How about them Dodgers?

Really cute song about raising taxes on the rich.

It's getting crowded in here

The club of people noticing eerie parallels between 2011 and the 1930s welcomes its newest member, Paul B Ferrell from MarketWatch:

Listen to that hissing: The fuse is rapidly burning, warning us. Wake up before the rage explodes in your face. This firestorm is endangering America’s future. From forces outside, yes. But far more deadly, from deep within our collective psyche. We have lost our moral compass. We are self-destructing.

Crackpot warning? No. This warning comes from the elite International Monetary Fund. A recent IMF report looked at “the causes of the two major U.S. economic crises over the past 100 years, the Great Depression of 1929 and the Great Recession of 2007,” writes Rana Foroohar, an economics editor at Time magazine.

“There are two remarkable similarities in the eras that preceded these crises. Both saw a sharp increase in income inequality and household-debt-to-income ratios.” And in each case, “as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living.”

But the rich “got richer, by lending, and looked for more places to invest, bidding up securities that eventually exploded in everyone’s face. In both eras, financial deregulation and loose monetary policies played roles in creating the bubble. But inequality itself — and the political pressure not to reverse it, but to hide it — was a crucial factor in the meltdown. The shrinking middle isn’t a symptom of the downturn. It’s the source of it.” Today the consequences of the meltdown still haunt us — there’s more to come.

There’s a new bubble blowing. No one can stop it ... soon it will explode.

Worth reading the whole thing.

Karl Marx was right

So says Nuriel Roubini, the guy who called the 2008 crash.

[Businesses are] not adding workers because there’s not enough final demand, but there’s a paradox, a Catch-22. If you’re not hiring workers, there’s not enough labor income, enough consumer confidence, enough consumption, not enough final demand. In the last two or three years, we’ve actually had a worsening because we’ve had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased and the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater propensity to save, that is firms compared to households. So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.

Karl Marx had it right. At some point, Capitalism can destroy itself. You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.

Amateurs

From The Salt Lake Tribune:

The Lottery Economy

Here's how to solve all of the world's economic problems: invent a super-virulent strain of the ebola virus that will kill everyone on earth within a month or two. Voila! No more economic problems. You can't have economic problems without an economy.

What? Not the answer you were looking for? Not surprising. I put forth that extreme position to make this point: underlying any discussion of a solution to a problem are some tacit assumptions, like that you want to cure the disease without killing the patient. Yes, you can get rid of a whole host of problems (cancer, AIDS, hate crimes, athlete's foot) by exterminating humans from the planet, but surely everyone agrees that that is clearly missing the point?

Well, no. Not everyone. There are people who contemplate a planet devoid of humans with varying degrees of seriousness. And actively seeking a world devoid of one's own descendants (a.k.a choosing not to have children) is nowadays not uncommon. And there are a lot of people who argue in all seriousness that things would be better if there were fewer people, even if they stop short of advocating getting rid of them altogether.

Different people have different ideas of what constitutes a good outcome. Some people think that having a big family is the good life, others think it's a yacht and a private jet, and still others think that what really matters in life is getting right with Allah.

What I'm winding up to here is not the usual despair about the intractability of getting people to agree on fundamental issues, but wonder at the remarkable fact that we can afford to have these disagreements. Disagreement is a luxury that most creatures on this planet can't afford. You never see lions arguing about whether it is morally correct to eat wildebeests. They take what they can get or they starve.

It's important to keep things in perspective. Being able to get a banana any day of the year by going to the store and handing someone a piece of paper is not the natural order of things. It is only possible because we humans have built this thing called civilization, on which is layered the amazing system known as the global economy.

I have said in the past that one of the fundamental problems we are having in the U.S. today is that people have lost sight of the distinction between money and wealth. I think the problem actually runs even deeper than that. What people have lost sight of is the relationship between economies, civilizations, and quality metrics.

Civilization at root is based on division of labor. Some people do one kind of work, other people do other kinds of work, and so the overhead involved in learning how to do a particular task and become proficient at it is spread out over a population. Instead of everyone having to learn to do everything, an individual only has to learn to do one thing, and so the whole becomes greater than the sum of its parts.

It's a terrific theory, but it has two problems: first, how do you decide who has to do the dirty work? If everyone decides to be a lawyer and no one is left to fix the plumbing the system breaks down. And second, how do you decide how to distribute the proceeds of the system? And then there is the meta-problem of how to decide who makes the decisions. Obviously, being a decider is preferable to being a decidee (just ask George Bush), which leads to certain conflicts of interest.

In the very earliest civilizations, someone managed to convince everyone else that they should be the decider either by killing all the rivals or convincing people that they were anointed by God (sometimes both). But then we invented trade, which is even more powerful and amazing than division of labor. Division of labor produces dramatic efficiency gains but at the cost of having to solve the problem of decision-making. Trade allows for decentralized decision-making that results in improved outcomes even -- in fact especially -- in the face of different quality metrics. This is an amazing result. It means that you and I can interact in a way that we both agree is mutually beneficial even if we don't agree on what that benefit is! We can have completely different quality metrics and still cooperate to mutually agreed upon mutual benefit. Trade is white magic.

To complete the trifecta we invented money, which makes trade orders of magnitude more efficient. Before money, in order to trade you had to find another person who wanted what you had and who also had what you wanted. It was like dating, with all of its attendant difficulties. (In fact, the reason finding a mate is so troublesome is that it is one of the few kinds of exchange that cannot be facilitated by money.) With the advent of money that problem went away. With money you can buy and sell independently. You still need to find a corresponding seller or buyer depending on which you want to do. But it's a lot easier to find someone who wants to buy a goat and then someone else who wants to sell a pair of shoes than it is to find someone who wants to trade shoes for a goat. (It also solves the problem of how to make change for a goat.)

The upshot of all this is that you can go to the store and buy a banana for the equivalent of about 20 minutes of menial labor. It is truly an amazing thing. Our simian forebears would be incredulous.

Money, alas, is not quite as free of adverse side-effects as trade. The only way to conduct trade is through the provision of mutual benefit (otherwise it isn't trade). Alas, there are two ways to acquire money. One is to produce and sell valuable goods and services. This is the way of Jedi. The other is to game the system. That is the dark side.

There are lots of ways to game the system. You can sell snake oil. You can run a Ponzi scheme. You can acquire a monopoly which allows you to impose tolls.

In the absence of a mechanism to keep people from gaming the system, small disparities in economic power tend to be amplified through positive-feedback effects. If I have enough money I can buy media outlets through which I can influence your thinking. I can give money to government officials so that they will pass laws that unfairly benefit me. I can run my businesses in a way that makes it all but impossible for you to acquire any resources beyond what you need to subsist. The result is the creation of an oligarchy.

This is the problem we have today in the United States. Our country is no longer a democracy, it is a moneyocracy. One dollar, one vote. Which might be acceptable if all those dollars represented the creation of value, but they don't. By and large today, the people making the money are not the ones creating value, they are the ones who are gaming the system. There are, of course, exceptions. But they are a rapidly shrinking minority.

Aside from the fact that the diversion of money to non-productive activity is a drain on the economy, there is an even more insidious and corrosive effect. Those who have acquired money by gaming the system generally live in denial about this. People don't like to think of themselves as parasites, so they invent elaborate stories about how they are producing value by "providing liquidity" or some such bullshit. This begins a process of decoupling decision-making from reality. The end result of this process is a world where the most ridiculous nonsense becomes not just part of the debate but the prevailing view. It begins with investment bankers being in denial about the fact that they are parasites on society. It progresses from there to the belief that the best way to deal with a recession is to cut government spending. It ends with most of the presidential candidates from one of the two major political parties professing to believe in creationism.

