On inflation

[Guest post by Don Geddis.  Another in our recent series on macroeconomics and the recession.]

Ron,

You admirably took time recently to investigate Market Monetarism, which offers an explanation for the recent Great Recession which is very different from the typical story told in the mainstream media.

You seemed to grasp the bulk of it, but your biggest complaint was about inflation:

Inflation in 2008-2011 was 3.8, -0.4, 1.6, and 3.2% respectively (BLS inflation data). The average of those four numbers is 2.05, just inside your target range.

 Here's a chart of inflation over the last decade (from Wolfram Alpha):

Note the 2-4% range during the decade, and then the steep plunge to negative numbers (deflation) beginning in the second half of 2008.  Notice also that, aside from a brief attempt at the beginning of 2010, inflation was basically below trend for two solid years, only recently recovering.

But inflation itself isn't really the interesting metric.  Look at what happened to nominal GDP:

(NGDP graphs from Josh Lehner.)

Ron, you ask:

And if you concede that the economy can get into exquisitely sensitive control regimes, where tiny changes in a crucial parameter can result in enormous differences in outcome, then how can you possibly know what would have happened if the Fed overshot by a little instead of undershot by a little?

But now we have a second question, which is the difference between level targeting, vs. growth rate targeting.  You think, if you're shooting for 2% inflation, and some years you get 1% and other years 3%, that should be ok, right?  You can't control things more accurately than that, so what's the big deal?

Here's the big deal:

The big deal is that the US economy is, and continues to be, 10% below where it should have been, had the Fed not messed up in 2008.  It's not enough to simply "return to trend", and think that everything should be OK now.  You need to have a sense of "catchup for past failures" when you undershoot, so that you get back near the original trend line as quickly as possible.

Even given the numbers you quoted, with two years of inflation well below 2%, that should mean that this year's inflation was more like 6%, in order to "make up" for the extended too-low inflation.  Just saying "we're back to trend now!" isn't enough.

And finally, you might want to consider that "inflation" itself, isn't necessarily a well-defined concept.  People often think that inflation is a "real thing", and that we just need good enough tools to properly measure it.  But the truth is that there is no "fact of the matter" in the real world, about what the rate of inflation "is".

Twenty years ago, Dell sold a certain volume of units of PC computers, and received a certain total of US dollars in exchange.  Last year, Dell sold a different volume of PC computers, and received a different total of dollars.  But the actual physical PC computers were not identical, between last year and twenty years ago.  What is "the" rate of inflation in PC computers supposed to be, between then and now?

In any case, even if all you care about is inflation, the Fed allowing inflation to go negative in 2009, was a horrible mistake, and entirely preventable by the Fed.  They got the data early enough, and they had the tools to do something about it, but they chose not to.  And we're all suffering the Great Recession consequences for that now.

The US Fed and the Recession

[Guest post by Don Geddis.  Yet another in the series.]

Ron,

I spent a couple of hours over the weekend digging into market monetarism

Good for you!  It's clear you're not yet convinced, but your efforts to learn more about this subject are to be admired, and put you in the top tiny fraction of all people thinking about macroeconomics (including many economists!).

the Fed ... believes (or wants the world to think that it believes) that it has reached the limits of its control authority

Not really.  The Fed certainly doesn't believe that it has reached any limits.  Bernanke has stated publicly many times that the Fed is not "out of ammunition"; rather, that they are deliberately choosing to act as they are right now.

real interest rates can (and in this case should) go below zero (at least relative to inflation, which is the measure that really matters), which will discourage savings, encourage spending, and kick-start the economy

Not quite.  "Real" interest rates (= nominal interest - inflation) "should" be positive.  But they should get that way by having (slightly) positive inflation, real economic growth, and as a consequence nominal interest rates that are somewhat higher than the inflation rate.

What should the Fed set the interest rate to be?  For the last few decades, the US Fed has basically (in effect, if not directly) used a formula based on the current inflation and unemployment rates, known as a Taylor Rule.  And the decades of the 80's, 90's, and 2000's -- as the Fed followed the Taylor Rule -- were ones of low inflation, low unemployment, and continual moderate growth.

Until 2008, when suddenly the Fed Funds rate no longer matched the Taylor Rule, because of the zero-bound liquidity trap:

Instead, for a couple of years, the Fed Funds rate was 5-7% too high.  It was exactly as though, in the 1990's, instead of setting the rate at 3-5%, some malicious Fed official decided (under the same economic conditions) to set the rate at 8-12%.

What would you expect from any economy, with such excessively high interest rates?  An immediate crash to recession, high unemployment, etc. ... exactly the recession that we saw starting in 2008.

Interest rates, at 0%, were far too high, and that's what choked the economy.

Inflation in 2008-2011

I'm going to have to get back to you on this data.  The data you reported does not match the story I've been telling, but inflation is a complicated subject, so since you did some analysis on it, I want to be more careful in my reply than I have time for right now.

The argument that sub-prime did not cause the G.R. is kind of like the argument that it's not the fall that kills you, it's the sudden stop at the end. 

But that's exactly true!  If you're in an airplane, or hang glider, there's no problem with jumping off a cliff!

The economy jumped off the cliff when the banks loaned vast amounts of money to non-credit-worthy borrowers and left investors holding the bag. Once they did that, massive defaults and the resulting ripple effects throughout the economy were inevitable, it was just a question of when.

No, the scale of the bad mortgages wasn't enough to destroy the entire economy.  The residential housing crisis had already peaked in early 2007, and the scale of the problem was well understood by then.  But the rest of the economy properly ignored it (just like it ignored the stock market crash in 1987, and the dot-com crash in 2000).

The economy-wide problems didn't start until the fall of 2007, when the Fed raised interest rates, and Lehman Bros. was allowed to go bankrupt.  Then the whole economy began tanking.

Franky, I dont see how even 4% inflation could have changed the course of events much. That would not have been nearly enough to cause wages to rise enough for all those formerly non-credit-worthy borrowers to suddenly be able to afford to pay their mortgages.

Yes, it would have.  You're assuming that everybody who did default, were going to default in any case.  But only a small fraction of defaults were of the Ponzi scheme variety, people who bought houses they could never afford, hoping to flip them at ever-higher prices before their mortgages ballooned.  That isn't the typical case.

The typical case is someone who stretched to make their mortgage, and would have made it, but they lost their job because unemployment zoomed from 5% to 10% in a year.  Or they expected their career to advance, and to be in a higher-paying job shortly -- but that future job didn't come to pass.

Wages rising 4% annually would have had a massive effect on lowering mortgage defaults.

That begs the obvious question: why hasn't the Fed done it?

That's the best question you've asked so far, and there is no obvious answer.  It's been the subject of intense debate in the economics blogosphere for the past few years.  Here is Scott Sumner's stab at an answer.  I'll be curious to hear your theory.

Did the Federal Reserve cause the Great Recession?

[Fifth in what was originally supposed to be a short series]

Don,

Let's take a break from arguing about breakfast cereal and return to the more civilized topic of the cause of the Great Recession.

