2008-12-30

Svoboda in orožje

(Prvotno objavljeno kot odziv na zabaven video na Libertarcu.)

Nekateri zagovarjajo splošno pravico do nošnje orožja s hipotezo, da bi bilo okolje, v katerem so vsi oboroženi, veliko vljudnejše in posledično manj nevarno.

Levitt in Dubner v knjigi Freakonomics pravita, da dokazov za to hipotezo primanjkuje, oziroma da dokazno gradivo, ki je na voljo, kaže prej v nasprotno smer.

Če se gremo te "pravice" do skrajnosti, razmislimo o tem, zakaj ne bi dovolili kar vsakemu imeti najmočnejšega vojaškega razstreliva. Mogoče celo kake male atomske bombe. Ali kemičnega orožja. Konec koncev vse take stvari lahko pridejo kdaj prav tudi civilno.

Če si lahko privoščiš malo atomsko bombo, potem si lahko verjetno privoščiš tudi kakšno malo goro. In če hočeš to goro zravnati, ker bi rad imel na njenem mestu golf igrišče, bi ti prišla ena mala atomska bomba čisto prav. Kajne? Potencial civilne uporabe je torej razviden. Da ne smemo imeti atomskih bomb, je kršenje človekovih pravic!

Podobno recimo z biološkim orožjem. Recimo, da v prostem času delaš humane eksperimente na 1,000 podganah. Po zakonodaji je treba vsako podgano po enem eksperimentu humano ubiti. To se pa najlaže stori s kakšnim primernim plinom. Zakaj torej ne bi smel imeti doma takih plinov? Spet kršenje človekovih pravic!

Orožje ne služi za vsakdanjo rabo, temveč pride prav v posebnih okoliščinah. Te okoliščine so ponavadi stresne in udeleženci v njih so pod pritiskom. Kadar je v takih okoliščinah zraven orožje, se zlahka zgodi, da posledice, ki bi bile sicer začasne, postanejo trajne.

Svoboda je dobro načelo, ker več svobode ponavadi pomeni več užitka, manj škode, več prosperitete v življenju. Svoboda je pomembna, ker nas drugače množica, obuta v cementne čevlje, vse vleče nazaj. Ampak načelo svobode drži tam in samo tam, kjer drži - ne pa po neki magiji kar povsod, absolutno in vedno. Pri kemičnem orožju in atomskih bombah, recimo, ne drži. In po gradivu, ki nam je na voljo, prav tako ne drži pri puškah in pištolah.

2008-12-24

Newcomb's problem

I just recently read again Eliezer's article about Newcomb's problem.

To summarize the "problem":

It's Christmas, and a superintelligent being called Omega from another dimension comes to your living room and leaves you 2 boxes. The boxes are rigged as follows:
  1. Box A is transparent and contains $1,000.
  2. Box B is opaque and contains either $1,000,000 or nothing.
  3. You can take either both boxes or only box B.
  4. Omega has filled box B with a million dollars if, and only if, it has predicted that you will take only box B. If Omega predicts that you will take both boxes, then box B contains nothing.
  5. Omega is not present when you make your decision. It has already left, and will not return to you again.
  6. However, Omega is superintelligent. It has been observed delivering boxes like this before, and has never been observed to predict incorrectly. People who take only box B always get $1,000,000, and people who take both boxes always find box B empty, netting them $1,000.
So where's the dilemma? You take only box B and pocket the million, right? Why doubt the superintelligence?

Well, there are some confused people that would like to persuade you that the rational thing is to take both boxes. Here is how they argue. Omega has already left, so the state of box B is already determined. It is either full, or it is empty. If it is full, then taking both boxes nets you $1,001,000, as opposed to $1,000,000 if you only take box B. But if box B is empty, then taking both nets you $1,000, which is more than $0 if you take only box B in this case (being empty).

So you should take both boxes. Then, because Omega has predicted you will do so, box B is empty, and you get only $1,000.

I am writing this because, apparently, intelligent people have actually spent considerable time arguing about whether it is "rational" to take only box B, or whether a rational person "should" take both boxes.

How people can get genuinely confused about this eludes me. Quite obviously, the way the problem is framed, there are only two possible futures to choose from. Either there's future F1 where you take box B, and it contains a million, because Omega always predicts correctly. Or there's future F2 where you take both boxes, and you get $1,000. The very framing of the problem dictates that future F3, where you take both boxes and find both of them full, is impossible or very implausible. Likewise impossible or very implausible is F4, where you take only box B and find it empty.

So then the supposed "rationalists" come and say, hey, we don't believe the framing of the problem. Omega has already departed, so future F3 must be possible. So we take both boxes. But hey, we believe the framing of the problem after all. Omega knew that I would pick both boxes, so box B is empty. What a paradox!

Well, yes, usually, if you try to believe two mutually exclusive things simultaneously, you get yourself into a paradox. Either you believe the framing of the problem, or you don't. If you believe that Omega's predictions are always correct, you take only box B. If you believe that Omega is correct X% of the time, then your decision depends on your estimate of X, and there's no paradox either way.

But you don't simultaneously believe that Omega could be wrong, but then again, it must always be right by definition. Believing both is simply stupid.

And as for those who say that it is rational to pick both boxes even believing that Omega's predictions are always and unfailingly correct... well. I rest my case.

Chinese dishonesty

Freakonomics publishes a Q&A with Leslie Chang, author of a recent book Factory Girls, a closeup of the lives of workers in China. I found the following a fascinating part of the dialog:
Q. You followed students for a semester at a school that teaches factory girls how to become “white-collar” workers. A major part of the curriculum teaches students how to lie effectively. How do the concepts and values being taught in these classes affect the manufacturing economy that these women make up?

A. A major part of the curriculum involved how to lie your way through job interviews into an office position. This ultra-pragmatism is pervasive in Chinese society today; people are less concerned with abstract notions of right and wrong than with getting things done. In economic terms, this fosters a business climate in which companies copy each others’ products, steal employees and business plans, and compete ruthlessly over tiny profit margins. But with little trust or sense of long-term planning and investment, they find it hard to grow and develop their businesses.

This system also takes an emotional toll on individuals. Everyone I knew in Dongguan had stories of being cheated and robbed and lied to, and over and over people told me, “You can only rely on yourself.” But even though this is a world marked by corruption and deceit, it is at the same time highly functional. It just functions by its own set of rules.
The latter two sentences (my italics) might be interpreted as bias against the unseen. I believe Leslie Chang when she says a world like that is functional, but just how much more functional could it be if one didn't have to expect outright deceit at every turn?

Here's another "gem":
Self-help gurus like Ding Yuanzhi have a large following among China’s migrant workers. Yuanzhi, whose book Square and Round has sold around six million copies, gives the following advice to migrant workers:

Now I will talk about copying. I think copying is very important. Everyone always talks about how innovation is important. But you need to invest a lot of time to innovate and the risk is high. Why not take things that have already been proven to work in other places? That is copying.
With respect to this paragraph, we could observe that economic growth has two components: originating new ideas, and spreading them. There is no growth without either. The two mechanisms, however, are partly in conflict. What good is working hard at originating an idea, if it will be copied so fast that you can't take advantage of it?

What Ding Yuanzhi is proposing here is maximizing the spreading of ideas in such a way as to disincentivize the origination of new ideas in the first place. This can only work if there's another market, say like the United States, which respects origination of ideas, and provides innovators ways to get returns on their investments at least there.

There are claims that the United States was quite like this in the 19th century as well, and that such endemic hustling is merely a phase in the evolution of a high-growth economy. But is it a necessary phase?

Would the Chinese not benefit more if they could actually trust each other? Would they not receive more investment if foreigners could trust them?

Would the Chinese not receive investment of a different quality, allowing them to perform more demanding and higher paid tasks, if they could be trusted not to sell pretty much any plans and information they can access, to pretty much anyone?

Endemic dishonesty is a burden. The problem is, it is a burden that's embedded in their culture, and it's a burden that a single-party system promotes. When allegiance to the Party is a pre-condition for any career, you can be sure that people who have careers are people who fake their allegience.