Once upon a time we were a country where wealth was more or less correlated with the creation of value. Americans made money building railroads or making steel or inventing computers. There was a strong middle class, so even if you weren't extraordinarily talented you still had a pretty decent shot at a car and a house with a white picket fence if you showed up for work. We had a grip on reality. Science was cool. We invented the Internet and sent men to the moon.

There is still a slow trickle of innovation coming out of the U.S., but the defining themes of this country today are not the latest technological advances but rather shrill ideology about things like terrorism and drugs, epic fiscal irresponsibility, voters who say things like "get government out of my medicare" with a straight face, and political extremism that a few weeks ago very nearly sent us over a cliff.

Above all, we have a tiny minority of people who have won the lottery (myself included) and a huge majority of people who are somewhere between struggling to make ends meet and being on the street. It is no coincidence that gambling is on the rise in the U.S. The entire economy is shifting from merit-based capitalism to a lottery economy. Instead of a pension, you get a 401-K, which may or may not leave you with enough to retire depending on what the stock market does. Instead of a steady job, you get contract work, which may or may not be there next week. Instead of a social safety net, you get your share of a mortgage that you didn't sign up for and have very little hope of ever paying back.

Unless you win the lottery.

If you win the lottery, which nowadays pretty much means being an early employee at a company that goes IPO or making partner at Goldman Sachs, then you don't need a social safety net. You don't need a steady job. You don't need a pension. You get to be one of the people who makes the decisions, buys the politicians, bypasses the security lines at the airport.

But your odds are not good. The top 1% now own about 40% of the nation's wealth. Your odds of being in the top 1% are about 1 in 100. Are you feeling lucky? And do you want to live in a country where that question is the one that decides the fate of your children?

The reason I support raising taxes on rich people is not just because it has to be done to close the budget deficit. There's a much deeper reason than that. Taxing the super-rich provides a vital countervailing force to the natural tendency of money and power to concentrate in the hands of the few people who are most willing to game the system and most able to be in denial about it. The corrosive effects of the phenomenon on the fabric of society are evident everywhere today. Our infrastructure is crumbling. Our people are out of work. The middle class an endangered species. Our government is dysfunctional.

It doesn't have to be this way. We don't have to have a lottery economy. But the first step to recovery from any addiction is always the hardest: admitting to yourself that you have a problem.

[UPDATE: The lead story of the on-line edition of the NYT this morning is "Starved State Budgets Inspire New Look at Web Gambling."]

Three geopolitical oddities

Did you know that there is a part of the continental United States that it not actually connected to the rest of the continental United States? It's called Point Roberts and it consists of the southern part of a peninsula that sticks down off of southern Vancouver just below the 45th parallel, which marks the border between the U.S. and Canada. I've been there. There is an actual border crossing manned by actual border crossing guards whose salaries are paid for by your (if you're an American) taxpayer dollars. These guards defend the 2,739 residents of Point Roberts from invasion by Canadian militants. They don't do a very good job. I visited the place in 2009 and was able to walk right past the checkpoint from Canada into the United States unchallenged. It was not until I tried to get back into Canada from whence I had come that I was challenged by a guard on the Canadian side.

This bit of geopolitical weirdness is not unique. There is, according to Google maps, a tiny bit of Austria that juts out into Germany. This piece of Austria is technically contiguous with the rest of the country, but the place where it connects is only about 150 feet wide, and there are no road that go through it. To get from this part of Austria to the rest of the country without hiking you have to go through Germany.

But the weirdest example of bits of country in random places has to be Oman. There is an enclave of Oman called Madha that is completely encircled by Fujaira, one of the United Arab Emerates. And completely encircled by Madha is the enclave of Nahwa, which belongs to the Emirate of Sharjah, the main part of which is next to Dubai. And as if that weren't bad enough, there is a third discontiguous part of Oman called Musandam at the northern tip of the Arabian peninsula.

Go figure.

Is history repeating itself?

The NYT thinks so:

The events of the last few weeks — gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor’s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market — bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then.

...

“The parallels to what is happening now are very strong,” Robert McElvaine, author of “The Great Depression: America, 1929-1941” and a professor of history at Millsaps College, said this week. Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis.

Are we at similar risk today? David Bianco, chief investment strategist for Merrill Lynch Bank of America, told me this week that “the market is collapsing faster than any fundamentals would warrant.” The possibility that the United States faces a recession as bad as 1937’s seems far-fetched. Nonetheless, Mr. Bianco notes that the market is now pricing in an 80 percent chance of recession, one likely to be more severe than in 1991.

Actually worth reading the whole thing. It's an interesting analysis.

Yes, software patents are evil (and what to do about it)

There's been a flurry of discussion on HN recently about patents. In particular, Paul Graham's 2006 essay on the topic is making the rounds again. As always, I have a lot of respect for Paul, and he usually gets things right, but not this time. He writes:

One thing I do feel pretty certain of is that if you're against software patents, you're against patents in general. Gradually our machines consist more and more of software. Things that used to be done with levers and cams and gears are now done with loops and trees and closures. There's nothing special about physical embodiments of control systems that should make them patentable, and the software equivalent not.

No, that's not true. It's a specific example of a more general fallacy which is sort of the inverse of the slippery-slope fallacy. (This version of the fallacy probably has a name too, but I can't find it.) The slippery slope fallacy argues against a small policy change on the grounds that it might lead to a larger policy change whose consequences are clearly undesirable. (This is used, for example, to argue against gay marriage because it might lead some day to people marrying their pet hamsters.) The inverse fallacy is that because we can't draw sharp lines dividing a continuum into discrete chunks that we should just give up and treat the entire continuum as if there were not distinctions to be made at all. This is Graham's version of the fallacy. Because our machines gradually consist "more and more" of software there's no point in trying to draw a line between inventions that consist of software and those that don't.

There are two reasons this is wrong. First, there is a sharp line you can draw between an invention that consists partly or wholly of software but where the complexity of the problem that the invention solves is driven by features of the physical world. For example, consider an algorithm for generating and recognizing QR codes. The reason this is hard is because to be useful a QR code has to be rendered on a physical medium, and then that image has to be captured by a camera. In that process, the original data can be obscured and corrupted in a large number of different ways. The image can be noisy or partially obscured. The camera can be rotated or held an an oblique angle. All of these things make dealing with QR codes hard. The reason the QR code algorithms are useful is that they solve these problems. That is what makes them worthy of being patented.

Contrast that with this patent on multiply-linked lists. This is a patent that clearly should never have been issued. The prior art goes back at least as far as 1970, probably as far back as 1959, and possibly even earlier than that. But independent of the prior art, it is a pure software patent. The problem it addresses (insofar as it addresses a problem at all) does not arise from the physical world. It is a problem and corresponding solution that exists entirely in the realm of software and abstract mathematics.

Now, there are some ideas in this realm that are also worthy of patents, like elliptic curve cryptography. The problem is that the patent office has shown itself to be singularly inept at distinguishing worthy software patents from worthless ones, and the worthless ones are doing serious damage to our economy. So this is the second reason that opposing software patents is not opposing patents in general. It is arguable that empirically software patents are doing more harm than good, that this is not the case (for whatever reason) in non-software patents, and so one can reasonably oppose software patents without opposing patents in general on purely practical grounds.

But I think there is a happy middle ground that would make everyone happy. I've proposed this before, I'll propose it again: simply open the patent issuing process up to public comment. Before a patent is issued, publish the patent and invite public comment. All the PTO needs to deny a patent is plausible deniability that it should not be issued, and I'm sure there are plenty of volunteers in the software world who would be more than happy to spend some time policing the system. It's a win-win. Which means it almost certainly won't happen.

Now I'm really worried

This made me laugh:

The heads of JPMorgan, Bank of America and Citigroup avow that a repeat of the 2008 financial crisis is not looming. The Dow falls 520 points.