I spent a couple of hours over the weekend digging into market monetarism, which turns out to be quite the rabbit hole. I'm not sure that I fully understand it, but let me try to paraphrase the part I think I get:

1. The Fed does have the means to increase the money supply beyond setting interest rates to zero, and hence to escape liquidity traps. One thing many people don't realize is that the Fed does not really "set" interest rates directly, it buys and sells government bonds and other financial instruments in an attempt to move the credit markets towards a target. If it buys, it drives price up and yields down and vice versa. Or something like that. I may have dropped a sign somewhere. But the point is, the Fed acts (or at least tries to act) like a closed-loop controller for some economic parameter. That parameter has historically been the discount rate, but that's an arbitrary choice. Market monetarists argue (if I understand them correctly) that this is the wrong parameter to try to control, and that the right parameter is nominal GDP.

2. Because the Fed is trying to control the wrong parameter, it believes (or wants the world to think that it believes) that it has reached the limits of its control authority (in the strict control-theoretic sense) because interest rates are near zero and they can't go any lower than that. But this is wrong because real interest rates can (and in this case should) go below zero (at least relative to inflation, which is the measure that really matters), which will discourage savings, encourage spending, and kick-start the economy. The Fed's failure to do this has prolonged (you would say created) the Great Recession.

It's a very appealing theory, but it has several problems. For starters, it assumes efficient markets, and they aren't, but let's leave that aside for now. Second, as you yourself pointed out earlier in this thread when you discussed the Laffer curve, economies are complicated things, and simple stories about them, intuitively appealing as they may be, are likely to be wrong merely by virtue of their simplicity. But let's leave that aside as well. After last night's reading binge I'm not sure how much more complexity I can handle.

The bigger problem with market monetarism (or at least the market-monetarist theory of the G.R.) is the same as the problem with the theory that higher taxes on rich people causes unemployment: it makes intuitive sense, but it is not in fact supported by the data. You write:

I'll agree with you, that the subprime residential housing crash was the original spark. But it's like living in a dry forest, while somebody at a campfire plays with matches, and the professional firefighters that you've hired for this job are standing watch. Yeah, one of the matches got dropped in a bush. But this kind of minor, industry-local crisis happens all the time. That's why we have a US Fed, so that when a bush starts to spark, the professional firefighters who are standing right there, put it out.

Only, in 2008, they didn't. And they still haven't, for the last four years.

...

Inflation is obviously a spectrum. For the last four years, it has been far too low, averaging 0-1% instead of 2-4%.

Inflation in 2008-2011 was 3.8, -0.4, 1.6, and 3.2% respectively (BLS inflation data). The average of those four numbers is 2.05, just inside your target range. (Contrast this with the period 1930-1933, when the Fed really did fan the flames and we had four years of deflation ranging from -2.3% to -9.9%.)

Or, if you want to compute "average inflation" the right way, taking the effects of compounding into account, then the average rate over the last four years has been just over 1%. The trouble with that approach is that compounding is very sensitive to very small changes earlier in the sequence. If, for example, the 2009 figure had been zero instead of -0.4, then the resulting average would be 2%, again within your target range. So really, the difference between what you say you want the Fed to achieve and what it actually did achieve is less than half a percentage point in a single year (one that happened to follow a catastrophic stock market crash). Considering how hard it is to steer an economy, I'd say that by your standards the Fed has been doing a pretty admirable job.

No matter how you slice it, the difference between what the numbers are and what you say they should be is very small, at least compared to what it was during the Great Depression. So there are two possibilities. The first is that the market monetarist account of the G.R. is simply wrong. The second is that it's right, and the apparent discrepancy between the naive linear version of the theory and the actual numbers is accounted for by the underlying complexities of the economy.

Economies are complicated, full of non-linearities (even non-monotonicities), time lags, and hysteresis. So maybe the economy is exquisitely sensitive to differences in inflation in the 1-2% range, and less so in the negative 5-10% range. Or maybe the sensitivity depends on the particular conditions at the time. Under normal circumstances 1% inflation would be OK, but the particular conditions set up by the sub-prime crash set up a situation where 1% was disastrous while 2% would have been OK. But that begs the question: what exactly are those conditions, and how can you know if they pertain except in hindsight? And if you concede that the economy can get into exquisitely sensitive control regimes, where tiny changes in a crucial parameter can result in enormous differences in outcome, then how can you possibly know what would have happened if the Fed overshot by a little instead of undershot by a little? You can't have it both ways. Either small difference matter, or they don't. You can't arbitrarily say that small differences matter in one direction but not the other. You have to have a theory that explains why (at least if you want to be considered a legitimate scientific theory). And market monetarism doesn't as far as I can tell.

The argument that sub-prime did not cause the G.R. is kind of like the argument that it's not the fall that kills you, it's the sudden stop at the end. The economy jumped off the cliff when the banks loaned vast amounts of money to non-credit-worthy borrowers and left investors holding the bag. Once they did that, massive defaults and the resulting ripple effects throughout the economy were inevitable, it was just a question of when. 4% inflation might have changed that outcome, but we don't know and we can't know because we didn't do that experiment. We were -- and still are -- in uncharted economic waters, and God only knows how the system will respond to control inputs at this point.

Franky, I dont see how even 4% inflation could have changed the course of events much. That would not have been nearly enough to cause wages to rise enough for all those formerly non-credit-worthy borrowers to suddenly be able to afford to pay their mortgages. So you still would have had a wave of defaults, AAA-rated bonds becoming worthless, rapid deleveraging from unwinding all the credit default swaps that suddenly came due, financial institutions going bankrupt but for government bailouts, the stock market crash, foreclosures, yadda yadda yadda.

The only way I see that inflation would have gotten us out this mess is if it had been high enough to essentially reset the principal balance of all those sub-prime mortgages to affordable levels before the interest rates reset. I haven't done the math, but that would probably have required inflation closer to 100% than 4%.

But let us leave even all that aside for now. Let us assume that the market monetarists are 100% correct, and that all that is needed to get us out of the recession is a little more quantitative easing. That begs the obvious question: why hasn't the Fed done it? I have a theory, but this post is already too long so I'll save it for the next installment.

Something is wrong!

[Guest post by Don Geddis.  Fifth in a series (0, 1, 2, 3, 4).]

Coby  asked a number of excellent questions.  In my last post, I replied with an abstract explanation about morality and fairness.  But it occurred to me that it might help to attempt to answer concretely as well.

Coby said:

Let us know if you think life in a Chinese factory may be hard and sound miserable to us, but it is not a symptom of something wrong with an economic system.  Does the existence of hungry, sick and desperately poor people mean something needs fixing in a society?

I find words like "need" and "ought" to be more confusing than helpful, when trying to discuss public policy.  It often leads to bad reasoning chain along the lines of, "something needs to be done ... this is something ... therefore, let's do this."

No matter how bad last season's crops were, witch burnings are a poor policy response.  [Julian Sanchez]

The question that really needs to be asked is, "does this action result in a better or worse overall society in the long run?"  It's basically the difference between "signalling" that you care, vs. actually accomplishing something.