Create a system in which honesty is a handbrake, and guess what; it's going to be populated by the dishonest.

2008-12-21

Tao te ching

One of my favorite wisdoms:
A man is born gentle and flexible.
At his death he is hard and stiff.
Green plants are tender and filled with sap.
At their death they are withered and dry.

So it is that the stiff and unbending is the disciple of death.
The gentle and yielding is the disciple of life.

Thus an army without flexibility never wins a battle.
A tree that is unbending is easily broken.

The hard and strong will fall.
The soft and flexible will overcome.
Since translations from Chinese vary widely, I took some liberty with the translation to reflect the proper meaning as I perceive it. Specifically, I replaced "weak" with "flexible". Other translations use "lithe", or "supple", which are less clumsy, but would not be as easily understood by my non-English friends.

Just to be sure, Tao te ching also contains a lot of crap, otherwise.

2008-12-18

Ka-Ching

Have you noticed that the lyrics to Shania Twain's Ka-Ching! now have a whole different feel? They suddenly sound so... appropriate, and prophetic. :-)
We've created us a credit card mess
We spend the money that we don't possess
Our religion is to go and blow it all
So it's shoppin' every Sunday at the mall

[...]

When you're broke go and get a loan
Take out another mortgage on your home
Consolidate so you can afford
To go and spend some more when
you get bored

[...]

All we ever want is more
A lot more than we had before
So take me to the nearest store

Can you hear it ring
It makes you wanna sing
You'll live like a king
With lots of money and things
Ka-ching!

2008-12-12

The ineffectiveness of economic stimulus

A number of venerable economists believe in the Keynesian governmental economic stimulus concept, in which big government spending is supposed to boost a flagging economy.

To summarize roughly: when everyone across the board starts saving too much, this causes a fall in consumption, which causes a fall in production, which causes a fall in investment, which causes a fall in economic growth, all of which generally harms human well-being.

Many economists believe that, when this happens, the cure is for the government to print money and spend it. This ought to have a multiplier effect on the economy: for every newly created dollar the government thus spends, the recipient might save 20 cents, but spend 80 cents. The next person down the line might do the same, saving 16 cents and spending 64 cents, and so on until, ultimately, each $1 thus created ought to result in $5 of trickle-down spending.

Venerable economists think that this ought to boost the economy and get the GDP right back on track.

Except, it doesn't. The multiplier as practically measured is not 5. It is more like 1 to 1.4; at best. Each dollar the government spends like this raises GDP by... one dollar. Maybe $1.40.

At first, this seems counterintuitive. Assuming that the $1 the government created didn't previously exist - assuming that it's new money that would not have been present in the economy - then it ought to circulate in the economy like any other money. If the savings rate in times like this is 20%, this money too should be saved at a savings rate of 20%, so there should be a multiplier effect. Why don't we see one?

Let's take a look at what actually happens. Suppose that 90% of people who want work have work, and 10% do not. If government spending goes to existing businesses, then it's going to people who already have work. Now they have a bit more work. But what do they do with the extra money from the government that they would not have received otherwise?

Given the empirical measurements, it would appear that people treat the extra money as just that - extra money. Even if their average savings rate is 20%, the extra money is not saved at the same rate; instead, since it is surplus and the times are bad, it is 80% saved and 20% spent. This leads to a meagre multiplier of no more than 1.4, as observed. The money doesn't trickle down to the economy.

This suggests that stimulus might be more effective if it was used to purchase work from people who are currently unemployed. People who lack sufficient income to live reasonably in the first place would spend more of this windfall on consumption, likely increasing the multiplier more than if the money is given to existing businesses where people, obviously, already have work. But still, the multiplier will not be much more than 2, because when the formerly unemployed spend their new money, they will spend it with businesses where people already have work, and those people and businesses will save most of the extra income. The trickling down stops fast in hard times.

Meanwhile, Christina Romer and David Romer find that the multiplier from tax cuts is about 3. It would appear that every $1 of tax cuts raises GDP by $3. Still - this too might be true in economic good times more so than hard times.

Ever done indoor skydiving? You enter a vertical tunnel where you stand on a mesh while a huge fan blows wind up at 100 mph or so. You wear an oversized suit and you need to adopt a certain position in order for the wind to lift you. If you are gripped with fear, you reach down to protect from falling. Your form now fails to capture the wind, and indeed you fall. As long as you adopt the form of fear, the wind can't lift you.

So it seems to be with the economy. As long as people are afraid, they're going to save most of their extra income. This is something that only very radical government policies might be powerful enough to change; and I mean policies far more radical than tax cuts or deficit spending.

We are better off without those policies. The economy is undergoing some reconfiguring; it is now apparent to everyone that some parts didn't work, and they need to be thrown away. Not knowing how we are connected to those parts makes things uncertain, and in times like that, it's normal that most people will save. But as long as governments do not meddle too much, a new order will arise, and the economy will soar again.

2008-12-05

The falsity of formally proven software

Eric Drexler falls into the hole of "imagine we can prove programs correct":
Why does this matter to us ordinary mortals? Because proof methods can be applied to digital systems, and in particular, will be able to verify the correctness (with respect to a formal specification) of compilers [pdf], microprocessor designs [pdf] (at the digital-abstraction level), and operating system microkernels [...] If this doesn’t seem important, it may be because we’re so accustomed to living with systems that have built on foundations made of mud, and thinking about a future likewise based on mud. All of us have difficulty imagining what could be developed in a world where computers didn’t crash, were guaranteed to be immune from virus attack, and could safely download code written by the devil himself, and where crucial pieces of software could be guaranteed to not leak data.
The bolding is mine. Eric Drexler is missing that, if you have a formal specification for a program, then you have the program. Programming is writing a formal specification. In the absence of hardware error, programs always behave according to their formal specification - their source code.

But what if the formal specification, when actually put to work, turns out to specify things that we didn't really want? Ah... Therein lies the rub.

The reliability of software can be improved (a lot!) by designing and adopting new programming languages which restrain the programmer's freedom of expression in subtle and wise ways that cause errors to be avoided as much as possible, while maximizing the ability to get things done. But far from it that we will ever produce programs that are error-free.

Bugs are in the mind of the programmer. The computer will always do what the programmer tells it to do. Bugs indicate the programmer's lack of awareness, confusion about what he wants, conflicting ideas. As long as human minds are faulty, the formal specifications they produce will be faulty as well - and this is the eternal source of bugs.

2008-11-28

Thanksgiving prayer

Eliezer Yudkowsky:
And as she said this, it reminded me of how wrong it is to give gratitude to God for blessings that actually come from our fellow human beings putting in a great deal of work.

So I at once put my hands together and said,

"Dear Global Economy, we thank thee for thy economies of scale, thy professional specialization, and thy international networks of trade under Ricardo's Law of Comparative Advantage, without which we would all starve to death while trying to assemble the ingredients for such a dinner as this. Amen."

2008-11-18

Somali pirates capture huge oil tanker

Amazing.

How long can this go on?

The longer that shipping companies and their countries continue to allow ships being held hostage, the better equipped and organized the pirates will get; the longer their range will be; the more ships and the more valuable ships they will hijack; the higher ransoms they'll demand; and the more difficult they will be to eventually eradicate.

These trends are already underway:
The location of the latest attack, far out to sea, suggested that the pirates may be expanding their range in an effort to avoid the multinational naval patrols now plying the Gulf of Aden and the Arabian Sea.

“I’m stunned by the range of it,” said Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff, at a news conference in Washington. The ship’s distance from the coast was “the longest distance I’ve seen for any of these incidents,” he said.

The vessel was headed for the United States via the Cape of Good Hope when it was seized, Reuters reported.

[...]

Only a few years ago, the average ransom was in the tens of thousands to hundreds of thousands of dollars. Now payments can range from $500,000 to $2 million.