How to fix the economic mess

One of my personal rules is that if you complain about a problem it's incumbent on you to propose a solution. So here goes:

1. Re-regulate investment banking. Investment banks should go back to being what they once were, small partnerships of high net worth individuals. They should not be public companies, and they should not be allowed to invest other people's money. Un-repeal Glass-Steagall. (Banking should be a commodity. No one should get rich from banking. That being a banker is one of the most lucrative careers a person can have nowadays is just one of the symptoms of how badly screwed up our priorities are.)

2. Institute patent reform. Specifically, institute a system of peer-review where the public is invited to comment on, cite prior art for, and opine on the obviousness of patents before they are issued. Most patents being issued today are bogus and only serve to feed patent trolls and stifle innovation. Patents on human genes should be eliminated entirely. These are clearly discoveries, not inventions.

3. Cut defense spending. The amount of money we spend on defense is just ridiculous. Spend the money instead on alternative energy research and development.

4. Let the Bush tax cuts expire. Even better, raise top marginal rates to 50% or more, but allow people to spread windfalls out over several years so that you only get pushed into the top brackets if you make obscene amounts of money on a sustained basis.

5. Raise the retirement age. Index it to life expectancy. Means-test social security.

6. Institute single-payer healthcare. (Hey, a boy can dream, can't he?)

7. Listen to this guy

Since none of these things are likely to happen any time soon (except maybe #7), I'm not going to spend much time elaborating on them. I just wanted to go on the record with my suggestions so that I can carry on complaining without feeling guilty about it ;-)

Deja vu all over again

The NYT wonders:

It feels eerily familiar: Stocks are plummeting. The economy is slowing. Politicians are scrambling to find solutions but are mired in disagreement.

Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008.

No, this is not a repeat of 2008. This time will be worse. Why? Because:

1. All of the problems we had in 2008 are still with us in 2011. We have done absolutely nothing to actually address the underlying problems that led to the crash of 2008. All of the same people are still in charge (I'm referring here to all the Goldman Sachs alums running the treasury). All of the same policies are still in place. All we have done is throw a few hundred billion dollars at the economy, which has been enough to stave off complete catastrophe for the past three years.

2. We have used up what little margin we had. Back in 2008 we had money (well, to be more precise, we could borrow money) to throw at the problem. Finding more money to borrow to throw at the problem to stave off catastrophe this time will be much harder, and in the current political climate, probably impossible.

The result, almost certainly, will be at best a double-dip recession. And we might be looking at Great Depression, the sequel depending on how long it takes for the American People to come to their senses and abandon the tea party.

I've said this before, I'll say it again: the fundamental problem with the United States of America is that at all levels of society we have lost sight of the difference between money and wealth. At every stratum, from the very bottom to the very top, you can find overwhelming majorities of people who believe that having a lot of money is the same thing as being rich. And what these people are about to find out the hard way, like they did in the Weimar Republic, is that it isn't true.

The parallels between what is happening today and what happened in the world in the 1920's and 30's is really getting very eerie indeed, including all of the people who are saying that it can't get that bad. It might not. But it can. And if we don't do something about it, it will.

The right to privacy redux

I have been prompted by circumstance (don't ask, it's complicated) to read parts of the Constitution of India. It is, according to Wikipedia, the longest constitution of any of the world's democracies, and at 417 pages (including an index) I believe it.

The part that has become of particular interest to me of late is Part III - Fundamental Rights. It's the Indian counterpart to the first ten amendments to the U.S. Constitution, and it includes this:

19. (1) All citizens shall have the right—
(a) to freedom of speech and expression;
(b) to assemble peaceably and without arms;
(c) to form associations or unions;
(d) to move freely throughout the territory of India;
(e) to reside and settle in any part of the territory of India; and
(g) to practise any profession, or to carry on any occupation, trade or business.

Ever since Roe v. Wade, American conservatives have been on the warpath against so-called "penumbral rights", those rights that are not specifically enumerated in the Bill of Rights but are inferred to exist under the auspices of the ninth amendment, which Robert Bork famously referred to as "an inkblot."

To those who would deny the ninth amendment's imputation of a right to privacy I put the following question: do American's have the right "to move freely" through the United States? Or is this a privilege granted to the people by the government (like driving) that could legitimately be taken away if the government saw fit to do so?

It's an interesting question in light of the explicit granting of the right "to practise any profession, or to carry on any occupation, trade or business" in the Indian constitution. Americans specifically do not have this right. To be a lawyer or a doctor, even in some places a massage therapist of a hairdresser, you must obtain a license from the government. You don't need a license to move to a different house. But could the government Constitutionally require one?

I think that the idea that freedom of residence (modulo one's ability to afford it) is not a fundamental right is anathema to the American spirit. And yet nowhere in the text of the U.S. Constitution is this right to be found. The Bill of Rights grants us (at least ostensibly) the right to be secure in our houses, but not to change them at will. So if you're a right-to-lifer of the Borkan persuasion, I don't see any way that you can argue that the ninth amendment does not grant a right to privacy without also taking the position that the government can, if it wants to, restrict where you can live.

That is, unless you're willing to be a hypocrite. But then again, hypocrisy is not in short supply on the right these days.

Personally, I can hardly imagine a more un-American attitude.

Why the Debt Crisis Is Even Worse Than You Think

BusinessWeek:

An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.

There is some hope:

The good news is that this speeding vehicle does have brakes—if Washington would only use them. Eliminating deductions would broaden the base of income that’s subject to taxation and increase revenue. On the spending side, it’s crucial to change the incentives that lead to overconsumption and inefficiency in health care.

The bad news is that putting on the brakes requires Congress to stop acting like blithering idiots, and blithering idiocy shows no sign of falling out of fashion in Washington -- or the nation at large for that matter -- any time soon.

And that's the way it is...

With apologies to Walter Cronkite. From The Economist:



The Cronkite link has this telling excerpt:

"The first night up, he ended the show by saying, I'm paraphrasing, 'That's the news. Be sure to check your local newspapers tomorrow to get all the details on the headlines we are delivering to you.'"

That didn't fly.

"The suits -- as we used to call them -- went crazy," Socolow told CNN, referring to CBS executives. "From their perspective, Cronkite was sending people to read newspapers instead of watching the news. [Emphasis added.] There was a storm."

CBS News President Richard Salant met with Cronkite, who initially resisted, then agreed to change his sign-off, Socolow said.

"In the absence of anything else, he came up with 'That's the way it is.'"

Oh, the horror! People reading newspapers! It's a wonder civilization survived long enough to see the advent of television. (Whether it will survive the advent of television is still an open question.)

I'm in good company

JP Morgan's CEO agrees with me:

"No one … could possibly say that there is no chance of a catastrophic outcome" JPMorgan Chase CEO Jamie Dimon told analysts last week.

The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.

Such a downgrade could lead to a temporary market panic

A one-week reprieve?

The NYT reports that the U.S. apparently has some cash hidden in a mattress.

Why I'm worried

I want to be very clear about exactly what kind of alarm I'm raising. We are not headed inexorably towards global economic catastrophe. We are heading for a global catastrophe if Congress does not raise the debt ceiling before August 2 (or thereabouts -- there is some disagreement over the exact timing, but it doesn't matter. We actually will reach the point of no return earlier than that.) So avoiding catastrophe (for the time being) is very simple: raise the debt ceiling. That's it.

Normally this would not be an issue at all. The debt ceiling has been raised 90 or so times since it was first created back in WWI. What's different this time is that we have an opposition party in Congress that is determined to see to it that Obama is a one-term president by any means necessary. Against this we have a president who looks back as a role model on Bill Clinton successfully standing up to Newt Gingrich in the mid-90's. And we have a ticking clock. That is a very dangerous combination.