Yes, of course I feel terrible about the hard life of Chinese factory workers, and it feels unfair that they live that hard life just so that I can play Angry Birds on my iPhone.  Surely I would be willing to give up that stupid game, if somehow I could thereby give the Chinese workers more to eat.  That seems "fair", doesn't it?

But you have to decide whether you're asking a question about how my fallible internal inconsistent moral intuition works, or whether you're asking about what public policy would result in a better future world.  Those are very different questions.

If you're asking about my intuition, about how I "feel", there's a lot we actually know about how people feel.  I (and most other people) care more about current Chinese alive today, than about the suffering of those fifty or a thousand years ago.  Is that just because I can't do anything about the past?  Not really.  I don't much care about a random Chinese citizen a thousand years from today, either.  I would care more if a co-worker, that I saw every day in person, had a relative who worked in one of those factories.  Does it really make moral sense that the rightness or wrongness of the lives suffering in the factories, depends on whether I happen to encounter a related co-worker or not?  What a strange morality it would be, if that were objective truth.  But it makes perfect sense as a fallible (but often correct) quick heuristic.

Why do I care more about income inequality in the US, and the fate of the US poor, than I do about the poor citizens of whole nations like Bangladesh, or the local provinces in India that have more humans in poverty than the entire population of the United States?  Why do we care at all about US income inequality, when the poorest 5% of the US is richer than 68% of the world, and in fact the richest Indians (as a group) have approximately as much wealth as the poorest Americans?

I, like everyone else, wishes I could live in a world that I designed, without pain and suffering and just happiness and joy.  But if wishes were horses... Instead, the actual universe is filled with all sorts of horrible things, not necessarily even involving humans!  How horrible is it when hyenas eat a baby elephant alive, that was stuck in the mud?  Rip off its trunk, munch away as it screams in pain?  Or orcas drowning and eating a whale calf?  Or lions slaughtering a baby giraffe by suffocating it, and eating it alive as it slowly dies?  You want me to worry about some humans being offered a job in a Chinese factory, when horrible suffering is happening every day in the animal world?

It makes me sad to see the live baby giraffe, slowly suffocating as the lion clamps its jaws around the throat and slowly squeezes.  That's how I "feel".  Yet, intellectually, I realize that this has happened to trillions of animals over hundreds of millions of years.  And really, there's nothing I can do about it.  (Although these amusing people disagree!)

But none of this really matters.  All that matters is: what choices do you have in front of you?  And which ones will result in a better future world?

The main caution I would offer, is the danger of being satisfied with mere signalling.  Most people in public policy debates ignore unintended consequences, and are happy with just the surface idea that they saw something "wrong", and then "did something" about it.  But the real intent is not to actually improve the world; instead, it is to feel good about oneself, so that they can chat with friends and say "I didn't buy an iPhone because I heard about their Chinese workers!"  And the joy they get out of feeling smug and superior.

Don't take the easy way out.  Most of what is wrong in the world, nobody can do anything about.  Of the tiny fraction that could be changed, the easiest thing to do is just to publicly announce your sympathies, but not actually improve the world.  If there's something you really care about, then do the hard work of figuring out how to actually make it better.

But words like "right" and "need" and "ought" aren't very useful (to figuring out what to do).  Those are words of persuasion and intuition, and distract you from the hard real analysis.

Labor IS different

[Nth in a series]

Don,

My, this is turning into quite the lively exchange. I have another obligation right now (a Lisp meetup -- say, why aren't you here ;-) but I wanted to get this in before I fell too far behind.

Sometimes the hardest things to explain are the ones that seem obvious to the person doing the explaining. I have found that at root these kinds of disconnects are usually caused by a disconnect in some foundational assumption. Unearthing that assumption is never easy, but it is always enlightening, and so these efforts are worthwhile. But it is important as a first step to achieve clarity on exactly what the underlying disagreement actually is.

I think you go too far to claim that it has been established that higher tax rates cause higher growth, and lower tax rates cause lower growth.

I don't claim this, or at least I didn't intend to (and if I did claim it I retract it now). What I am doing is pointing out that if you look at the historical data in the U.S. over the last 100 years, higher taxes are strongly correlated with lower unemployment and vice versa. The only conclusion I draw from this is that the claim that raising taxes kills jobs is (almost certainly) false.

Second, I am not a bleeding-heart liberal. I am a born-again capitalist. I understand how the free market is supposed to work. I understand the concept of a clearing price. I understand that grain usually does not rot in silos. Labor is nonetheless different from other commodities. This is one of those things that seems so obvious to me that it doesn't require explanation, but apparently I'm wrong about that. I apologize in advance if what I'm about to say comes across as condescending.

What makes labor different from wheat is that labor is made of humans, and humans are different from wheat in ways that matter. Humans are vastly more complicated than wheat. The elapsed time between sowing and harvesting a crop of humans is much longer, and a lot more effort and intervention is required. You can't just leave a human in the sun and water it and expect a useful product. Humans are less fungible than wheat. They cost more to store. If they are not stored properly their value deteriorates. And, if their value deteriorates to the point of economic-non-viability they can become devilishly difficult to dispose of. Humans can't be easily recycled or turned into breakfast cereals. In some parts of the world you can use them for spare parts, which is the natural capitalistic response, but in most of the world you will find that there are unsurmountable political obstacles to this approach.

I honestly don't know whether that analysis strikes you as cold or sensible. I can tell you with high confidence that there are a lot of people who would read the preceding paragraph and be completely horrified.

I have to wrap this up but I will point out one more thing before I go: you seem to be assuming that I think that exploiting poor people is a bad thing. I do happen to believe that, but to this point in the conversation I haven't actually said so. You've assumed it. Why? Why did you not assume the converse, that my observation that it's easier to make money by exploiting poor people was meant to encourage people to exploit poor people (because it makes it easier to make money)? I have no way of knowing for sure, of course, but I conjecture that it's a sign that underneath your hard-nosed capitalistic facade there still beats a human heart. ;-)

I'll have to defer the issues you raise with regards to the G.R. until later. TTFN.

What is "fair"?

[Guest post by Don Geddis.  Fourth in a series (0, 1, 2, 3).]


In my last post on exploitation, Coby asked an excellent question:

What is fair?

I'll address that in this post, but first let me respond to more of his questions:

My impression so far is that you might say any transaction is, as a manner of definition, fair if it is entered into willingly.

There might be some difficult corner cases, but as a first cut, yes I think I would agree.

I submit we are only kicking the can down the road because now we have to think carefully about what it means to be "willing."

Another great observation.  Just as I accused Ron of a non-answer, because he merely replaced "exploit" with "unfair", so Coby is complaining that I haven't answered "fair", but only replaced it with the equally vague "willing".

We can save time and advance the discussion faster if you let us know if you think life in a Chinese factory may be hard and sound miserable to us, but it is not a symptom of something wrong with an economic system.

 I absolutely agree with that.  It may become clear why, by the end.