The pirates’ profits are set to reach a record $50 million in 2008, Somali officials say. Shipping firms are usually prepared to pay, because the sums are low compared with the value of the ships.

[...]

Maritime experts recently have noticed a new development in the gulf — the pirates’ use of “mother ships,” large oceangoing trawlers carrying fleets of speedboats which are then deployed when a new prize is encountered.

“They launch these boats and they’re like wild dogs,” said Mr. Choong in Kuala Lumpur. “They attack the ship from the port, from starboard, from all points, shooting, scaring the captain, firing RPGs and forcing the ship to stop.”

2008-11-17

Skilled, unskilled, unaware

A 1999 paper by Kruger and Dunning, Unskilled and unaware of it, has recently been receiving attention. In summary, they tested people on a few tasks while measuring their self-assessments, and found that the worst performers consistently rated themselves above average in the tested tasks. They attributed this effect to a deficiency of metacognitive skill in the worst performers, a conclusion that found resonance with many readers - including me at the time.

But Robin Hanson points to Burson, Larrick and Klayman's 2006 paper which reinterprets Kruger and Dunning's work. They argue that the issue at work is not a metacognitive deficiency, but effectively that people tend to estimate their absolute performance in a task (how well they'll do on an objective performance metric), and do not compensate for that the task is either easy or difficult for everyone. Estimating absolute performance requires awareness of oneself and the task, whereas estimating relative performance requires awareness of everyone else as well. This latter part is difficult.

It turns out that everyone is bad at estimating other people's abilities. The worst performers tend to overestimate their relative ability for easy tasks, but tend to be more accurate for hard tasks. The best performs tend to underestimate their relative ability for hard tasks, but tend to be more accurate for easy tasks. In tasks of medium difficulty, the overall bias is lowest.

It appears, therefore, that there is no reason to think that there's a metacognitive deficiency in poor performers. It's just that when asked for a relative performance comparison, everyone starts with an absolute assessment of their performance, and then fails to compensate for everyone else's skills.

Which is understandable. The only people who really know about everyone's relative skills in a particular task is those who administer tests and see everyone's results.

2008-11-15

The clever rebooting by Windows Update

If I ever meet the guy who cleverly decided that, after automatically installing an update, Windows should reboot unless you explicitly postpone, even if you're doing other things on the computer, and cannot see the damn Postpone window - well, if I ever run into that fellow... I'm going to kick him in the balls, and I'm going to keep kicking until my foot hurts.

Several times now, me and my wife have played games, and it has happened that Windows helpfully went and rebooted itself while playing. This is because no one clicked the Postpone button, you see, and if no one clicked that button, then obviously no one cares. The fact that no one sees the Postpone dialog because a game is running full screen, well, apparently that didn't enter anyone's equation.

The manager responsible for this feature, please present yourself to Frigate Bay so I can kick you in the balls.

Bring spare balls. I'll kick you once for each time this has happened.

Yes. I know I can switch the updates to manual. I have now done so on the machine I use for games. But I shouldn't have to. The stupid dialog shouldn't reboot if the computer is playing content full screen, or if someone is interacting with the PC.

"The case for forward-looking protectionism"

The Financial Times Economists' Forum published this bone-headed article by Ha-Joon Chang, a South Korean now at University of Cambridge, who studied under Robert Rowthorn, "a leading British Marxist economist".

Among other things, Ha-Joon Chang calls for the U.S. both to employ some protectionist policies, as well as to encourage developing countries to make use of them to develop their fledgling industries; as if their own protectionism isn't part and parcel of what's been obstructing progress for developing countries in the first place.

He also makes a pointless appeal to Alexander Hamilton, citing the weighty argument that he appears on the $10 bill (so his policies must have been good).

Here's my response (currently awaiting moderation on FT):
Trade barriers imposed by developing nations necessarily:

(1) Help only those infant industries whose consumers are predominantly local.

(2) Harm those same local consumers by restricting their access to more expensive, lower quality local goods, rather than allowing them access to cheaper and higher quality foreign goods. (If such were not the case, trade barriers would not be necessary.)

The world’s marketplace is global. If developing countries are to have worthwhile industries, those industries will have to compete globally. There is a huge leap from serving a few poor customers held hostage by trade barriers, to competitiveness on the global markets. Companies that need privileged access to their small local market in order to function cannot make that leap. Companies that can make the leap, do not need trade barriers.

I do not see how the developed world will become developed by organically growing competitors to world giants. How are those competitors going to make the leap from providing inferior products and services to an artificially protected local market, to competing effectively worldwide?

How is this going to happen, if the neighbors of such countries, themselves being developing countries, have their own protectionist agendas?

If protectionism doesn’t work for these reasons when employed by a large group of small countries, then at what size country does it begin to work?

Alexander Hamilton was born in Nevis. Some say that the U.S. constitution was drafted requiring presidents to be U.S.-born specifically with the aim of excluding Hamilton.

How much credence does one get from appearing on a dollar bill? Robert Mugabe is also on his country’s currency. Does it add to his economic credibility?

They can't even cut the power right in St. Kitts

I wrote last month about how there was a fire in the St. Kitts power station that damaged two of the largest generators and cut the generating capacity in half. Thus began a period of power outages which started daily and prolonged (8-12 hours, depending on the part of the island) and which has recently improved to 2-6 hours per day or so, at least where we live (Frigate Bay).

Of course, the day after the fire, officials were predicting how this load shedding would be necessary for about two weeks, but everyone who is familiar with how things work here knows that two weeks doesn't really mean two weeks. It means two months, or two years, or however long it takes. Whatever.

Recently, they started cutting power to our area more frequently again. But there is an additional problem: instead of cutting power outright, as they should be doing, the voltage first drops, then rises again, then drops further, then rises. It takes about a minute, maybe two, for the power to really go. Meanwhile, the various appliances - the air conditioners and our voltage regulators - switch on and off, and on and off, beeping as the motors start, then stall, then power up again, then stop, and start again...

Not only is the local power company incapable of supplying the island with reliable power; they don't even know how to shut it down right.

Things are like that in pretty much every aspect of our life here in St. Kitts. Construction is especially like that; see this A je to short film for a highly accurate impression. Everything needs to be done 2 or 3 times because they always destroy X while doing Y, especially if no one is around to tell them how to do things right before there's damage.

But enough carping. We didn't come here for the mad skillz of the local work force, and things are actually improving, although they can't seem to be improving fast enough. For one thing, there is now a real cinema, with recent movies, clean seats and multiple screens. We find it very welcome, and it has increased our going out at least twofold. :)

2008-11-14

A question for Ron Paul (on Freakonomics)

Freakonomics has published the first part of Ron Paul's answers to their readers' questions. The guy strikes me as probably the most reasonable, clear-headed politician I've encountered. He seems almost like a Warren Buffett of politics, except that in politics, dishonesty is what's rewarded, so Ron Paul isn't doing very well. (He's doing well with about 10% of people who actually have a clue, but that will never include most voters. I wonder how many supporters he has in Detroit.)

That having been said, though, I sincerely hope (but do not really expect) that - at least in the second part - he might get around to answering my question. Essentially, what I'm wondering about is this:
Q: Do you believe that it is possible to make positive incremental changes to our monetary policy, entitlements, taxes, etc. within the system, or is it just a matter of waiting for failure and then coming in with a solution?

A: Yes, I do believe we can make successful changes. And I want to start making those changes now so that we can avoid a devastating collapse. But we need to start quickly before it’s too late. If we can cut spending and balance budgets, beginning with our overseas expenditures, we can do a lot to fix this mess. We also need monetary reform. I would begin with the incremental step of repealing legal-tender laws and legalizing the use of gold and silver to act as a currency alongside the dollar. That would help stabilize the dollar and strengthen our monetary system. [denis: my emphasis]
I just don't see things happening this way. If gold and silver are allowed to act as currency alongside the dollar, the effect will be a collapse of the dollar. This is unless issuing policy for the dollar is rewritten to credibly ensure that the supply of dollars will increase no faster than the supply of gold and silver. This, in turn, would basically prevent the state from being able to protect bank depositors in the event of a financial crisis; and this, in turn, would bury banks. Which then prompts the question that I ask:
The way I understand it, one of Dr. Paul’s fundamental proposals is to deregulate currency, allowing people to use gold as they choose to, or whatever else they like. This renders an inflatable fiat currency non-viable, and provides the state with no way to support banks in rumor-based runs or in liquidity crises. This in turn leads to the Iceland effect, where banks go down not because they are insolvent, but because there is a run on them or because the market temporarily dries up.