The other difference this time is that the stakes are much, much higher. Shutting down the U.S. government is a colossal pain in the ass, but ultimately not a long-term problem. Defaulting on the debt, which will happen if the debt ceiling isn't raised, will be vastly worse. It will be be the worst thing that has happened to the world economy since WWII, and possibly the worst in living memory. No one knows. But since WWII, all of the mathematical models that underpin the world's economy are based on the assumption that the U.S. will not default on its debt. If that assumption is discharged, all bets are off. No one knows exactly what will happen, but whatever it is it will not be good for most people. There will be runs on banks, unemployment, foreclosures, that will make 2008 look like the good old days.

I still believe that Washington will ultimately come through and figure this out. But the clock is ticking, and right now things are not looking good. The chances of a worst-case scenario are low, but they are not zero. And the more time goes by the higher the probability becomes, until at some point we will reach a tipping point and by then it will be too late.

Exactly where that tipping point will be is also impossible to determine. Frankly, I'm surprised the markets have not reacted more negatively to the situation. There are two possibilities: either someone out there knows something I don't, or the world is being complacent. There is ample precedent for complacency. Ironically, it is the firm belief that nothing bad will happen that could ultimately prove to be one of the major contributing factors to something bad actually happening. That is why I am sounding this alarm. It's not because I want to be a doom sayer, it's because I'm hoping that if enough people get scared enough and start making enough noise that that will contribute to solving the problem, at least in the short term.

[UPDATE:] For a contrary view, read this. And for a counter-contrary view, see this.

Maybe you don't realize how serious this is

It occurred to me that maybe most people don't actually realize just how serious the fiscal situation in the U.S. is. They have some idea that August 2 is not really a hard deadline, that there are some games that can be played with the books and delaying social security payments and whatnot. If you think this, if you are not seriously worried, you need to listen up because you do not understand the situation.

It is not the case that on August 2 the U.S. hits its debt limit ceiling. The U.S. hit its debt limit ceiling back in May. Since then we've been running on cash reserves. What happens on August 2 is that the United States of America runs out of cash. In the absence of at least some additional short-term borrowing, a default is inevitable. Yes, in the aggregate, there is more than enough money coming in to service the debt, but the timing is wrong. Tax revenues are not a steady stream, they come in sporadically, and the next big batch of revenue is not expected until after the next round of debt payments are due. The U.S. is quite literally living paycheck-to-paycheck, and on August 2 we hit the wall hard.

I hope I do not have to point out the obvious, that if we do hit the wall hard, the result will be that even the sporadic tax revenues will shrink because we will be immediately embroiled in Great Depression II, which will make the first one look like a cake walk by comparison. The actual bankruptcy of the United States of America, that is, a situation where total tax revenues are not enough to cover the debt even in the aggregate, is not out of the question.

On August 3, if Congress does not get its act together, there are going to be a whole lot of folks who will wake up and find themselves with no job, no cash, and very shortly thereafter, no home and no prospects, and they will say, "What the fuck just happened?" Now you know. Tell your friends. Call your senators and congresscritters, ESPECIALLY if they are tea partiers. This is serious, serious shit, folks, and time is running out.

[See my follow-up here.]

This might have some relevance...

The other day I wondered out loud why the federal government was taking such a keen interest in Aaron Swartz and going out of its way to prosecute him for a "crime" despite having no one willing to step up and claim to be the victim. Well, here's a clue:

... [Swartz] worked with Shireen Barday at Stanford Law School to assess “problems with remunerated research” in law review articles (i.e., articles funded by corporations, sometimes to help them in ongoing legal battles), by downloading and analyzing over 400,000 law review articles to determine the source of their funding. The results were published in the Stanford Law Review.

There is no greater crime in the U.S. than posing a credible threat of making powerful people look bad.

(Hm, maybe I'd better be more careful what I say.)

Are we bankrupt yet?

Yeah, pretty much:

Here's one way to express how catastrophically screwed the U.S. government's finances are: If the entire U.S budget were cut to zero, effective immediately—the military, all entitlements, the electricity bill for the Capitol—there still wouldn't be enough money to cover the payments on old debt that come due every day.

[UPDATE:] Some people have disputed Wilson's results. It's important to understand that the U.S. actually hit its debt limit back in May. Since then it has been paying its bills with cash on hand. Yes, there is money coming in, but it's not a steady flow. It comes in batches. You can see the spikes in Wilson's graph. In the aggregate there is enough money coming in to cover interest payments, but because of the way the timing works out, default is inevitable without at least some additional short-term borrowing. This is serious shit. On August 2 we really do hit the wall hard.

Glenn Greenwald to the rescue

I wanted to write something about the Norwegian terrorist attacks but couldn't come up with anything that didn't sound hackneyed. Good thing I have Glenn Grenwald to fall back on.

That Terrorism means nothing more than violence committed by Muslims whom the West dislikes has been proven repeatedly. When an airplane was flown into an IRS building in Austin, Texas, it was immediately proclaimed to be Terrorism, until it was revealed that the attacker was a white, non-Muslim, American anti-tax advocate with a series of domestic political grievances. The U.S. and its allies can, by definition, never commit Terrorism even when it is beyond question that the purpose of their violence is to terrorize civilian populations into submission. Conversely, Muslims who attack purely military targets -- even if the target is an invading army in their own countries -- are, by definition, Terrorists.

As usual with Greenwald, it's worth reading the whole thing.

The government is out of control, part N

I'm starting to lose count of the number of "government spinning wildly out of control" stories I've linked to here. It's shit like this that makes me sympathize with the Tea Party's desire to shrink the federal government:

In 2009, [Eddie Leroy Anderson of Craigmont, Idaho] loaned his son some tools to dig for arrowheads near a favorite campground of theirs. Unfortunately, they were on federal land... [and] the Archaeological Resources Protection Act of 1979 ... makes it a felony punishable by up to two years in prison to attempt to take artifacts off federal land without a permit.

There is no evidence the Andersons intended to break the law, or even knew the law existed, according to court records and interviews. But the law ... doesn't require criminal intent...

Faced with that reality, the two men, who didn't find arrowheads that day, pleaded guilty to a misdemeanor and got a year's probation and a $1,500 penalty each.

...

As federal criminal statutes have ballooned, it has become increasingly easy for Americans to end up on the wrong side of the law. Many of the new federal laws also set a lower bar for conviction than in the past: Prosecutors don't necessarily need to show that the defendant had criminal intent. [Emphasis added.]

These factors are contributing to some unusual applications of justice. Father-and-son arrowhead lovers can't argue they made an innocent mistake. A lobster importer is convicted in the U.S. for violating a Honduran law that the Honduran government disavowed. A Pennsylvanian who injured her husband's lover doesn't face state criminal charges—instead, she faces federal charges tied to an international arms-control treaty.

Sure gets the blood boiling.

Except... wait, this is the Wall Street Journal. The Wall Street Journal is owned by Rupert Murdoch. Rupert Murdoch is not known for adhering to the very highest levels of journalistic ethics. Could it be that there's some, uh. spinning going on here? After all, you can't trust anyone any more.

Last September, retired race-car champion Bobby Unser told a congressional hearing about his 1996 misdemeanor conviction for accidentally driving a snowmobile onto protected federal land, violating the Wilderness Act, while lost in a snowstorm. Though the judge gave him only a $75 fine, the 77-year-old racing legend got a criminal record.

Invoking Bobby Unser sure sounds like it's designed to tug at the heartstrings of the NASCAR set. Could there be another side to this story? Apparently not. The Salon report makes the incident sound even more egregious than the WSJ account, and Salon is not exactly known for its conservative bias.

All of which leads me to conclude that the real problem we have in the U.S. is that we seem to have abandoned every last vestige common sense.

"Shoot the nigger!" is Constitutionally protected speech

So says the 9th Circuit court of appeals (at least if the LA Times is to be believed):

A ... man who posted racial epithets and a call to 'shoot' Barack Obama on an Internet chat site was engaging in constitutionally protected free speech, a federal appeals court ruled Tuesday in overturning his criminal conviction.