Does the existence of hungry, sick and desperately poor people mean something needs fixing in a society? 

Sort of ... but I hope to convince you, in this post, that we disagree on some of the assumptions underlying this final question, so agreement on the question doesn't make as much sense as it first appears.

So let's go back to the root question:

What is fair?

It's hard to address this, without considering a general framework for morals and ethics.  To be up front about it, my general meta-ethical perspective is that there is no absolute moral or ethical framework.

If you back up (philosophically) far enough, the universe is a four-dimensional frozen cube of space-time, and everything that has happened or will happen is already determined.  Most moral reasoning takes the form of counterfactuals ("if this fact about the universe had been different, than this other outcome would be different").  But in point of fact, there are no counterfactuals.  There is only the actual universe, with its actual events.  "What might otherwise have happened" is not necessarily a meaningful question.  Everything simply is.  (This has shades of Hume's famous is-ought conflict.)

OK, but all is not lost.  Determinism is not necessarily in conflict with free will.  We are entities with decision procedures, and it makes perfect sense for a decision procedure to model itself as having choice.  Even if the decision procedure is deterministic, it's still the case that the deterministic procedure that is being followed, is one of imagining possible future worlds (and perhaps counterfactuals), evaluating the benefit of each world, and picking the action that the procedure predicts to most likely maximize some kind of value.  That's basically "free will".

So we finally get back to something concrete.  We're a group of three people, with free will, and we come across a cookie.  What is the "fair" way to divide it?

Now your mind will generate all sorts of moral intuitions.  Probably the first one is, "we should each take an even third".  But I can alter your moral conclusions, with some additional information.  For example, perhaps one person is a child, and the other two are adults.  Or perhaps one is starving, and the others just ate a big meal.  Or maybe one works at a cookie factory, and the others not.  Or one has just recently been rude and mean, and the other two are banding together to exclude the first.

As you explore this further, you find that people's moral intuitions have a predictable nature.  We care more about those near us -- in both time and space -- than those farther away.  We care more about those who look like us (e.g. same race) than those who look different.  This moral intuition has been expanding over the last centuries, as the concept of "us" grows larger.  Still, we care more about humans than about non-human entities, etc.

If I could give you a single lesson to take away from this post, it would be:

Intuitions are rough guides to behavior that is good on average.  They do not provide insight into God's will or objective truth.

This is as true for religion, as it is for morality.  Religious believers often talk about a transcendent feeling that they get in certain situations.  A revelation, that they feel they have experienced, but that I don't seem to understand.  But the truth is the reverse: I understand the feeling; I just think it's an error to believe that your introspective feelings are a strong guide to the truth.

White people instinctively hate black people (and vis versa), simply because they look different, which (in ancestral times) meant that they were part of a different tribe, and thus dangerous enemies.  It was important to defend "us" against "them", or else our village would be slaughtered and theirs would take over our resources.

Does this mean that a black CEO should refuse to hire a white entry-level applicant (or vis versa)?  Of course not.  Even though the CEO can appreciate that he's vaguely uncomfortable with this particular candidate, and would much rather have a beer with a guy who plays basketball, cheers for March Madness, listens to rap ... and looks dark-skinned.  But a rational CEO can realize that this intuition is not a helpful guide to finding the most skilled waiter for his restaurant.

So if we can't rely on quick-and-dirty moral intuition, then how can we ever make moral decisions?  My suggestion, if the topic is important enough, is to do it in much the same way you make every other decision.  Consider the possible actions you could take, project forward to the (complete!) details of what world would result from such actions, and then simply evaluate those final predicted worlds: which one would you prefer to live in?

This is basically a form of consequentialism, although I won't bother to go into the details of that philosophical rat hole.  But the basic point is: it is useless to try to evaluate the current state of the world as "bad" or "good".  It's even useless to try to evaluate some proposed action as "right" or "wrong".  I find the use of all those heavy morality-laden words to be ... unhelpful ... when trying to have any serious discussion.  At best, they're a form of rhetorical propaganda, where one side in a political debate is trying to attract more supporters, and the method used is to claim that anyone who disagrees must be "evil" in some way.  I certainly don't want to be evil!  Do you?  So surely we must agree with whatever the position is.  It's a way to stop thinking, and to let your emotions guide your behavior.

But I want you to think, instead of to use your emotions.  Of course, emotions are a part of life, and in fact I use them myself at the end: I'm recommending that you look at possible future worlds, and just evaluate them directly, see how you feel about living in one of them.  In that sense, personal preference is perfectly fine.

But if you think that your moral intuitions give you access to some objective truth ... you're going to be sorely disappointed when you eventually realize how inconsistent and Neanderthal they really are.

Exploitation (?)

[Guest post by Don Geddis.  Third in a series (0, 1, 2).]

Ron,

You said:

it's a lot easier to make money if you do exploit the poor, so in the absence of some countervailing force, those who choose to exploit the poor will win, at least in the short term.

 I asked what you mean by "exploit" the poor.  The example I gave was:

But at the end of the day, what you have is people who are living in desperate situations, and someone offers them an optional job. Whatever it is, that is one more option than they had before the job came along.

 First you tried to answer with a dictionary definition:

exploit (verb): 1) to take unfair advantage of 2) to control or take advantage of by artful, unfair, or insidious means

But this doesn't really clarify anything.  You've basically just changed the confusing word "exploit" for the equally confusing word "unfair".  When I go to a peasant farmer in China, and offer him a factory job, am I exploiting him, or not?  Is my job offer unfair, or not?  In the abstract, objectively, how am I supposed to distinguish the "unfair, exploitative" job offers from the "fair, non-exploiting" job offers?

You helped more with an example:

If we're engaged in a negotiation and I'm rich and you're poor then I might choose to proceed on the assumption that you need my money more than I need your labor

But this seems roughly true of any negotiation.  That's the whole point of negotiation.  People have different values, and different needs.  If one party is unable to walk away from the deal, but the other party is willing to walk away, that flexibility has a huge consequence for the final price.  This applies whether you're buying a used car, or trying to get a factory job in China.

It may be a sad state of affairs, that one party has so few other options, that they are actually willing to volunteer to take a job that would horrify you.  But the problem is not the job offer itself.  The problem is their lack of options.  And their current, pre-job offer state -- which is even worse than the horrible job offer you are complaining about!

Your example continues:

So even though the incremental value of your labor to me might be X I might decide to offer you Y<<X instead knowing that you have a strong incentive to accept this offer even though I would actually be willing to pay you more if you had any leverage.

Is this not the situation in every negotiation throughout history?  Each of us has a private value for the voluntary transaction, and our aim is to get as good a deal as we can for ourselves.  And that depends on the other party's flexibility, and has little to do with the internal value we would receive from the transaction.

There is no objectively "correct" value for any transaction.  That was the great insight of capitalism, over failed economic concepts like Marx's Labor Theory of Value.  The great insight was that there is no proper value.  The "correct price" of something depends on what someone is willing to pay for it.  Period.