The monetary policy that Dr. Paul is proposing would therefore make it foolish to put money in a bank, as any interest gained is likely to be outweighed by risk of the bank’s failure.

My question to Dr. Paul is as follows: is your opinion that banks are not fundamentally important to prosperity and growth? If they are not, then what is your opinion of the economists who say that banks are a crucial link between borrowers and savers?

On the other hand, if banks are important for GDP growth, then what system do you envision would replace banking, after your monetary policy has rendered bank deposits foolish, and banks prone to fail?

— denis bider

2008-11-12

The Bomb prevented a yet greater tragedy

Not to advocate the triggering of mass annihilation in anger, but it looks like the bombs that exploded over Japan in WWII - and caused it to surrender - might have saved more than they destroyed. By Joseph Coates in a comment to Hiroshima: The lost photographs:
The use of atomic weapons for the first time on Earth by the U.S. against the Japanese Empire and its civilian cities has always been a frustrating horror for me. I am alive because of it.

My father was an 18 year old kid (on a "great adventure") and unaware of the potential fate that would await him as he sailed with thousands of other soldiers in late October on a troop ship steaming across the South Pacific to invade Japan in Operation Olympic for "X-Day", as it was called.

Instead of probably being wounded or more likely killed while landing on the heavily defended mountains and beaches of Ōsumi Province or Satsuma on the island of Kyūshū in a massive invasion that was to make D-Day look like a skirmish — he helped rebuild Japan.

Names like Miyazaki, Ariake, and Kushikino, the three main invasion points, would be in our history books. The beaches of D-Day would be remembered with the beaches of X-Day, named after car brands: Austin, Buick, Cadillac, Stutz, Winton, Zephyr.

The Japanese had prepared an all out last stand defense of Japan, Operation Ketsugo, with no reserves.

Had the invasion happened, it is estimated that millions of American soldiers would have been killed or wounded and tens of millions of Japanese soldiers and civilians. The Pentagon ordered 500,000 Purple Hearts in preparation for the invasion of Japan and usually the military does not order enough of anything. Until just a few years ago, these unused invasion of Japan Purple Hearts were the Purple Hearts all recipients of all subsequent U.S. wars were given.

My father and countless other allied soldiers, Marines, and sailors never invaded Japan. He was switched to the Corp of Engineers after the Japanese Empire surrendered and promoted to sergeant so he could coordinate construction work for the Tokyo airport. After this, he went to college under the GI bill, got married, and raised a family. He helped run a number of companies, including a company founded by his brother (who was in the Navy during the war) which invented and sold, and still sells, important technology used in the manufacturing of microchips and later, LCD displays. (Your computer, its screen, your cell phone, ipod, et al could not have been made without it.)

He is alive, my family is alive, I am alive because the U.S. did not invade Japan. Many more U.S. and Japanese citizens and their families are alive too. The technology, medicines, and other inventions since WWII developed during or later by my father’s generation have saved and enriched billions of lives.

But if the U.S. had invaded Japan, would we have lost some crucial figures of that generation and the economic, technological, and creative prosperity of the late 20th Century?

The economics of religion

I think a great issue to pursue, for a person of the kind that might have written Freakonomics, would be the economics of religion.

We know that many religious leaders do not actually believe what they preach, but they preach what’s going to be well received by their audience. In this sense, religions are a bit like mainstream media. We don’t hear about “Oprah’s Mystery Man” because Murdoch thinks that everyone should know, we hear about it because they think it drives ratings.

In a similar parallel, it would be interesting to investigate how much religious policies are ratings-driven. How well would a Pope be received if he told everyone “I reconsidered, it is okay to use condoms”? Or if he said that “a regulated market in human organs would be okay”?

Already, the Catholic Church is more tolerant and more science-friendly in its views than many Christians in the U.S. If the purpose of a religion is to maximize its number of followers, what happens if a religious leader endorses views with which its followers do not agree? Is the purpose of religion really leadership, or is it more so to make people feel good about their existing views?

In other words - is it the dog (the Pope) that wags the tail (the believers); or is it the tail that wags the dog?

The Pope doesn't want you to be able to sell your kidney

The Pope - all-knowing and all-wise, and as his followers expect from him, the authority on all topics remotely having to do with ethics - spoke about organ donation:
"Any logic of buying and selling of organs, or the adoption of discriminatory or utilitarian criteria ... is morally unacceptable," he stressed.
To translate: the Pope would rather see a million people die, than have another million people voluntarily sell their spare kidney.

Because, you see, not being able to sell your kidney is much more important than saving a million people from dying.

According to the Pope, apparently, selling your kidney is an abomination. But a million people dying, prevented by people like the Pope from getting the kidneys that they desperately need, that's just "unfortunate".

Death, you see, is the natural course of things. You must accept it. If your kidneys are about to fail, surely God sees fit that you die now. It is God's will.

Could it be God's will then, pretty please, that the Pope die soon, and be replaced by someone more illuminated?

Yeah... as if that's likely. Ever.

To be fair, the Catholic Church is one of the less preposterously dark-ageist cults that this world has. See this for an example of yet more "enlightened" "leaders".

2008-11-11

A single, controlling majority shareholder in finance

Tim Bray publishes his opinions on what the coming changes in financial sector regulation should be like. Some make sense, but I don't agree with all of them.

I think a big part of the problem is the agency conflict of interest, and the ineffectiveness of shareholder democracy.

This is not such a big deal when a company in the "real" economy goes astray. In that case, shareholders suffer, and there are some externalities, but they are limited.

The problem is greater, though, when any of the cornerstone companies of finance go astray.

Perhaps it would not be a bad idea to require that finance businesses must have a single, controlling majority shareholder.

This would limit their size, which helps in the sense that too big to fail is too big to exist, and it would provide for better corporate oversight, as a single, controlling majority shareholder is more likely to steer the company on the right path than an ineffective democracy of smaller shareholders which management strings along by their noses.

Also, when politicians do eventually get to the business of revamping finance regulation, perhaps a good idea would be for them to choose a small number of countermeasures - one, two, but certainly no more than three - from all of the ideas proposed. Ideally, one decisive countermeasure should be chosen which is going to be effective - will likely fix the problem - and will be simple enough to understand.

Instead, what is actually likely to happen is that a huge variety of proposed countermeasures will be bundled together to create a straitjacket, for "good measure", to "make sure" that the crisis will not happen again.

It's a good thing to prevent a repetition of the crisis, but it's better yet not to suffocate future finance.

2008-11-08

The state of Cuba

My friend Maša has recently visited Cuba. Here is my translation of part of her blog post where she describes some of her impressions:
The first surprises began soon after landing. When one drives onto Autopisto Nacional - the only and the largest highway on the island - one begins to seriously question how many accidents they have. The road has enooormous holes and if you don't know the road, it can probably straight out destroy your tires rather than just puncture them. Left and right there's no safety fence, there's no centerline, no roadsigns or signposts, while on the road there are ox wagons, groups of cyclists training, cyclists and roadside vendors selling various things, trying to attract a driver's attention.