Walter Bagdasarian was found guilty two years ago of making threats against a major presidential candidate in comments he posted on a Yahoo.com financial website after 1 a.m. on Oct. 22, 2008, as Obama's impending victory in the race for the White House was becoming apparent. Bagdasarian told investigators he was drunk at the time. [Emphasis added. See below.]

[T]he U.S. 9th Circuit Court of Appeals overturned [his] conviction Tuesday, saying Bagdasarian's comments were "particularly repugnant" because they endorsed violence but that a reasonable person wouldn't have taken them as a genuine threat.

The observation that Obama "will have a 50 cal in the head soon" and a call to "shoot the [nigger]" weren't violations of the law under which Bagdasarian was convicted because the statute doesn't criminalize "predictions or exhortations to others to injure or kill the president," said the majority opinion written by Judge Stephen Reinhard.

Of course, the Times spelled "nigger" as "r-a-c-i-s-t s-l-u-r."

So let me see if I've got this straight. If I say, "I'm going to shoot the nigger," that is a felony threat against the president. But if I simply urge other people to "shoot the nigger" that is Constitutionally protected free speech. Have I got that right?

So does that mean that if Jeb Bush ever ends up in the White House (God forbid) that I can with impunity call on people to "shoot the redneck" as long as I get drunk first? Oh happy day.

Geek corner: A C puzzle

A bucket full o' bits to the first person who can correctly answer this question without actually running the program: what is the output of the following C program:


#include

main() {
unsigned int i = 0;
unsigned short s = 0;
int x = -1;
printf("%d %d\n", x>i, x>s);
}


Hint: It's not "0 0".

More info, particularly in the comments. Sometimes it's a wonder that anyone manages to write working code in C. (That anyone can write working C++ is nothing short of miraculous.)

Obama endorses DOMA repeal!

I've said on a number of occasions that I'm disappointed in the extent to which the policies of the Obama administration have tracked those of the Bush administration. So I have to give credit where it's due: Obama, despite previous waffling, has endorsed the Feinstein-sponsored repeal of the Defense of Marriage Act. That is clearly not something George Bush ever would have done. Kudos!

The government really is wildly out of control

They have indicted Aaron Swartz, one of the co-founders of Reddit, for downloading scholarly articles form the internet:

Shocking news: Moments ago former Demand Progress Executive Director Aaron Swartz was indicted by the US government. As best as we can tell, he is being charged with allegedly downloading too many journal articles from the Web. The government contends that downloading so many journal articles constitutes felony computer hacking and should be punished with time in prison. We disagree.

The charges are made all the more senseless by the fact that the alleged victim has settled any claims against Aaron, explained they've suffered no loss or damage, and asked the government not to prosecute.

I've had firsthand personal experience in how hard it is to get prosecutors to file charges against someone even when there is a victim willing to step up and say they've been victimized. That they would go to the effort of prosecuting someone like Aaron without a victim is simply mind boggling. Either these people are complete morons, or there's something sinister going on behind the scenes.

Here is JSTOR's statement about the case.

The Republican plan

Politico nails it.

This is why I'm worried

I still believe that Congress will figure out a way to increase the debt ceiling, but it's hard to see how it's going to get done in light of facts like these:

[M]any Republican House members are absolutely genuine in their adamant belief that stopping an increase in the debt ceiling -- an archaic relic from World War I -- that has been raised dozens and dozens of times without incident -- is a good way to combat deficits, which they truly believe are about to turn America into Greece. This view seems particularly pronounced among the 87 Republican freshmen (who together account for nearly 40 percent of the entire GOP conference) who were elected last fall. To many of them, the debt ceiling is a new concept; they haven't been in Congress for years, routinely voting to raise it. What's more, many of these freshmen are also convinced that the deficits that so upset them are the result of their own party's unwillingness in the past to stand firm at moments just like this one.

...

Perhaps the best example of the resistance GOP leaders will face when they push a deal comes from Rep. Todd Rokita, a freshman from Indiana. In an interview with ABC News' "Top Line" on Monday, Rokita said that even $4 trillion in immediate cuts -- three times the amount that is apparently now being discussed by GOP leaders -- "may not be enough" to convince him to support a deal. A default, he suggested, could be a good way of forcing the country to live within its means -- "even if the stock market does go down, if the economy does get worse."

You can call this crazy, and maybe it is. But remember: The 4th District that Rokita represents is overwhelmingly Republican. When he was elected last year, it was the GOP primary (which he won with 42 percent of the vote), and not the general election (when he cruised with nearly 70 percent), that Rokita had to worry about. In other words, not only is it likely that Rokita genuinely believes what he's saying about the debt ceiling, it's also likely that he'll be rewarded for it by the folks back home.

Funny thing is, I actually sympathize with Rokita's basic sentiment. But, oh my God, does he (and, more to the point, his supporters) seem to have no freakin' clue what kind of fire he's playing with.

The Tea Partiers are extortionists

If there is any lingering doubt in your mind that a U.S. default would be Bad with a capital B read this. The entire economy of the planet since WWII has been based on the assumption that a U.S. default would not happen. If that assumption is discharged -- and it's looking more likely every day -- then the rules of the game will have to be rewritten from scratch. What the net result will be is anybody's guess, but it's a pretty safe bet that it won't be pretty.

It is this threat of economic armageddon that the Tea Partiers are wielding in order to accomplish whatever it is they are really hoping to accomplish. Exactly what that is is far from clear. They say that they want to shrink the size of government, but their actions belie this.

...the consequences of any default would, ironically, actually increase the size of the government relative to the U.S. economy—the very outcome that Republican intransigents claim to be trying to avoid.

So there are only two possibilities: either they're stupid, or they really want to accomplish something else. Either way does not bode well for the future.

But their actual goal doesn't affect the fact that whatever it is they want to accomplish they can't do it via the normal legislative process. So they have to resort to the threat of economic armageddon with an outcome contrary to their stated goals in order to do whatever it is they really want to do. That is the very definition of extortion.

BTW, I am seriously considering going to the bank and withdrawing a rather substantial amount of physical cash, and I urge you to do likewise. There are two reasons for this. First, in a worst-case scenario, physical cash will be very useful, and if you wait until it's too late you won't be able to get any. And second, if We The People start to pose a credible threat of broad-based run on the banks before it is too late to pull back from the brink, maybe that will knock some sense into these morons.

I still believe that Congress will figure this out and we won't default. Certainly the bond market seems very sanguine about what is going on. But I think the odds are no longer 100% even to an engineering approximation, and that makes me very, very nervous. Because the Tea Partiers just might be crazy enough to take us over the edge.

And if they do, it will be Bad.

The Republican party's number one goal...

According to Kentucky senator Mitch McConnell is (still) to stop Obama from being re-elected. It's not to create jobs, or win the war on terror, or make progress towards energy independence. The single most important thing is to get Obama out of the white house by any means necessary.

Including bringing the country to the brink of default (and maybe even go over the edge -- who knows how batshit crazy these Republicans really are?)

What is most mind-boggling about this (and I have to credit this observation to Senator Al Franken) is not that the Republicans have this goal (which should come as no surprise to anyone) but that they are actually willing to admit it, that they actually seem proud of the fact that they are playing Russian roulette with the economy for political purposes.

A number of normally conservative sources are starting to desert the sinking ship. Even David Brooks has gone so far as to say that the Republicans have "No sense of moral decency." Brooks was referring to their willingness to voluntarily shirk the (by traditional conservative standards) sacred responsibility to pay back debt. But I think there's a case to be made for a much more sinister interpretation of their tactics: the Republicans show every sign of being willing to utterly destroy America's credibility and its economy in order to pander to those who want to -- why mince words? -- get that f******* n***** out of the white house.

If there's a more plausible explanation for their tactics I'm all ears.

[As a side note, I am posting this from an airplane via GoGo in-flight internet. It is truly an amazing time we live in.]