This is the fundamental problem: labor is unlike other commodities. If we have a surplus of wheat that causes the bottom to fall out of the wheat market and excess wheat to rot in silos, the wheat doesn't care. But labor does care

You're right that labor cares and wheat doesn't care, but you're wrong about just about everything else:

• Labor is exactly like other commodities
• A surplus of wheat does not cause wheat to rot in silos.  This is the whole point of free markets: free markets allow prices to float in order to bring quantity demanded in equilibrium with quantity supplied.  If there is a surplus of wheat, then the price of wheat plummets ... but all the wheat gets used.

In all of this, it seems to me that you're making a gut reaction between your current life, and what it would be like to live one of those factory lives.  And you would hate it, given what you know now.  And you would like those factory people to live happier lives.

But you aren't paying a whole lot of attention to the millions of additional lives, back on the rural farms in China.  Their lives are even worse than the factory workers.  Those people volunteer to leave the farms and work in the factories.

Your "do good" approach to Chinese factory workers, is very similar to raising the minimum wage.  Of course, the easy-to-find people who already have jobs, will have better lives if you force the companies to bear additional costs, that the voluntary negotiations have not already yielded.  But you don't seem to understand that the reason the conditions appear so "bad", is because they are able to fill all the positions, at that level of compensation.  Which means that there's a whole pool of willing people out there -- who you are ignoring -- with lives even worse.

The net effect of interfering in this labor market, is not that global happiness goes up.  Instead, it is that a fewer lucky workers will have better lives, and the marginal worker who would have been hired in the past, and would have been happy to take that job, now is no longer offered the job, and must stay on the rural farm.  You have basically transferred happiness and wealth, from the very poorest people, and given it to those who are already (slightly) better off.  You've increased wealth and happiness inequality.

You have not at all convinced me that this so-called "exploitation" is a "bad" thing, until you've fully accounted for the missing employees who will no longer be offered any job at all in your brave new world.

Macroeconomics and the Great Recession

[Guest post by Don Geddis.  Second in a series.]

Ron,

I enjoyed your original post, but thought it made a number of assumptions that were worth drawing out, and conclusions that were worth questioning.  As the length was getting a bit much for the comment section, I appreciate you giving me the opportunity to explore this in a top-level post.

There seem to be three topics: taxes, the financial crisis (which started around 2008 but continues to this day), and exploitation.  I'll address the first two in this post, and the third in a followup.

Taxes.  You are correct to criticize the right/Republicans for their unthinking mantra that lower taxes will necessarily spur growth, and that higher taxes will retard it.  There is some abstract truth to the Laffer Curve, the idea that, at some point, higher tax rates result in lower overall revenue.  (And the converse, that, in certain circumstances, lower rates can actually increase revenue.)  But I think the empirical evidence is clear that the current US marginal income tax rates are nowhere near this level.

I think you go too far to claim that it has been established that higher tax rates cause higher growth, and lower tax rates cause lower growth.  That would be an astonishing result (despite the historical correlations, which you mentioned), and I think it is far from established, in the studies of the economic data.  But perhaps that's a minor point, and we can let it go.

The financial crisis.  The mainstream press layman's narrative of this is something like: in the 2000's, house prices kept rising.  This was basically a Ponzi scheme, and people started buying houses that they knew they couldn't afford, but their plan was to finance the purchase with short-term teaser mortgage rates, and then flip the house at a higher price before their mortgage rate skyrocketed.  This ended in 2007, when the musical chairs stopped, house prices stopped going up, and all the people who couldn't afford their houses suddenly got stuck and defaulted.  And then contagion effects happened, because evil greed Wall Street bankers had collaterialized all these mortgages, and sliced them up, and there were systematic risks in the whole financial system that nobody appreciated.  And suddenly Lehman Brothers went bankrupt, and then Bear Stearns, etc.  And then all of a suddenly everything was under attack, the automotive companies were going bankrupt, unemployment doubled from 5% to 10%, and the world economy ground to a halt for the last five years.

A compelling narrative, about how evil, morally-corrupt people, took selfish risks with our valuable society.  And many of them profited personally, as the collateral damage to the economy destroyed tremendous value for the rest of us.  What a story!  What a moral lesson.  Karma has returned to balance.  We angered God by being bad people, and he has now punished us for our misdeeds.

Only ... that story, while it has elements of truth, is basically not true.  Oh, there are plenty of examples and anecdotes where such things happened, but it has almost nothing to do with the economic pain of the last five years of 9-10% unemployment.

And the problem is, since people want the simple, compelling narrative of evil selfish greedy bankers to blame, they focus on the wrong solutions in their attempt to fix this so we don't suffer this pain again in the future.  For example, they focus on regulating bad financial behavior, in the hopes this will stop future greedy people from destroying the economy again.

The problem was not greedy selfish people.  There were greedy selfish people decades ago, and there will be more decades from now.  Capitalism is robust in the face of (and to some extent, relies on!) greedy selfish people.  The problem was that, once the housing crisis started, the US Fed allowed nominal GDP to plummet (Sumner, Wilson, Sumner video, Sumner National Affairs paper).

So now you say that we agree, that maybe the Fed "exacerbated" the situation.  That's an interesting choice of word, for the difference between a few-month downturn in one local industry (US residential housing), vs. a global five-year recession.  The things to compare it to are the 1987 stock market crash (which had almost no impact on US GDP), and the 2000 dot-com crash (which destroyed tech companies for a few years, but again was hardly noticed in the huge overall US economy).  The housing crash of 2007 could have been just another one of those, without the mismanagement by the Fed.  That's a bit more severe than the word "exacerbated" suggests.

So now you want to get into what it means, philosophically, to "cause" something.  I'll agree with you, that the subprime residential housing crash was the original spark.  But it's like living in a dry forest, while somebody at a campfire plays with matches, and the professional firefighters that you've hired for this job are standing watch.  Yeah, one of the matches got dropped in a bush.  But this kind of minor, industry-local crisis happens all the time.  That's why we have a US Fed, so that when a bush starts to spark, the professional firefighters who are standing right there, put it out.

Only, in 2008, they didn't.  And they still haven't, for the last four years.

You're trying to eliminate all flames from the forest.  Not only is that plan unlikely to be successful, but you're also ignoring all the collateral damage from no longer having access to fire.  It's used to cook, to keep warm, to melt metal and make horseshoes and swords.  It's incredible to me that you don't look at this situation, and reach the obvious conclusion of asking the professional firefighters: why didn't you put out that one tiny spark that happened right in front of your eyes?  Why did you allow it to grow into a forest-wide wildfire?

Ron, you persist in your theory of the "obvious" housing bubble, that "obviously" needed to crash:

the resulting bubble in the housing market and rise in mortgage delinquencies was unsustainable (and this was evident in 2005).  Something would have had to end it sooner or later, and it seems unlikely in the extreme that it could have been ended by anything other than a crisis

But again, seen through the eyes of NGDP, even this apparently non-controversial statement is probably false.  A strong rise in asset prices does not always presage a bubble.  "What goes up must come down" is a poor predictor of future prices.  In housing, in particular, residential house prices in Canada, Britain, Australia and New Zealand followed much the same 2001-2005 path as US housing prices -- but then went flat after 2007, instead of crashing in value with the so-called "bubble" popping in the US.