Despite all of the above, we did not see a single accident in three weeks, and we traveled almost 2000 km. [denis: Cuba apparently had 1,000 fatalities in 2001 and about 172,500 cars in 1998, for about 0.5% fatalities per year per car. The U.S. has about 40,000 fatalities per year and about 250 million cars, for about 0.016% fatalities per year per car. Cuban cars are more than 30 times as deadly. It is doubtful that they are driven 30 times as much.] The cars are dilapidated, they hardly even stay in one piece, while people drive over that wreck of a road much faster than we would (while of course braking before holes), however I didn't see anyone overtaking brazenly, and I didn't see anyone cut off another driver. One wonders how much help road signs, highways and airbags are, when people [in Slovenia] drive so damn recklessly. [denis: Slovenia has modern European roads, modern cars, about 300 road fatalities per year and about 1,000,000 cars, for a fatality rate of 0.03% per year per car, which makes a Slovenian car about twice as dangerous as a U.S. car, but 15 times less dangerous than a Cuban car. Figures would change in some direction when accounting for the number of miles driven.]

I have come to detest socialism much more than before, but I'm also angry at the arrogant Americans. Yeah, great... every month, each Cuban gets one paltry packet of rice, oil, salt, and so on (and women now EVEN get 10 hygienic pads), health care is free, schools also. But what help is that, when they take back most of everything people earn, and the remainder is nowhere near enough to live normally. And then doctors work as waiters and professors work as taxi drivers, because only working in tourism can make life bearable. Until work is not sufficiently rewarded, people simply won't work more and better - and that goes for you as well, dear voracious Slovenia!

If you are seen in public with a tourist and you have a police record from before (which you can probably get just by sneezing too loud), you go to jail. Committees for revolutionary defense serve to snitch on people and god help if you get on your neighbor's wrong side and he reports you for talking against the revolution. You need the state's permission to set sail to the sea, so that you might not by chance escape from this heavenly political system. To work out papers for a regular trip out of the country, you need 4 months and at least some 4 visits to Havana (and the costs of traveling there aren't small). You practically cannot buy a car unless you're at the trough or you work in a government company. And then the poor people, who don't have much to begin with, are being sold cathode ray TVs at about the same price as you can buy an 8" larger LCD in Slovenia. If that's not screwing people, I don't know what it is.
Maša goes on to argue against American economic sanctions against Cuba, which policy indeed seems unreasonably harsh and inequitable until you realize that Americans owned much of Cuba and were expropriated in the glorious revolucion. The economic sanctions may still seem harsh, and it definitely doesn't help Cubans, but when a nation expropriates your citizens, one could argue the justification.

So there you have it, Cuba as observed by a European tourist in late 2008.

Democracy may be beneficial economically after all

Elias Papaioannou and Gregorios Siourounis:
Cross-country comparisons have produced little evidence that democracy improves economic growth. This column summarises research using within-country comparisons over time to show that democratising countries realise higher long-run growth after the volatile transition period. Democracy’s value may lie in its dynamic aspects.

[...]

While there is significant heterogeneity across countries (Persson and Tabellini, 2007), our results suggest that, if anything, the average effect of successful democratic transitions on growth is positive. Our “within” evidence shows that the experience of the past four decades suggests that even moderate political reforms can also bring sizable economic gains. Most importantly, our dynamic analysis suggests that growth is usually volatile and negative during the transition period. Yet after the consolidation of democracy, growth stabilises at a higher rate. This J-shaped pattern accords with F.A. Hayek’s (1960) idea that the “as is true of liberty, the benefits of democracy will show themselves only in the long-run, while its more immediate achievements may well be inferior to those of other forms of government.”

Pensions and fertility

An interesting article by Francesco Billari and Vincenzo Galasso describes their research into fertility of those Italians who were affected by reduced pensions, compared to those who were not. Their data shows that fertility increased by 13% even after controlling for factors such as age. If children are seen as investment goods (might help you in old age) as well as consumption goods (can be a source of satisfaction), then their findings indicate that the investment view can dominate: apparently, couples tend to have more children when the adequacy of their pensions is in question.

This points out a useful policy for countries that have low fertility combined with an aging population: reduce the expectation of pension benefits immediately for people young enough to have more kids as a result. This helps make the long-run pension budget viable both by reducing the expected outlays (less benefits) and by increasing the expected income (more workers in the future).

Such a reduction will also stimulate the affected workforce to put more effort into providing a safety net for themselves, and count less on the state's ability to provide it. This leads to higher GDP growth, which makes everyone better off for it.

To make things fair, this should be coupled with increasing the retirement age (rather than reducing benefits) for people who are too old to have more children. When pensions were first introduced in the 19th century, they were primarily for the very small percentage of people who were too old and fragile to take care of themselves. This, not a twenty year long holiday, is the purpose of pensions.

Let's shift the system a bit towards its original purpose, and it will not be on the verge of falling apart as it is today. Since medicine is now making such mediocre progress with further increasing our lifespans, the change in the retirement age does not need to be much more than a couple of years.

You can have your early retirement if you can pay for it, but it's not fair to have it at younger workers' expense.

To make things just, perhaps those who raised more children could be spared some of the retirement age increase. After all, it is their children, and their investment in raising them, that is now supporting the existing retirees.

The demerits of DST

Stephen J. Dubner opened a debate on Freakonomics with an article about DST.

Whatever the ostensible benefits of DST, they are overwhelmed by the hassle of hundreds of millions of people who have to adapt, many of whom have serious problems with it - e.g. parents with children.

Furthermore, the silly time changes affect not only the communities who adopt them, but also communities that do not: businesses in Arizona shift schedules because of DST elsewhere, viewers in non-DST communities shift their sleep patterns because their favorite shows come on later, etc.

DST is a preposterous charade in an attempt to pursue minuscule or illusory savings. It is not only social engineering on a grand scale, it is useless feel-good social engineering on a grand scale.

I know how difficult it is to adapt systems to different DST rules. That's why I think the U.S. politicians who voted to change the DST schedule recently, instead of abolishing it altogether, should be sent to a no-happy place for a time comparable to the duration of people's lives that they wasted: a long duration indeed.

2008-11-07

The monkeys came to power

Foreign media refer to Slovenia as having performed a good transition from a centrally planned single-party state to a modern market democracy. But for all the praise it receives, Slovenia is populated disproportionately by leftist zealots who, after four years of centrist government by Janez Janša, recently won major elections. Letting no time go to waste, they are already coming up with stunts like these.

Borut Pahor - president of the Social Democrats, the party that got the most votes - promised today that the coming government would focus on "economic democracy", by which he apparently means a combination of employee shareholdership, employee participation in management, and employee participation in profits. The way I understand it, the newly elected leftists plan to make these things into law.

If you speak Slovenian, read Marko's excellent article on how silly the idea is of legally mandating employee participation in profits. Giving employees profit shares is a good idea for companies with high-value-added employees, but it only works if it is voluntary. An involuntary mandate will just result in companies finding ways to avoid the law: e.g. by not officially hiring people but rather working with them on a contractual basis; or by having another company employ the workers and outsource them; etc. In the short term, the net result is merely yet more bureaucratic burden on the economy, as if Slovenia does not yet have enough. In the longer term, the government can either silently give up, keep the new rules knowing they don't work to avoid admitting its error; or it can further tighten rules, causing a vicious cycle of regulation-workaround that will ultimately smother the economy.

Then there's Katarina Kresal, the charismatically naive young leaderette of the Liberal Democracy of Slovenia (the party's name is a 2-decade-old oxyomoron), which is part of the new governing coalition. Ms. Kresal is quoted saying:
We are in times when our economy should be more actively protected, so we should think about a potential purchase of Mercator [Slovenian equivalent to Wal-Mart] by the State and a later sale at a higher price, which would also be good for all taxpayers.
Wow, let's get the state into the business of making gratuitous investments in "national champions", for the benefit of the political-economic elite that runs the place!

How did everyone not think of that as a crucial step in the transition to a market-oriented economy?

While Borut Pahor could be sincere but misguided, Ms. Kresal's proposal is a transparent servility to the powers who run Slovenia: the few people who own much of the economy and most of the media, and who have been adept at using their political ties, particularly among the leftist parties, to publicly promote "national interest", the real purpose of which is to bleed the public purse and to discourage competition for their business.

What's funny is how the public lets itself be strung along, happily letting itself be convinced by essentially non-arguments.