I feel so much better now

Ben Bernanke says the economy will get better Real Soon Now (tm). This is the same Ben Bernanke who just a few weeks ago said the economy was getting worse and he didn't have a clue as to why.

Well, here's a theory: Rupert Murdoch paid negative $4.8 billion in taxes on profits of $10.4 billion. That's right, the U.S. government gave Murdoch $4.8 billion. [UPDATE: Reuters has retracted this report. See the comments for details.]

In other news, the state of California is going to close 50 state parks to help close the state's budget deficit. The move will save $19 million (with an M, not a B).

But we can't raise taxes on Murdoch because that would kill jobs.

You're all wrong!

I've been quite remiss in tending to the Ramblings of late, so thanks to Don for picking up some of the slack. Time constraints have kept me from writing as much as I would like, and the result has been a piecemeal and somewhat incoherent set of posts on my part. But the scope of the issues raised by the current economic situation is so vast that it's hard sometimes not to feel overwhelmed and just throw up one's hands in despair. Surveying the economic and political landscape today evokes in me a feeling somewhat akin to watching the last scene in Raiders of the Lost Ark.

I do believe that at root we probably agree on more than we disagree, but that makes for boring television. So I'll cut right to the chase and say that I think that quibbling over which way the causality ran in 2008 is badly missing the point. The problems we're experiencing right now have been forty years in the making (and there is evidence that the seeds were actually planted 80 years ago). None of the policies that put us where we are today have been changed, nor is there any indication that they will or even could be changed given today's political realities. It has next to nothing to do with Ben Bernanke. My problem with Bernanke is not that this mess is all his fault (it isn't) it's that he's not even pretending to know what's going on and what to do about it, which is the job he's being paid to do.

(That's the thing that pisses me off most about this situation: tons of people are being paid tons of money for being incompetent. I want a piece of that action. I can be more incompetent than any of those clowns, and I'll do it for half what they're making.)

The situation is so complicated that it's very hard to boil it down to a pithy sound bite, but here's my best shot at it: the people of the United States, including, apparently, those at the very top, have fundamentally lost sight of the difference between money and wealth. They think, for example: if I pay more taxes, I have less money, so I'm poorer. If I pay less taxes I have more money so I'm richer. So cutting taxes makes everyone richer. Duh! It's very compelling logic (if you're an idiot), but it is, of course, wrong.

I am reminded of a scene in one of Douglas Adams's books where the smart people on a particular planet that is becoming overcrowded manage to con all the stupid people to emigrate to a different one. Upon arrival on their brand spanking new planet the stupid people decide to declare that leaves are money. Everyone stuffs their pockets full of leaves, and -- presto! -- everyone is rich. They didn't even have to go to the bother of building printing presses!

This is, I am sad to say, the kind of logic that is being bandied about in all seriousness today by people who really ought to know better. The proposition that all our problems would go away of only Bernanke would print more dollars is not so far from the Adamsian proposition that all our problems would go away if only we just proclaimed leaves to be money. That at least would solve the problem of the Fed chairman's obstinacy, wouldn't it?

The problem is that money isn't wealth. It isn't even a proxy for wealth! It's a tool, a technology, and like any technology it can be used to help create wealth, but it can also be used for other purposes, like obtaining power and influence (which some people -- mainly those who have it -- reckon as wealth).

This is the fundamental problem: not everyone reckons wealth the same way. Not everyone has the same quality metric. One of the things that makes money so useful is that it helps catalyze a process by which multiple disparate quality metrics can be mutually reconciled so that everyone gets what they wants. This is the beautiful promise of the free market, that actual wealth can be created out of nothing merely by providing a venue where people can exchange goods and services, and an accounting mechanism that allows the goat herder and a barber to trade 1/10th of a goat for a shave without having to actually go to the trouble of butchering a goat.

No one seems to understand this any more. Certainly the "wizards of Wall Street" don't seem to understand it.

Sub-prime did not cause the great recession. Neither did the great recession cause the mortgage crisis. Both were caused by vast numbers of people buying into the theory that money is wealth, that if you create money you create wealth, that everyone can get rich by stuffing leaves into their pockets. Of course, the details are quite a bit more complicated than that. The reality was more like: the recession and the crisis were caused by vast numbers of people buying into the theory that you could eliminate risk from financial transactions by building up a Ponziesque scheme of derivatives. The problem was then exacerbated when the perpetrators of this scheme were let off, not just scot-free, but were actually rewarded by the government for essentially perpetrating a fraud. (I am speaking here of AIG being forced by the treasury to pay Goldman Sachs 100 cents on the dollar for their credit default swaps in exchange for a government bailout of AIG. It is no coincidence that many of the government officials who instigated this policy were Goldman alums.)

I could go on and on and on. The level of incompetence at the highest levels is truly staggering. Take the ratings agencies for example. They got paid to rate bonds. They gave AAA ratings to bonds backed by sub-prime mortgages that they knew would default. They did this because they got paid by the bond issuer. Then they hid behind the first amendment to evade liability. Again: vast numbers of people getting paid vast amounts of money, not to create wealth, but to actively destroy it.

Go back and watch that clip from Indiana Jones again.

Of course, ultimately the blame lies with the American people. None of this would have been possible without the complacent acquiescence of vast numbers of ordinary citizens. But although the responsibility ultimately lies with them it's hard for me to count these folks as villains. Most people, I think, just want to do an honest day's work for an honest day's pay and leave the complicated stuff to someone else, and it's hard to find fault with that. The wealth of this nation was built in large measure by people with that kind of outlook on life. Those people are not the bad guys.

The bad guys are the intellectual elites in this country who really ought to know better. No one should be allowed to graduate from Harvard or Yale without understanding the difference between money and wealth, and yet the corridors of power in this country are chock full of ivy league grads who either don't get it or don't care. Either way, this mess is their fault.

What caused the recent Great Recession?

[A guest post from Don Geddis]

Ron recently complained about Ben Bernanke. In particular, he shared his own theory of who is to blame for the recent bad US (and world) economy (high unemployment, fall in GDP):

The housing crisis was not an unexpected aberration, it was the completely predictable result of the systematic dismantling of the tax and regulatory regime that was in place in this country since the end of WWII [...] The predictable result was increasing financial instability and economic inequality. Since 2008 we have done absolutely nothing to change the strategic situation so it shouldn't come as a surprise to anyone that we continue to see the same results.

I disagreed with this analysis, and there was some lively debate in the comments.

Scott Sumner (my economist hero blogging at The Money Illusion) has recently posted what I think is an excellent summary of the real issue about assigning this blame correctly:

Progressives tend to blame the instability of unregulated capitalism, prone to bubbles and crashes. Conservatives blame moral hazard created by government insurance and/or policies that tried to get more low income people into housing. But both seem to see the sub-prime crash as the proximate cause of the crisis of late 2008. I think they are both wrong. [...] I’m depressed by almost all discussions of the current crisis, as they all start with the premise that “it goes without saying” that the Great Recession was triggered by financial crisis. No, the Great Recession caused the financial crisis.

It's true that the first obvious sign we all saw, back in 2007, was the bubble in housing prices, and then the collapse of subprime mortgages. But people on "both" sides of the political debate seem to spend all their time trying to pin the blame on what led to the subprime collapse, as though the subsequent (worldwide!) Great Recession was a necessary consequence, once the mortgage crisis began. To avoid such future economic pain (years of high unemployment, low GDP growth), both sides seem to be trying to figure out how to prevent another mortgage collapse. And of course they have wildly different theories on how to go about that.

But Sumner rightly questions the second part of the link. What if it doesn't matter that mortgages collapsed? What if that didn't need to lead to a huge recession? Sure, you can blame the match for starting the destructive wildfire ... but when you see the fully-staffed fire trucks parked right next door, and they decline to intervene to put out the fire as soon as it begins ... well, is the match really the "cause" of the wildfire's destruction?