Ron, you claimed an error of the economics profession (and evidence that economists shouldn't be trusted) was that

The economic consensus in 2005 was that everything was hunky dory.

 Yet you haven't distinguished conditions in the US, from those in Canada, Britain, Australia and New Zealand.  In fact, the recent history of their housing sectors looked fairly similar -- but the performance of the overall economies from 2007-2012 has been very different.

Finally, you say

The Fed may well have exacerbated the situation with its too-tight monetary policy. I don't know, and we can never know for certain. Maybe the current crisis would have been averted. Or maybe we would have ended up with Weimar-Republic-style hyperinflation.

 You know the Fed has tools (e.g. the interest rate) to affect inflation.  They can take steps to raise inflation while (sometimes) lowering unemployment, or other steps to lower inflation while (sometimes) raising unemployment.

Inflation is obviously a spectrum.  For the last four years, it has been far too low, averaging 0-1% instead of 2-4%.

You seem to imagine the only possibilities as either too little inflation (the current state), or too much (hyperinflation).  What makes it so hard to actually hit a target?  You realize, I hope, that this is all the same spectrum.  Even if hyperinflation was the eventual state, in order to get there from here, you'd first have to go through "just right" inflation.  There is no other path.  There is no way to jump from "too little" to "too much", without going through "just right".

So you seem to think that the Fed is not capable of hitting a target.  That if they try to raise inflation a little, they'll just turn on a faucet and accidentally raise it too much.  But of course, surely you know that they have tools to lower inflation also.  So you must think that there's some "oversteering" problem, where the Fed would constantly apply too much of one direction or the other, but not have the fine control to hit a planned target?

I wonder why you think that's the case.  Especially given that inflation has been incredibly stable for thirty years, starting around 1980, despite widely varying economic conditions.  It sure seems like they have the tools to hit their desired target.

What does it mean to "exploit the poor"?

[First (or maybe second depending on how you count) in a (short) series co-authored with guest blogger Don Geddis]

Don,

Before our discussion outgrows the comment thread it started in I'd like to move it out here to the main page. Privately you expressed some reservations about participating in this exchange because you're not a macroeconomist. Well, neither am I, and IMHO neither are most macroeconomists. If you haven't already, you really should watch the movie "Inside Job." It documents (among other things) how the economics profession has been thoroughly corrupted by Wall Street. Apart from the fact that one should never accept arguments from authority to begin with, economists IMHO have no authority.

That said, you wrote "exploiting the poor" isn't really a well-defined concept. Actually, it tuns out to be quite well defined:

exploit (verb): 1) to take unfair advantage of 2) to control or take advantage of by artful, unfair, or insidious means

Do I really need to explain this? If we're engaged in a negotiation and I'm rich and you're poor then I might choose to proceed on the assumption that you need my money more than I need your labor, because if I fail to obtain your labor then maybe my profits will go down by some unmeasurably small increment, but if you fail to obtain my money your children will go hungry. So even though the incremental value of your labor to me might be X I might decide to offer you Y<<X (for you non-geeks, that means Y is much less than X) instead knowing that you have a strong incentive to accept this offer even though I would actually be willing to pay you more if you had any leverage. But you don't, so I'm not. Having come to this realization, I might further decide that it is in my interests to deploy my resources so that you remain poor. Of course, I don't think of this as insuring that you remain poor, I think of it as insuring a ready supply of cheap labor. But it amounts to the same thing.

This is the fundamental problem: labor is unlike other commodities. If we have a surplus of wheat that causes the bottom to fall out of the wheat market and excess wheat to rot in silos, the wheat doesn't care. But labor does care because, to paraphrase Mitt Romney, labor is people, my friend. And labor has children that aren't going to stop needing food just because society has no present need for what their parents have to offer in the way of tradable goods and services.

To your second point, that the economic conditions of 2005 were not the cause of the Great Recession. We don't actually disagree about the macroeconomics. The Fed may well have exacerbated the situation with its too-tight monetary policy. I don't know, and we can never know for certain. Maybe the current crisis would have been averted. Or maybe we would have ended up with Weimar-Republic-style hyperinflation. We simply don't know because we didn't do that experiment, and one of the problems with economics is it's very hard to reset the initial conditions so you can try again.

But all this misses the point. Debating whether the housing bubble or the Fed caused the Great Recession is a philosophical argument. What matters is not whether the sub-prime crisis or the Fed's decision was more to blame, what matters is that the sub-prime crisis is what led the Fed to have to make that decision in the first place. It is in this sense that the G.R. can fairly be attributed to the conditions that obtained in 2005, even if subsequent events might have played out differently. (Note that the exact same argument is used to try to blame Obama for the G.R. Interestingly, and tellingly, there are two different explanations for how Obama caused the G.R.: some say it's because the stimulus was too big, and others say it's because it was too small. Both sides can't be right. And, I note in passing, both sides count economists among their ranks.)

I think it is indisputable that the rapid expansion of credit to non-credit-worthy borrowers and the resulting bubble in the housing market and rise in mortgage delinquencies was unsustainable (and this was evident in 2005). Something would have had to end it sooner or later, and it seems unlikely in the extreme that it could have been ended by anything other than a crisis because, as is also painfully evident in retrospect, in the absence of a crisis it was all but impossible to convince anyone that there was a problem that needed solving.

Which might be one reason that poor people sometimes have to resort to dramatic measures to get their point across.

SkyNet has arrived

Skynet has arrived. Or at least one of its peripheraks has:

The X-47B marks a paradigm shift in warfare, one that is likely to have far-reaching consequences. With the drone's ability to be flown autonomously by onboard computers, it could usher in an era when death and destruction can be dealt by machines operating semi-independently.

Although humans would program an autonomous drone's flight plan and could override its decisions, the prospect of heavily armed aircraft screaming through the skies without direct human control is unnerving to many.

Yes, you can make money without exploiting the poor, but...

I was (briefly) a guest on a BBC World Service radio program this morning discussing Obama's state of the union speech and income inequality in general. To my mind, this has always been a no-brainer. My argument is: we've done this experiment (of lowering taxes on the rich) twice now, once in the 1920's and again in the 1980's (and doubled-down in 2000). We have also done the control experiment. Between 1945 and 1980 top marginal tax rates in the U.S. ranged from 70 to 90%.

The results are clear: high marginal rates correlate with broad-based economic prosperity and an expanding middle class. Low marginal rates correlate with extreme income inequality, reduced prosperity overall, and ultimately, economic catastrophe.

Now, correlation does not imply causality. Economies are enormously complex systems. And one of the guests on the program dismissed my argument as "not being accepted by economists." To which I say, this would not be the first time economists have been wrong about something. But I freely concede that while the data are suggestive, this is not a slam dunk. In particular, it certainly does not prove (and in fact I do not believe) that raising taxes on the rich by itself will solve all our problems. The data do, however, convincingly falsify the opposite theory, that lowering taxes on rich people results in economic prosperity, and raising them causes unemployment.