This combination of leftist zealots and populist oligarchists is now coming to power in Slovenia. The monkeys have prevailed, and will run that country for the next 4 years.

2008-11-03

Iceland's mistake

Willem Buiter and Anne Sibert publish this brief but insightful article summarizing their findings when Icelanders asked them to look at their banking sector in early 2008:


Briefly, they state that Iceland's problem was being (1) a small country, with (2) a large, internationally exposed banking sector, having (3) their own currency, and (4) limited ability to provide their banks with backup financing in difficult times, relative to their banks' obligations.

Even if their banks were solvent and profitable, which they very well might have been, they were prone to collapse during a liquidity crisis, because they did not have a large enough economy to back them.

Buiter and Sibert suggest that Switzerland, Denmark, Sweden, and even perhaps the UK may be in a similar predicament.

2008-10-30

Ben and Ryan translate rap

For your indulgence:
I am in fact orating with little or no prior preparation, an act commonly referred to as freestyling. Once again, and I think this bears repeating, I would like to restate my claim that I am in fact much stronger and have endured a larger number of hardships than you; hardships which have left me with an aggressive behavior and an imposing demeanor which, I believe, frightens you.
Thanks to Freakonomics.

2008-10-25

Ideological reporting in Slovenia

There's an old joke that, in one of its incarnations, goes like this.

During the Cold War, the Soviets and the Americans decided to arrange a good-will running competition between the two presidents. The day of the competition arrived, and Reagan, being in better shape, outran Gorbachev. The next day, American newspapers proudly reported: "Reagan first, Gorbachev last!" On the other hand, the Soviet newspapers reported: "In yesterday's presidents' running competition, Gorbachev finished an excellent second, while Reagan was second-to-last."

Slovenia used to be part of Yugoslavia - not as bad as the Soviet Union, but still a decidedly socialist state. In its heyday, socialist Yugoslavia featured such boons as a single type of jeans (why would you need more than one type of jeans?); a single type of toothpaste; stores that were predominantly empty; essential goods that were sometimes available, and sometimes were not; for aspiring drivers, waiting lists of several years to buy a Yugo that would start falling apart in about a year.

These times are looked back upon fondly by socialist nostalgists, who emphasize how life was simpler then; how things were less hectic, and everyone lived in harmony, and so forth. Yes indeed, everyone lived in harmony, except the political dissidents who were sent to Goli Otok (Naked Island) - a forced labor camp on a barren rock with no escape, the Yugoslav equivalent of gulag. On the other hand, if you were smart and unscrupulous enough to abuse the system, it was indeed possible to live quite well.

People say that, in those days, everyone could have a house. Yes, indeed: during the times of high inflation, you could get a no-interest loan from a state bank to build a house, and you could repay that loan at a later date when the money became worthless. The hard part wasn't getting money: it was getting the materials to build a house. You needed to pull all sorts of connections to get cement; once you had cement, you didn't have bricks; once you had bricks, you didn't have tiles; etc. But yes, houses could be built on loans that effectively were not repaid, incurring foreign debt and leaving repayment to future generations.

Not to be too wordy, this is to illustrate the dis-economy of socialism, which wasn't even as bad in Yugoslavia as it was elsewhere.

Now, back to the starting joke. Indeed political ideological reporting was ubiquitous in socialist Slovenia. But now, the country has been out of socialism for some 18 years. You would think that, by now, the people working in the media might have changed, and that professional standards might have prevailed, right? No.

Here's an LA Times article titled House panel heaps blame on Alan Greenspan for financial crisis. The article describes the recent congressional hearing of Alan Greenspan, Christopher Cox and John Snow. You can read the article at the link and discover that it is fairly reasonably balanced.

Consider now an article about the same topic, published in dominant Slovenian newspaper Delo (Work). I translate:

Greenspan admitted his mistake

Washington - Former president of the American central bank Federal Reserve (Fed) Alan Greenspan, who led the central bank for a long 18 years and in the process acquired the reputation of an unerring prophet, on Thursday in Congress crushedly admitted that he was mistaken in his unwavering faith in free markets.

Greenspan was questioned by the House Oversight and Government Reform Committee along with Securities and Exchange Commission Chairman Christopher Cox and former Treasury Secretary John Snow. The committee, led by Henry Waxman, a California Democrat, is attempting to determine the causes for the outbreak of the worst financial crisis in the U.S. after the Great Depression in the 1930s. After the hearings of investment bank leaders and ratings agencies, congressmen were facing regulators on Thursday.

Greenspan admitted flaw in his lifelong faith in the free market ideology

Waxman told the three witnesses that, as regulators of the markets, they contributed to the outbreak of crisis due to their beliefs in the unmistakeability of markets without government regulation. Waxman brought Greenspan to admit a flaw in his lifelong faith in the free market ideology. "I don't know how fundamental and long-lasting this realization is, it shook me very much, because for 40 years I believed that the thing works," said Greenspan among else.

A tsunami that comes once in 100 years

The forerunner of Ben Bernanke at the helm of the Fed is under attack from critics that at the beginning of the decade he did not raise interest rates, or rather that he left them low for too long, which contributed to the explosion of the housing market. He also did not use the Fed's ability to regulate the issuing of new types of mortgages, such as subprimes, whose breakdown caused the crisis.

Congressmen faced him with his own statements at the time of the real estate boom, when he denied the probability of a collapse in real estate prices on a national level, and Greenspan apologized that he did not predict this because the United States had not yet faced such a crisis, which he named "a tsunami that comes once in 100 years".

Greenspan admitted that he believed that banks would act in their self-interest and protect their investors and their equity. In his words, there was an error in the economic models used to forecast the future. These models apparently took into account only the past two decades, which were decades of "enthusiasm".

After admitting that even he did not anticipate what happend, he also blamed investors who en masse bought mortgage-backed securities without worrying about a potential fall in condominium and house prices. Greenspan said that he doesn't see how the U.S. can now avoid an increase in layoffs and unemployment, while he also forecasted a fall in consumption. In his words, a necessary condition to end the crisis is stabilization of house and condominium prices, but this will not occur for several more months.

"Will someone go to jail, too?"

Congressmen asked Greenspan, along with the other two, how to ensure that something similar does not happen again. Greenspan said that regulatory reforms will be useful, but he also immediately added that they will mean less than market self-regulation, which ostensibly is already coming. Greenspan is convinced that, in the future, there will be a higher degree of self-restriction.

To questions in the sense of: "Will someone go to jail, too?", the three "wise men" were muted. Cox admitted that someone in this mess probably also broke the law, but he opined that cleansing with the help of the Justice Department is not "ideal", but that it is necessary to learn lessons from it all and prevent a repetition.

Congress Republicans replied to Democratic attacks on their faith in the free markets that the main responsible parties for the crisis were the para-governmental mortgage companies Fannie Mae and Freddie Mac, for which Democrats did not allow more regulation. Waxman asked the three witnesses about this, and they in turn admitted that the two companies were not responsible for the crisis, but contributed to it.
Similar article, different choice of words.

While reporting more or less the same things, the Delo article tries to portray Greenspan, especially to a casual reader, as "crushed", as thoroughly intellectually defeated, as wrong in everything he believed in for the past 40 years.

Yet, this is not the impression that one gets from the LA Times article, and indeed is probably far from the truth. Greenspan did trust the self-regulation of financial institutions more than he should have, and has admitted as much. But this does not change the fact that his trust in markets over regulation is, for the most part, well-founded and valid.

The editors of Delo, however, strive to make hay while the Sun shines. Once again, Gorbachev finished an excellent second, while Reagan was second-to-last.

2008-10-22

Harlem voters make an educated choice

Now, I think McCain is a sleazebag - which is not to say that Obama is a good choice - but this is great. Transcript:
Stern: ... and, most people said - Barack Obama. So what he said is, do you support Obama's views, but he attributed all of McCain's views to Obama. And it didn't sway anyone.
Quivers: But it didn't cause people to even flinch -
Stern: No. This is crazy. Listen to this.