Sumner himself echoes this in a comment on his own post:

Suppose the helmsman fell asleep at 2:00am. The ship goes of course. Who’s fault is it–the wind, or the sleeping sailor? I say the sleeping sailor.

(BTW: if you want to know the "real" cause of the recession of the last few years, Sumner has convincingly argued that it happened because the US Fed incorrectly allowed nominal GDP to plummet after the mortgage crisis began. In essence, we didn't have enough inflation; the Fed allowed damaging deflation instead.)

Tough call

For $100,000 you can get either one of the last Tesla Roadsters or one of 99 Zafirro Iridium razors. Yes, that's "razor", like the thing you use to shave with.

If the existence of this product isn't proof that some people have waaaaay too much money I don't know what is.

Doin' what comes natchurly

The Second City Network has made a wonderfully irreverent video answer to people who say that gay marriage is not "natural". WARNING! Highly NSFW. If you are easily offended, do not watch this video.

Five down...

I've not been blogging much because I'm working on a new startup which is taking up most of my time, but I could not let the legalization of gay marriage in New York pass without mention. So... kudos to the New York legislature, and all the hardworking folks working behind the scenes. Well done. And a special honorable mention to Mark Grisanti who stood up to his party to do the right thing.

Wouldn't it be easier to just pick the lock?

UCSD scientists have demonstrated that you can create duplicate keys from photos of the keys taken up to 200 feet away.

As long as I am on a tear about the economy...

Everyone needs to see this movie.

Can Ben Bernanke really be this stupid?

Ben Bernanke is surprised that the economy is not recovering faster:

Fed Chairman Ben Bernanke told reporters Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy. And he said the troubles could continue into next year.

"We don't have a precise read on why this slower pace of growth is persisting," Bernanke said. He said the weak housing market and problems in the banking system might be "more persistent than we thought."

Well, I'm not surprised. It's completely obvious to me why the economy has not recovered: we have done absolutely nothing to fix it. The housing crisis was not an unexpected aberration, it was the completely predictable result of the systematic dismantling of the tax and regulatory regime that was in place in this country since the end of WWII, and replacing it with a tax and regulatory regime that more closely resembles what we had after WWI. In 1925 top marginal tax rates were lowered from 46% to 25% and banks were deregulated. Five years later the Great Depression started. By 1945 top marginal rates were back up to 90% and a strong banking regulatory regime was put in place that resulted in thirty years of unprecedented financial stability and prosperity. Starting in 1982 we began to dismantle that regulatory regime and lowered top marginal tax rates back down to 30% or so. The predictable result was increasing financial instability and economic inequality. Since 2008 we have done absolutely nothing to change the strategic situation so it shouldn't come as a surprise to anyone that we continue to see the same results.

I'm going to go on record here with the following prediction: within the next five years we will see an economic crisis that will make 2008 look like a cake walk by comparison. We came very close to a global meltdown back in '08, and the only thing that saved us from complete calamity was using up what little margin was left in the system to restore liquidity. The next time things start to come apart at the seams that margin will be gone. I have no idea when or how this crisis will come about. I just know that unless we make some painful choices it is a question of when, not if, this will happen. And right now I see no indication that those painful choices will be made. The fact that Ben Bernanke apparently has his head shoved so far up his butt that he can't see what is blatantly obvious to an amateur like me does nothing to bolster my optimism.

[UPDATE] Looks like my prediction may be coming true faster than I thought.

Fukushima: It's much worse than you think

I've been a proponent of nuclear power. I'm still a proponent of nuclear power. But because I endorsed the view that there was nothing to worry about at Fukushima and that nuclear power is the safest way to generate electricity (which it actually still is) I feel duty bound to point out this article from Al Jazeera (which nowadays seems to be a fairly reliable source) that says that the situation at Fukushima is pretty frickin' bad, much worse than official sources would have one believe.

Because reliable information from Fukushima is so hard to come by it is probably impossible to say if this article has overblown the actual danger. But the article seems plausible to me. I still believe it is possible to design and build safe reactors. But at this point I don't see how any reasonable person could fail to concede that Fukushima manifestly wasn't.

Wouldn't it be ironic...

... if CO2 emissions ended up saving the environment instead of destroying it?

Py-bcrypt discrepancies explained

Earlier today I raised an alarm over some discrepancies that I discovered between the behavior of the py-bcrypt library and the published description of the bcrypt algorithm. Today I got a response from the author of py-bcrypt, which I quote here in its entirety:

No, they are not bugs. As usual in the real world, there are differences between academic work and practical implementation. There is no reason to worry about this because:

a) The truncation of the hash exists in the reference implementation that was written by Provos and Mazieres (the paper authors). You can check this for yourself in OpenBSD's CVS.

b) The incremental likelihood of collision caused by truncating the hash is in the order of 2^-186, which is irrelevant in this context.

Why was this done? You'd have to ask Niels or Davis, but I'd guess that they figured 60 characters was a more convenient length.

I guess this blog post was yours: http://rondam.blogspot.com/2011/06/possible-flaw-in-open-source-bcrypt.html

I have to say that I find it completely assinine and irresponsible. You imply that this difference in behaviour could be a deliberately-inserted vulnerability, without waiting even a week for a reply from me or bothering to check the reference implementation or its authorship before insinuating malicious intent.

Please retract your your post.

For the record, I never meant to imply that py-bcrypt was malicious, only that it is prudent to track down and understand discrepancies like this when one encounters them because they could some day be an indication of something malicious going on.

It's true that I did not wait a week before going public, I waited two days. I think reasonable people could disagree over what the appropriate length of time is in a situation like this.

In any case, for the record, there is now no reason I know of not to use py-bcrypt, and I apologize for any misunderstanding my earlier post may have caused.

The darker side of bitcoin

Isn't it funny how sometimes life seems to follow a theme? Here I am being all paranoid about security and not five minutes later I stumble across this:

Hi everyone. I am totally devastated today. I just woke up to see a very large chunk of my bitcoin balance [has been stolen].

I feel like killing myself now. This get me so f'ing pissed off. If only the wallet file was encrypted on the HD. I do feel like this is my fault somehow for now moving that money to a separate non windows computer. I backed up my wallet.dat file religiously and encrypted it but that does not do me much good when someone or some trojan or something has direct access to my computer somehow.

...

Block explorer is down so I cannot even see where the funds went.

I tried restoring an earler backup of my wallet but naturally that does not work because the transaction has already been validated.

Needles to say I feel like I have lost faith in bitcoin.

Anyone have any ideas what I can do besides just jump off a bridge?!

No, there is nothing that this poor sod can do. That is the whole point of bitcoin. It's untraceable virtual cash, and like physical cash, if someone steals it from you it's gone for good.

Wow, the bitcoin that was stolen was worth about half a million dollars at current exchange rates. You gotta wonder if the motive was profit or to undermine trust in bitcoin.

A possible flaw in open-source bcrypt implementations

[NOTE: See updates below and here.]

I'm working on an application that requires a secure password hash. The state of the art is Colin Percival's scrypt but the available code base is not very developer-friendly. Scrypt is published as a self-contained file-encryption utility, and to extract the key-derivation function is not trivial. It's not a lot of work, but it does require a fairly deep understanding of how scrypt actually works under the hood to make sure that you don't screw it up (and crypto code is notoriously easy to screw up even for someone who knows what they are doing). So I decided instead to try bcrypt, which is not as secure as scrypt but is a lot easier to use because it has python bindings and a password-hashing-friendly API.