The real problem is not really tax rates per se. The real problem is the power asymmetry that is invariably results from lassez-faire capitalism. Capitalism depends on competition in order to function properly, otherwise it devolves into fascism. But the problem is there is more than one way for a company to succeed. One way is to provide a superior product at a lower price, but another is to engage in rent seeking behavior like lobbying legislators to pass laws that favor entrenched interests at the expense of potential competitors or using your economic clout to bias binding arbitration proceedings in your favor.

In short, naked capitalism does not distinguish between success that arises from successful competition and success that arises from gaming the system. Angelo Mozilo made $40 million net of SEC fines (and 34 million net of taxes) for bankrupting Countrywide and helping to precipitate the greatest economic catastrophe in three generations. But his dollars buy just as many yachts, private jets, and politicians as someone who made their money by bringing an actually useful product to market.

After I was kicked off the BBC radio program the question was raised: can you make money without exploiting the poor? The answer I would love to have given is: yes, clearly it is. But it's a lot easier to make money if you do exploit the poor, so in the absence of some countervailing force, those who choose to exploit the poor will win, at least in the short term.

In the long term, of course, they will lose. But so will everybody else.

I am about to be silenced

We got the settlement offer from an organization about which I have written before but which it would be unwise for me to call by name in this post. It includes confidentiality and non-disparagement clauses. So after I sign it I will be legally prohibited from talking about it. The confidentiality clause even prohibits me from disclosing the existence of the settlement. I will also be legally prohibited from saying anything disparaging about the organization-that-shall-not-be-named. So after I sign it I will no longer be able to say that they are a bunch of dirty rotten crooks, no better then common thieves, except vastly better at their craft. But they are. And after I am silenced, they still will be.

Of course, until the settlement is final I am not bound by its terms, and the agreement does not prohibit me from disparaging the State of Nevada, which I intend to do in the fullness of time. But right now I'm tired and I really don't want to push my luck any further. But if one were inclined to inquire further one might find a useful pointer in the comments.

On the brighter side, the American electorate does seem to be waking up to the dangers of SOPA. Google and Wikipedia have gone dark (sort of -- both services are still accessible, but it's a good start) to try to draw attention to the issue. I've not written much about it because I've been distracted by other things, but for the record, SOPA is evil and it must be stopped. It is a bald-faced power-and-money grab by Hollywood, and it would have dire negative consequences for the Internet. Yes, copyright needs to be enforced, but not through third parties coerced by an unfunded government mandate. The collateral damage of that approach is vastly too great.

By the way, from the better-late-than-never-but-nonetheless-still-timely department, in honor of Martin Luther King day, go find a copy of his I-have-a-dream speech. If you obtain one, and you didn't pay for it, then you are a pirate. That speech is copyrighted.

A very peculiar thing just happened on hacker news

I submitted this story to Hacker News about an hour ago. It collected 13 points before it dropped off the bottom of the New page never to be heard from again. But at the same time there was another story on the front page that was an hour older and had fewer points (9 at the time, 12 just now). So my submission should have appeared on the front page. But it didn't. I wonder why.

In case you're wondering, no, I don't really care that much about this particular story. But I'm in the process of trying to promote my movie, which has forced me to pay attention to such things (more on Reddit than HN, but they supposedly use the same algorithm).

The absurdity of online "piracy"

Nothing demonstrates the absurdity of the concept of online "piracy" better than the situation I find myself in: a new episode of The Simpsons aired this evening, one which I really wanted to see. I was out of the house when the episode aired. If I had remembered to set my DVR before I left, I would be able to legally watch that episode now (and skip the commercials). But I didn't, so now if I find a copy of the episode and watch it, I'm a pirate.

To which I say: arrrr, mateys.

[UPDATE:] I tried to see if the episode was available on-line. I first tried YouTube, and discovered a zillion videos that claimed to be the episode in question, all of which were spam (or at least all the ones I tried). I then tried to find the episode on the Fox site. No luck. Finally, I tried iTunes. The episode was there, so I bought it. I somehow ended up buying it twice by accident (for some reason the usual confirmation dialog didn't appear -- iTunes seems to have quietly gone to one-click purchasing.) And then -- AFTER I had bought the episode, paid for it (twice), and downloaded it, iTunes told me that I COULDN'T PLAY IT BECAUSE MY MONITOR WAS NOT HDMI-ENABLED!!!

Nonetheless, despite the fact that I BOUGHT AND PAID for a copy of this episode and didn't get it, if I now obtain a copy by other means I am STILL a pirate in the eyes of the law. But the studio, which stole my money, isn't.

I'm a filmmaker, so I am VERY sympathetic to the desire of content producers to protect their work. But even I am ready to hoist the jolly roger in this case.

What everyone in the SOPA debate is missing

Underlying the debate about the so-called Stop Online Piracy Act (SOPA) is the unstated assumption that intellectual property rights have the same legal standing as other property rights. They don't, and the tacit concession of this point by opponents of SOPA is significantly weakening their position. The foundation of intellectual property (patents and copyrights) in the United States is this clause in Article 2 of the Constitution:

The Congress shall have Power ... To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

This clause clearly establishes intellectual property as a granted right, not a recognized or fundamental right, that is, the "right" to "intellectual property" does not exist unless explicitly granted by Congress at its discretion. Furthermore, Congress is constrained to grant this right only in service of a specific purpose. namely, to promote the Progress of Science and useful Arts, and only "for limited times".

Notwithstanding that the Supreme Court has effectively eviscerated the "limited time" constraint in the case of copyright, "intellectual property" is clearly on a different legal footing from the "inalienable rights" to "life, liberty and the pursuit of happiness" to which people are endowed by their Creator, as recognized in the declaration of Independence. Neither the Declaration nor the Constitution mentions "property" by name [correction: the 5th amendment does mention it. See the comments.], but it is quite clear that the right to physical property was universally considered an inalienable fundamental right by the Founders. To cite but one of many examples, the state of Rhode Island attached a signing statement to its ratification of the Constitution that reads in part:

We, the delegates of the people of the state of Rhode Island and Providence Plantations... do declare and make known,—

I. That there are certain natural rights of which men, when they form a social compact, cannot deprive or divest their posterity,—among which are the enjoyment of life and liberty, with the means of acquiring, possessing, and protecting property...

Rhode Island's signing statement is significant because it is quite lengthy. It contains 18 separate clauses explicitly recognizing a long list of fundamental rights. (It's actually worth reading in its entirety). It is reasonable to suppose that if Rhode Island took issue with the clear implication of the Constitution that "intellectual property" is not a fundamental right, they would have said so.

The arguments against SOPA are mainly based on the collateral damage that would accrue by giving content "owners" the power to indiscriminately shut down web sites without due process. But this argument tacitly concedes a much more fundamental point, which is that a grant of copyright is not a right but a privilege granted at the discretion of the People for a particular purpose. It is far from clear that the Constitutional requirement that exclusivity be granted "To promote the Progress of Science and useful Arts" is being met.