Interviewer: Some people speculate that blacks are voting for Obama strictly because he's black and not because of his policies. So we took McCain's policies and pretended they were Obama's. This is what they had to say.

Interviewer: For the election, Obama or McCain?
Person A: I like Obama.
Interviewer: Now, what don't you like about McCain?
Person A: McCain seems to not really know what he's doing right now.
Interviewer: Are you more for Obama's policy because he's pro-life, or because he thinks our troops should stay in Iraq and finish this war?
Person A: I think because our troops should stay in Iraq and finish this war, I'm really for him with that.
Interviewer: Okay. Now, how about as far as him being pro-life. Do you support Obama in that case?
Person A: Yeah. I do. I support him in that case.
Interviewer: And if he wins, would you have any problem with Sarah Palin being vice president?
Person A: No, I wouldn't. Not at all.
Interviewer: You think he made the right choice in that?
Person A: I do.
Interviewer: Thank you very much for that and have a great day.

Stern: So the guy agreed with everything McCain is for, except he said he was for Obama. Here's another example.

Interviewer: Are you for Obama or McCain?
Person B: Obama.
Interviewer: Okay. Why not McCain?
Person B: Well, I just don't agree with some of his, you know, policies.
Interviewer: Now, Obama says that he's anti-stem cell research. How do you feel about that?
Person B: I believe that's - I wouldn't do that either, I'm anti - stem cell, yeah.
Interviewer: Anti-stem cell research. Now if Obama wins, do you mind Sarah Palin being vice president?
Person B: No. No, I don't.

Stern: Aight, there you go, and our third example, in which we found this woman.

Interviewer: This election, Obama or McCain?
Person C: Obama.
Interviewer: Now, why not McCain, what don't you like about him?
Person C: Umm... he sort of doesn't sound like he has enough... like he does - he's uneducated - because when he had, um, they had, um, both of the presidents speaking - he didn't sound like he knew what he was talking about too much, whereas Obama had facts and information when he was speaking.
Interviewer: Good point. Let me ask you this. Do you support Obama more because he's pro-life or because he says our troops should stay in Iraq and finish the war?
Person C: Um... I guess both.
Interviewer: Now if Obama wins, do you have any problem with Sarah Palin being his vice president?
Person C: Um, no - not at all.
Interviewer: You think she'll do the job?
Person C: I think she'll do the job.
Interviewer: Are you glad that he elected her to be the VP if he wins?
Person C: Yup.
Interviewer: Thank you very much.
Thanks to Eric Falkenstein on Overcoming Bias.

2008-10-20

Subprime mortgage vs. loan sharks

At the end of an otherwise fine article comparing loan sharking to subprime lending, Mark Gimein makes a doo-doo.

The core of Mark's article explains how loan sharking is not as profitable as you might think. Advance America charges $17.50 as its fee on a two-week $100 advance. If that were an annual interest rate, it would be 450+%. However, a huge proportion of borrowers default on their loans: the defaults work out to $49 per customer, while the average loan is $366. Advance America loses most of its fees to those who fail to repay their advances.

Then, Mark Gimein waltzes off into fantasy world and makes the following conclusion:
We've yet to see what lesson lenders draw from the subprime debacle. One possibility is that they will conclude that they need to stay away from any but the safest borrowers at all costs-that seems to be the direction they're heading in. And it's likely to be bad news for the economy. That'll mean less credit for those at the bottom and higher rates for everyone else. Another possibility, however, is that lenders will be very careful about raising rates in the hope that borrowers will be more likely to repay more affordable loans. Then they will run less risk of crossing what looks like the "fairness threshold" at which borrowers throw up their hands and give up. They might conclude, in other words, that they want to stay as far away from the payday-loan/sky-high-rate model as they can. That would take a little bit of rethinking of interest rates and risk from the credit industry. But then, it sure feels like this is a good time for some rethinking, doesn't it?
In his next article, I suggest that Mark could explain how rain is associated with umbrella use, so if everyone just left their umbrellas at home, it would stop raining.

The thing with risky borrowers is, they don't become less risky if you just charge them lower interest rates. If that were the case, the government could just give everyone free money, charge no interest rate, and count on 100% repayment. Who needs banks, eh?

It doesn't work that way.

The former of Mark's predictions is realistic and will come true. There will be less credit. Especially for people who cannot be relied on to repay.

2008-10-17

Detroit houses for sale: prices from $9,000

Yup.

The median property in Detroit sells for $9,250.

Here's just one listing (they're easy to find) for a 3-bedroom house, 1 bathroom, built 1941. Price: $14,900.

Dang.

We spend more each year on groceries.

Apparently, this is what happens in places where supply exceeds demand.

Why does no one want to live in Detroit?

Do a search on its demographics...

2008-10-15

South Africa sees the light on HIV

After years of HIV denial, in various assorted forms:
  • prime minister Thabo Mbeki and his hosting of alternative AIDS conferences;
  • governing party chief Jacob Zuma and his condomless rape of a woman he knew had AIDS, which small fact he didn't consider a problem because he showered afterwards;
  • health minister Tshabalala-Msimang and her advocacy that AIDS patients should simply get better by eating onions and beetrot;
after all that, South Africa now surprises the world with a new health minister who takes HIV seriously and calls for efforts against it.

Congratulations, South Africa. Way to go.

This all took place after Thabo Mbeki resigned:
Malegapuru Makgoba, vice-chancellor and principal of the University of KwaZulu-Natal, said that for the first time in years, South African academics were free to "state that HIV causes Aids without getting threats".

"It is a liberating experience," he said at the conference. "You don't know how long we suffered in bondage."

Former President Thabo Mbeki for many years suggested that HIV did not lead to Aids.

He resigned last month and his successor Kgalema Motlanthe quickly moved to name a new health minister.
Finally.

2008-10-13

Too big to exist #2

Here you go, exactly what I've been saying:
“Prior to Lehman, there was an almost unshakable faith that the senior creditors and counterparties of large, systemically important financial institutions would not face the risk of outright default,” notes Neil McLeish, analyst at Morgan Stanley. “This confidence was built up ever since the failure of Continental Illinois (at the time the seventh largest US bank) in 1984, a failure in which bondholders were [fully paid out].”

[...]

This would seem to put the complaints about Fannie Mae and Freddie Mac, and their implicit government guarantees, in proper context. Everyone, or at least the big guys, was behaving as if there was no chance that the government would allow them to fail.

The rules will have to be torn up and rewritten after this is all over and done with. As things stand, there are plenty of too-big-to-fail institutions remaining. They must either be reduced in size to the extent that the government's promise to let them fail is credible, or they must become more heavily regulated, particularly where leverage is concerned. We simply cannot allow firms to grow large and vulnerable enough to threaten the economy and hold it for ransom, to be paid by taxpayers.
Emphasis my own. From The hazard in moral hazard, on the Free Exchange blog.

James Bond at work

Two interesting tricks that the British used successfully against the IRA:
Having lost many troops and civilians to bombings, the Brits decided they needed to determine who was making the bombs and where they were being manufactured. One bright fellow recommended they operate a laundry and when asked "what the hell he was talking about," he explained the plan and it was incorporated -- to much success.

The plan was simple: Build a laundry and staff it with locals and a few of their own. The laundry would then send out "color coded" special discount tickets, to the effect of "get two loads for the price of one," etc. The color coding was matched to specific streets and thus when someone brought in their laundry, it was easy to determine the general location from which a city map was coded.

While the laundry was indeed being washed, pressed and dry cleaned, it had one additional cycle -- every garment, sheet, glove, pair of pants, was first sent through an analyzer, located in the basement, that checked for bomb-making residue. The analyzer was disguised as just another piece of the laundry equipment; good OPSEC [operational security]. Within a few weeks, multiple positives had shown up, indicating the ingredients of bomb residue, and intelligence had determined which areas of the city were involved. To narrow their target list, [the laundry] simply sent out more specific coupons [numbered] to all houses in the area, and before long they had good addresses. After confirming addresses, authorities with the SAS teams swooped down on the multiple homes and arrested multiple personnel and confiscated numerous assembled bombs, weapons and ingredients. During the entire operation, no one was injured or killed.
See the original article for another interesting trick at the end. Thanks to Bruce Schneier.