So I downloaded and installed py-bcrypt, ran a few tests, and everything seemed to be working properly. But then I noticed something odd. The hash produced by py-bcrypt was 60 bytes long:


>>> import bcrypt
>>> bcrypt.hashpw('x', gensalt())
'$2a$12$w6IdiZTAckGirKaH8LU8VOxEvP97cFLEW5ePVJzhZilSa5c.V/uMK'
>>> len(_)
60


Let's deconstruct that. The format of the bcrypt hash is:

1. A 7-byte header ("$2a$12$") identifying this is a bcrypt hash, followed by...

2. A 22-byte base-64 encoded salt ("'w6IdiZTAckGirKaH8LU8VO") which decodes to a 128-bit binary salt value, followed by...

3. A 31-byte base-64 encoded hash ("xEvP97cFLEW5ePVJzhZilSa5c.V/uMK") which is supposed to decode to a 192-bit hash.

Except that it doesn't. 31 base64 encoded bytes only yield 184 binary bits. One byte of our hash has gone missing. [NOTE: this is corrected from an earlier version where I had two bytes missing. Those damn off-by-one errors :-) ]

OK, so maybe someone accidentally introduced an off-by-one error into the python wrapper. Except that the problem is not in the python wrapper. You can find bcrypt test vectors on the web, and they are all 60-byte strings.

It gets weirder.

The official bcrypt paper says (and other accounts corroborate) that bcrypt is limited to hashing 55-byte-long passwords. But empirically, py-bcrypt uses up to 72 bytes:


>>> hashpw('x'*71, s)
'$2a$12$w6IdiZTAckGirKaH8LU8VOMZSlhS0VSZlNwXRObFsZV4.wyRyEn9.'
>>> hashpw('x'*72, s)
'$2a$12$w6IdiZTAckGirKaH8LU8VOD.VdDKdNfUBylAAnnmZvJuKg6dhqMLq'
>>> hashpw('x'*73, s)
'$2a$12$w6IdiZTAckGirKaH8LU8VOD.VdDKdNfUBylAAnnmZvJuKg6dhqMLq'
>>>


That is a very big discrepancy between the actual behavior of the code and the description given in the literature. It's vastly too big a discrepancy to be explainable by a simple inadvertent bug.

Now, some people might say I'm being excessively paranoid, but I don't think so. The higher the stakes in the internet security game get, the more incentive there is for attackers to try all kinds of sneaky and nefarious tricks to introduce weaknesses into people's defenses, and one of the easiest ways to do that is to publish some plausible-looking open-source security code that actually has a hidden weakness built in to it and hope that nobody notices. So IMHO it is prudent to raise at least a yellow flag any time the actual behavior of security code deviates from its peer-reviewed specification. When it comes to security, a certain level of paranoia can be prudent.

I sent an email to the author of py-bcrypt asking about this but didn't get a response. If anyone who knows their way around crypto code can shed some light on this I would be very grateful.

[UPDATE: My general level of paranoia has been at least partially vindcated]

[UPDATE2: The discrepancies have apparently been cleared up]

Obamacare takes another step towards the grave

A year ago March I predicted that the Supreme Court would overturn Obamacare on Constitutional grounds. Today the LA Times reports:

A top Obama administration lawyer defending last year's healthcare law ran into skeptical questions Wednesday from three federal judges here, who suggested they may be ready to declare all or part of the law unconstitutional.

Acting U.S. Solicitor General Neal K. Katyal faced off against former Bush administration Solicitor General Paul Clement in what has become the largest and broadest challenge to the healthcare law. In all, 26 states and the National Federation of Independent Business joined in urging the judges to strike down the law.

... in an ominous sign for the administration, the judges opened the arguments by saying they knew of no case in American history where the courts had upheld the government's power to force someone to buy a product. {Emphasis added.]

So it's looking good for my prophetic abilities. Not so good for the country.

One dollar, one vote

Former Minnesota Gov. Tim Pawlenty is calling for big tax cuts. (My, what an innovative idea.)

In order to offset any lost tax revenue — and to tackle the deficit — Mr. Pawlenty calls for something called “The Google Test” to determine whether the government should be involved in a program.

“If you can find a good or service on the Internet, then the federal government probably doesn’t need to be doing it,” Mr. Pawlenty says.

Hm, let's see what we can find on Google nowadays. I can find this. And this. And this. And this and this and this. Oh, those aren't goods and services available for sale you say? Well, how about this or this or this.

The point being (not that this should come as a surprise to anyone who hasn't been living in a cave for the last ten years): you can find freakin' anything on Google. Of course the private sector will step up and provide any service that the government doesn't for which there is demand. But you might not like the terms.

Here's the problem: we as a society are not willing to let people suffer the consequences of their actions, and with good reason: sometimes the consequences of your actions affect the people around you. Want to ride a motorcycle without a helmet? If you splatter your brains on the sidewalk it's not just you that suffers. It's your kids. It's your employer (or your employees). It's whoever gets stuck with the job of scraping you and your motorcycle off the pavement and disposing of them. And if you should be so unfortunate as to survive the accident, people seem generally unwilling to muster the cold-heartednes to let you die if your insurance premiums aren't up to date, or your pockets aren't deep enough.

So we build emergency rooms and make rules that they can't turn you away if you can't pay. We fund police and fire departments in the recognition that if your neighbor's house is robbed or burns down, you suffer too. We build schools because if your fellow citizens are uneducated, you suffer, because they vote.

Unless, of course, they didn't.

The idea of one-person-one-vote that we Americans claim to hold in such high esteem is actually a fairly recent innovation. When our country was founded it was one-landowner-one-vote. Then it became one-white-make-one-vote, then one-white-person-one-vote.

Most of us like to think that these are settled issues. But it is in our nature as humans to seek power and influence, and unlike wealth, where trades can produce winners on both sides, power and influence are zero-sum games. The whole point of having power and influence is to get other people to do what you want instead of what they want. Someone has to pick the vegetables, clean the sewers, fight the wars. How do you decide who draws the short straw?

It turns out there are lots of ways, some better than others. You can create a government and have it make the decisions. You can create a free-market economy and let that decide. Or you can create a system where some people are left with no alternative but to do the dirty work or starve.

That is what the Republican program of dismantling government is heading towards. If you replace government with the free market, then you replace one-person-one-vote with, effectively, one-dollar-one-vote, which some people (generally those with lots of dollars) genuinely consider to be a good thing.

I have to hand it to the Republicans though. Their marketing is brilliant. If they presented their agenda at face value they'd be run out of town on a rail. So instead they wrap their anti-democratic ideals in the flag and convince people that it's patriotic to fight the wars for starvation wages (and put up with being abandoned afterwards).

But it's not patriotic to pay more taxes. Oh, no.

I genuinely don't understand why anyone who isn't a millionaire would fall for this transparent scam. But they do, and by the tens of millions. I wish I did understand it because if I did I'm pretty sure I could make a lot of money.

If there was any doubt in your mind...

... that we are in another bubble, this should dispel it. Groupon, a three-year-old company with zero profit, is filing for an IPO. Why do they need the money? Because they took all of their previous investment rounds and paid them out to earlier investors:

In January, Groupon raised $950 million. By the end of March, it had $209 million in cash. What happened to all that money? The company’s IPO filing spells that out: Almost all of it went right back out the door, to employees and early investors. ... Of note: This wasn’t the first time Groupon had raised money and taken cash off the table. In April 2010, the company raised $130 million, and handed $120 million to many of the same people.

If it quacks like a Ponzi scheme...

Damn straight

"The global war on drugs has 'failed'" according to a new report by ... The Global Commission on Drug Policy.

What if they held a revolution and nobody noticed?

This is not a rhetorical question. Apparently, Spain has had people marching in the streets for the last two weeks. Who knew? Not me.

The world will end tomorrow (or is that today?)

I'm going to go out on a limb here and go on the record as predicting that the world will not end tomorrow. (Actually, in some parts of the world it's already tomorrow.

In Samoa, they recently hopped from one side of the international date line to the other. Does this mean the world will end 24 hours sooner in Samoa than it otherwise would have?