Political arguments are often lost before they even start because one side allows the other to frame the debate. The clearest example of this is the tacit acceptance of the terms "pro abortion" and "anti abortion" in the debate on reproductive rights. In this case, the tacit acceptance of the term "intellectual property rights" concedes the fight before it starts. If there are intellectual property rights, then the debate can only be about the extent to which the state should go in order to defend those rights. But, as I have shown above, there is no legal basis for intellectual property "rights", only intellectual property "grants" (for limited times and for a specific purpose). I hope it's clear how this reframing would change the tenor of the debate.

[UPDATE:] OK, so not everyone has missed this :-)

[UPDATE2]: Wow, things are changing fast: "In an incredible turn of events, six Republican Senators have asked Majority Leader Harry Reid not to hold a vote on PIPA, the Senate version of SOPA...."

[UPDATE3]: Someone who goes by the handle Nirvana over on Hacker News makes a really excellent point in the context of conceding too much by adopting the wrong terminology:

...the Bill of Rights was enacted "in order to prevent misconstruction or abuse of its powers". This is referring to the limited powers granted to the government in the constitution. Notice, the preamble doesn't say "in order to grant rights...". The bill of rights contains "further declaratory and restrictive clauses".

Thus, these clauses are not designed to create or grant rights, but are of a "declaratory and restrictive" nature.

The constitution does not create any rights. There is no such thing, in the american form of government, as "constitutional rights". [Emphasis added.] People often use this phrase when referring to the Bill of Rights, but it is imprecise, because the Bill of Rights doesn't grant rights. IT doesn't say "the people shall have the right of free speech", instead it says "Congress shall make no law ... abridging the freedom of speech, or of the press;"

The right of free speech, as recognized by the First Amendment, precedes and predates the constitution.

How nations shoot themselves in the foot

Raspberry Pi is a very small (credit-card sized) very inexpensive (<$50) computer capable of running Linux. The organization that is building it is located in the U.K. They write:

[T]he Raspberry Pi Foundation had intended to get all its manufacture done in the UK; after all, we’re a UK charity, we want to help bootstrap the UK electronics industry, and doing our manufacturing in the UK seemed another way to help reach our goals.

We investigated a number of possible UK manufacturers, but encountered a few problems...

[O]ne cost in particular ... really created problems for us in Britain. Simply put, if we build the Raspberry Pi in Britain, we have to pay a lot more tax. If a British company imports components, it has to pay tax on those (and most components are not made in the UK). If, however, a completed device is made abroad and imported into the UK – with all of those components soldered onto it – it does not attract any import duty at all.

Res ipsa loquitur.

It's alive!

My movie is now available on iTunes! Please tell your friends, like me on Facebook, upvote me on Reddit, subscribe to the movie blog, watch the trailer. And if you really want to send some love my way, rent the movie and write a review! Thanks!

What is your quality metric?

Imagine you're a political leader faced with the the decision of whether or not to institute a particular economic policy. You are told by your advisors, who are honorable, trustworthy, and 100% accurate economists, that instituting this policy will increase the real average income in your country by 25%. Would you do it? Of course you would. It's a no-brainer, isn't it?

Well, no, not necessarily. There are a lot of different ways to raise the average 25%. One is to raise everyone's income by 25%. But another way is to double the income of half the population while halving that of the rest. A third (to take this to an extreme) is to make the income of a single individual be the former GDP plus 25% while utterly impoverishing everyone else.

I hope I don't have to convince you that the third outcome is not a very good one. Even if you happen to be the one lucky person who becomes the trillionaire your quality of life is not likely to be very high, since you will now be living in a country where everyone but you is starving and living on the street. So maybe you'll decide to spread the wealth by hiring a few people to help out with the gardening. Or maybe you'll just hop in your private jet and go somewhere else (maybe somewhere they have gated communities).

But what about the second outcome, the one where half the people get their incomes doubled while the rest are halved? That again is not so clear, and whether you consider this a good outcome or not probably depends on how and why the income redistribution happens. For example, if it happens as the result of a shift from a controlled economy to a market economy, and the people whose incomes are doubled are the ones who are motivated by profit to become more productive while the ones whose incomes are halved are the ones who resist market forces and spend their days protesting the demise of the welfare state then you might be inclined to think it's a good thing. But if it's the result of half the people banding together and somehow coercing the other half into working harder for less pay then one might be a little less enthusiastic.

The point here is not that one economic policy is better than another, but that merely deciding whether one outcome is better than another is already a non-trivial exercise. But it is nonetheless a crucial exercise, because the chances that you will get what you want without first deciding what it is are very low. Even on an individual level figuring out what you want is not so easy. Do you want the big house with room for all your toys, or the little house that's easier to maintain? Or would you rather be unburdened by such choices so you can take the time it would require to make such decisions to sit under a tree and read a book?

Adherents of free-market economics like to think that they can solve this problem by letting everyone make their own decisions. And empirically, the outcomes of free market economics do seem to dominate all competitors, at least if you care at all about material well being. But there are two problems. One, as I have just noted, is that people often do not actually know what they want. And the second is that there is no such thing as a free market. Every market is regulated by something, even if that something is only the social norms and conventions of the merchants and their customers.

Of course, in the real world, markets are usually regulated by governments which make rules about, for example, what is and is not property. Once upon a time in the United States, humans could be legal property. Nowadays we have this concept of intellectual property, which is often misunderstood to be some kind of consequence of natural law, but is in fact a wholly artificial construct designed to reward people for creating (and hence encourage them to create more) artistic and inventive works. Intellectual property exists because we as a society decided that it should exist, not because it's a consequence of the laws of physics.

So here is a not-entirely-implausible scenario of something that could actually happen in today's world: somehow a highly contagious and deadly pathogen is released into the world. If you get it, you're probably dead. Someone invents a cure, but unlike Jonas Salk this person takes out a patent, and decides to price the medicine at what the market will bear: 99% of your net worth, and a lien on all your future earnings. After all, the alternative is death. What's your life worth? What is your child's life worth?

Or take this scenario: suppose someone invents and patents a genetically engineered food crop while at the same time releasing chemicals into the environment that kill all non-genetically-engineered alternatives. The inventor of such a plant could become fabulously wealthy. But is this a good outcome?

By the way, that last scenario is not a hypothetical. It is actually happening.

So much to do, so little time...

I was really hoping to get some writing done this week but circumstances have intervened. Between the movie, the company I'm trying to get off the ground, a hacking project that has me obsessed (elliptic curve cryptography if you really want to know), and a ton of miscellanea (end of year donations, family health issues, a piece of registered mail that the post office seems to have misplaced, yada yada yada) my time has been too fragmented to formulate coherent thoughts.

I am making progress on clearing out the backlog and I hope to be able to get back in the zone later today. In the meantime, go read this article on Ron Paul by Glenn Greenwald and the follow up. He's a much better writer than I am anyway.