do them. These mechanisms (price caps and rate-of-return caps) are how most US utilities are run.

 

This gets even more nasty in situations where input costs are changing. Most health insurance is rate-capped, and states are denying rate increases despite increasing healthcare costs. This exacerbates a number of other problems - insurance companies push back on their suppliers, hurting long-term medical R&D and making it harder for consumers to get coverage, making coverage more restrictive (less treatments) and when permitted, dropping coverage. You're struggling against their incentives.

 

 

Thus, in a lot of ways, we dont regulate monopolists very well. By that I don't mean "we need to regulate them more," but instead "we need to regulate them in a manner that is actually incentive-consistent with what they should be doing."

 

Here, I propose alternatives involving lags.

 

When cost-cutting is the biggest issue, you want a situation where companies can benefit from their cost cuts. You'd want them to be regulated based on lagged average cost or lagged marginal cost with fixed subsidy - that way, if you make the lag 8 years, for example, they'll cut costs because they'll benefit for 8 years (I chose 8 years so there's a roughly implied 12.5% ROIC for cost cutting, but this number could be flexible)

 

Similarly, if you use rate of return regulation, allowing a higher rate of return on recent investment gives them an incentive to continually invest or face declining profit. Of course, this could lead to overinvestment, but given where we currently are, that's not a bad thing for a while. So if a company invests $1b in the last 8 years, you'd let them earn 25% on that investment, and then 12.5% on whatever they did before the last 8 years. (again, allowing them an incremental 12.5% ROIC on investments they make).

 

 

This leads to a bigger question, raised by a friend, Sarah: what about promoting competition? is that a better way of dealing with monopolies, is there a way to do that?

 

In the case of a natural monopoly, the industry will naturally move towards one dominant competitor with others dying out. Thus, you either need to accept the monopoly and regulate its pricing, or you need to rig it so that companies constantly compete to be the monopoly winner but you make sure they never get there, and that's ok with them.

 

Which path is appropriate depends on the industry. I have argued a number of times before that health insurance falls into the latter category. You want a bunch of insurance companies fighting each other tooth and nail to try and win, but every time it looks like one of them is going to win, you reward the winner for winning, and then break them up into two smaller companies that have to fight each other again. Thus, everyone has an incentive to "win" - they'll be rewarded - but there's always competition driving for improvement.

 

 The reason you can do this is because their client base is distributed. If I had 2 customers in Aville, 2 in Btown, 2 in C city, etc, if i split it into 2 companies with 1 customer in Aville, 1 in Btown, etc, the monopoly disappears and they have to fight to win again. You can't do that with cable companies because if i have 2 customers in Aville, 2 customers in Btown, etc, it's still one cable that goes to Aville and someone owns it, so someone has a monopoly over Aville. Short of massively and inefficiently overbuilding (like RCN did, to their detriment),there's no way to compete with that existing capacity. So for cable companies you're better off accepting the 1 monopolist and then giving him incentives to improve.

 

An alternative - open access, where different providers can use that one cable - has been talked about, but even now, you need to make sure someone invests in it. If there's not one owner, you have a tragedy of the commons issue and you force the government to step in and manage a business they're unfamiliar with, and if there is one owner there's still a gatekeeper with power.

 

The US has (smartly) gone the latter route in some cases - competitors pay each other to use each others' networks so they dont all have to go crazy expanding and one company can do the investment, but you still haven't resolved the problem - if they have nothing to work towards, they won't work. If they can't realize greater profit they're not going to find ways to improve what they do.

 

Which brings me back to the theory of regulation. If your regulation changes incentives, it changes behavior. If behavior becomes better, the regulation is good, and if behavior becomes worse, the regulation is bad. That's why all these calls for "increased regulation" are dumb, in my opinion - you want more good regulation and less bad regulation. Both of these are responsible for what we're seeing in healthcare and cable and finance, not just "too little regulation". In the case of net neutrality, you want to be able to enforce net neutrality, because these are natural monopolists and net neutrality has substantial public benefits. Mandating net neutrality and then ensuring they get paid to uphold it and improve the speeds of everything means you get net neutrality, fast internet with wide access, for the best prices possible. That would be good regulation, and people have lost sight of that. 

The Auto Bailout

http://www.washingtonpost.com/wp-dyn/content/article/2010/08/01/AR2010080103286.html

 

This wasn't the smartest article. Bankruptcy for the automakers would almost certainly have been chapter 11, not chapter 7. The automakers would not have closed their doors, they would have continued operating as they reorganized and shed some obligations.

 

The reasons the carmakers were dead was twofold: union labor, pension and benefit costs far in excess of any competitors', and cars not good enough to justify the necessarily much-higher costs. Shedding union benefits and breaking union contracts in bankruptcy would have been enough to make them cost-competitive, perhaps even more so than they are today. Developing new cars would be even more useful, and without having to spend all their time fighting with the unions, management may have actually had a chance at doing that, too.

 

There was a case for bailing out the automakers, which I've made before, but it's not the one Dionne is making. Letting the automakers go would still cost a lot of jobs as the unions lost protection at a time when we dont have an alternative use for those workers because of the excessive slack in the economy, and workers with negative productivity (because of unreasonably high wages and benefits) are still likely more productive than those same people on unemployment when you're in a big recession. When you're not in a big recession and you don't have so much excess capacity, that's not the case. Thus, bailing out the automakers (especially at an accelerating interest rate, as I've mentioned a million times) would let you delay the reorganization and firing of all of those unproductive workers to a time when the economy is better able to handle it. Thus, it's a justifiable form of temporally redistributionary stimulus. It's not justified as a government-interventionary permanent labor policy.

 

 

 

 

Deflation and the difference between two potential sources of Inflation

I'd like to start off by saying that I thoroughly disagree with Steven Landsburg's post on deflation, found here: http://www.thebigquestions.com/2010/08/03/deflation-followup/.

 

The post completely ignores the savings/investment mechanism. In my mental model (perhaps someone with a better model can verify or correct this), in deflation, those things can decouple, because deflation means that spending money now is less appealing - everyone would rather wait a period and borrow less to finance their investment. Underinvestment in the US seems to be a chronic problem that deflation would only worsen.

 

The Fed's reluctance to hit its own inflation target makes no sense to me - it's throwing away free nominal economic growth at a time when nominal economic growth would reduce unemployment. This has been pointed out by Sumner, Krugman and Cowen, among others. I think the Fed should be printing money at full speed, and buying back either government or corporate bonds. It should be reducing the interest rates on reserves (I've heard that reducing it all the way to zero would cause some other mechanisms to break down, but it's currently at 25bps, and should be somewhat reducible with only small changes in policy).

 

The question, of course, is why aren't they doing this? I'm sure they're worried about something - perhaps they think they can't hit the inflation target with any precision and they'd rather stay where we are than risk overshooting. Perhaps I overestimate the Fed but it seems like there's no way they'll overshoot beyond a few percentage points, and 4.5% inflation will not cause an inflationary spiral. So unless they think they're much less powerful than I do, the current course makes no sense.

 

Maybe I'm underestimating the magnitude or consequences of a potential overshoot, but I suspect there may be a secondary problem as well.

 

I've noted a number of times that I'm worried about inflation - as a result of China, chronicled a number of times on this site (see the "links" section on the side of this page, or go read Michael Pettis' blog), as well as a result of fiscal deficits. Fiscal deficits can create problems for inflation on a number of levels - there's the more classic "governments print money to pay off their debt" issue, but in the intermediate term, before there's an issue, I have a theory for another problem - the "rigid financing models" problem.

 

The "rigid financing models" story goes something like this: Fiscal deficits mean interest rates should increase as a risk premium is eventually applied. This risk premium should be separate from the effect of government rates on consumer rates, as long as nobody's really concerned about the government printing money - the spread should be equal to the relative risks. However, you also have an issue of financiers' existing models. Most of finance treats American bonds as risk-free, and if that's the case, consumer interest rates climb too high as they maintain a risk and liquidity spread over supposedly risk-free (and actually liquid) US government bonds.

 

That initial interest rate spike can slow the economy, so in order to stimulate the economy, the Fed needs to cut the actual, pre-risk premium rate too low to get consumer rates in line, which causes inflation. That may actually delay the fiscal problem as the economy overheats, tax revenues shoot up, and inflation minimizes the problems presented by our existing debt base. Eventually that pops and shit hits the fan.

 

However, both of these fiscal stories are very separate from the inflation that most Fed hawks seem to worry about. The fiscal story is structural; there's not much the Fed can do. The Fed seems to be worried about the monetary side - if velocity starts to recover, then inflation happens because of the massively increased monetary base.

 

However, if that were to happen, it'd seem that the Fed could just turn around and raise interest rates slowly, reversing the most recent policies (perhaps reinstituting interest on reserves, or selling off some of the bonds it bought).

 

Concerns about fiscally-derived inflation are very real and legitimate, but monetary-derived inflation seems much more controllable, and conflating the issues in public dialogue may have put too many hawks on the Fed. I don't like inflation at all, it scares me a lot, but inflation that is a little (or even moderately) too high is still way, way less scary than deflation. On an upside-downside basis, I'm not quite sure why the Fed isn't doing more, especially given (to reintroduce this point) they're MISSING THEIR OWN INFLATION TARGET.