2008-10-07

Feldstein's loan proposal: Similarities to my call for a decentralized money supply

Steven Levitt summarizes on Freakonomics the following proposal by Martin Feldstein:
Writing in The Wall Street Journal, highly respected economist Martin Feldstein proposes that the government provide low-interest loans to consumers in return for mortgage debt.

These government loans would not be secured by the borrower’s home. The loan would need to be paid back even if the home goes into foreclosure and would not be eligible for relief in bankruptcy.
The narrower focus of Martin's idea notwithstanding, notice the similarities to the decentralized money supply I recently proposed.

I wrote recently how a true solution to the smaller and bigger banking crises we experience every decade requires us to turn the economy on its head. We need to keep the good parts of the economy which drive our progress: most importantly, capitalism and a limited role of the state. However, we need to replace the parts that are dysfunctional: banks and the monetary supply, which facilitate bubbles, wasteful boom and bust cycles, and dangerous depressions.

The fragility and volatility brought on by banks and bank-like institutions can be done away with by prohibiting interest-bearing loans (see discussion under Without banks). All investment would need to be driven by equity, as in the Berkshire Hathaway model. Meanwhile, people would still need to be able to get financing for emergencies and important personal investments. By decentralizing the money supply, everyone would be able to borrow against their future income - and the system would make people repay.

2008-10-04

Another year, more St. Kitts power outages

Last year, I noted that there was no power for 2 consecutive days during our first month of living on St. Kitts. The ostensible reason given was that the government-run electricity company was installing a new power generator to prevent load shedding (i.e. outages) in the future. Similar prolonged outages repeated a few times in subsequent months, but after that the situation stabilized. We have had fairly decent power supply over the course of 2008.

That was until October. On October 1st, we noticed one or more outages, which preceded a fire in the power plant on the morning of October 2nd. This fire brought 50% of the generating capacity offline, and we noticed this as frequent and repeated outages on October 2nd and 3rd. As of today, October 4th, electricity is being shut off at different parts of the island at largely unpredictable times and for largely unpredictable durations. Our area was without power for ten hours, from 08:30 to 18:30 today.

It all looks like this is going to continue at least until Monday. They're supposed to be putting online a smaller generator that was previously in maintenance, which will bring capacity up to 80% of peak demand. Further blackouts are certain for at least two weeks, as it takes time to repair at least the smaller one of the two generators that were damaged in the fire. With a power generating capacity of only 60% today, however, tomorrow we're most likely looking forward to another power-less Sunday.

This would have all been much easier to bear if the development we live in, St. Christopher Club, had a generator on backup, as many other businesses and institutions do, as well as most developments that cater to tourists. Unfortunately, the people who decide such things here, did purchase a generator, but are not keeping it online, as they consider the cost of maintenance too expensive. Apparently, the impact on the residents' quality of life (and in our case, loss off time that could be spent working) was not a factor in their equation.

I'm currently looking for a UPS solution, one that lasts longer than classic battery-based UPS, and can provide power to laptops and office equipment, as well as possibly a refrigerator, for at least 12 hours, although preferably up to 48. I'd like to avoid an oil-based generator, as they are loud and require frequent refueling, and thus onerous trips for gas. A nice solution would be a self-refueling UPS system based on water and fuel cells, which when powered would separate hydrogen and oxygen in water through electrolysis and store them in separate tanks, but when unpowered, would burn the hydrogen and oxygen back into water, producing electricity in the process. The best solution would be a closed system that doesn't burn oxygen from air, which would allow it to be stored inside without a risk of suffocation - if there is any such risk at all; it ought to be durable, not requiring new expensive batteries every 3 years; and it might be able to store sufficient capacity to last 12 hours, or even possibly days. Any tips?

Edited: Here's a fuel cell. Delivers up to 5 kW. Now all someone needs to do is bundle this into a system that will electrolyze water when there's power, and burn hydrogen when there is not.

It would sure beat 500 kg worth of batteries. That need replacing in 3-5 years.

2008-10-03

A decentralized money supply: Solving the scarcity of money

A major problem with all currencies we've had so far is that varying amounts of currency are available in different parts of an economy. This leads to sharp depressions in the prices of products and services in parts of the economy which are transactionally far from the sources of money, and sharp price increases in other parts of the economy which are close to the sources of money. There is no greater fundamental cause for this than simply that there's more money near the source, than there is farther away from it. These leads to injustice as parts of the economy that are transactionally far from the money sources struggle along with the paltry amount of currency that they can get, while people who are closer to the money sources can effectively exploit the rest of the economy, since they live in an environment where money is abundant.

The cure for this is to decentralize the supply of currency, and the most effective way to decentralize is to let every person be their own bank.

What I am describing would be a virtual monetary system, reliant on information technology, where instead of hauling gold or carrying cash, people would have accounts not with other people's banks, but directly with a single central bank.

The sums on those accounts would start at zero, but could be positive or negative. People could borrow from their future income without requiring anyone's blessing. Your debt would be not to anyone in particular, but to the economy at large. This solves the problem of the initial distribution of money - everyone starts with zero; then some people go into minus, and some go into plus. I would propose that there's no unnecessary interest, neither on positive nor on negative amounts, to avoid people spiralling into debt. Instead, to avoid people running up infinite debt, there would be a maximum amount of debt that they can have, and this amount would decrease towards zero with age, to avoid people running up debt as they approach their deaths. If someone exceeded their permitted maximum debt, they would be arrested and sent into forced labor until their balance returns to zero - i.e., they pay off their debt.

There would have to be some minor systemic adjustments to maintain a system-wide balance of zero as some people will die prematurely with negative amounts. Such systemic adjustments could take the form of a small interest rate on negative balances to further motivate repayment, as well as a small deflation of positive balances to motivate investment rather than hoarding currency.

Since money could be originated by everyone, there would be sufficient supply in all parts of the economy, and prices in different parts of the economy would cease to differ as much. This is assuming an absence of banks, which would be achieved by prohibiting interest-bearing loans, requiring all non-charity lending to take the form of equity investment. (See Without banks, in particular the ensuing discussion with Wei Dai.)

This might be an all-around better monetary and financial system than any we have now. The absence of interest-based lending emphasizes equity-based investment, which leads to better supervision of the investment process, no wasteful boom and bust cycles, and better results in the long run. A currency that slightly deflates stimulates everyone to invest, while the ability to borrow from one's future income up to a point guarantees a way out in the case of an emergency.

Cochrane on Why the bailout would be a disaster

This, I think, is a thoughtful rebuke of the Treasury-proposed bailout. This is the first time that I've read an economist weigh in on the topic, and my thoughts were, yes, that makes sense. On Freakonomics.

2008-10-01

The harm of banks: Economic booms and busts

I have argued recently that banks cause economic harm for a few reasons. One of those reasons is that the banks' varying lending moods cause expansion and contraction of the effective money supply. This leads to economic booms driven by malinvestment, as people compete to spend easy credit, followed by economic busts driven by a widespread realization of investment mistakes.

A counter-argument that I've seen more than once is such as made by this correspondent:
I disagree with the underlying premise that volatility is a bad thing and that the goal of "architecting" a financial system is to smooth-out the ups and downs. I have no problem with volatility. There's no law of nature or moral principle that states that the optimal state of the world is an even keel with minimal volatility.
The purpose of my proposal to phase out fractional reserve banking altogether is not to do away with volatility for the sake of itself. Rather, it is to remove the systemic harms and risks of this volatility, which are:
  • On a small scale, when the malinvestment cycle caused by lending trends is small, the economic bust that follows is a form of pollution. Economic stability is a common good that benefits everyone who wants to make solid business plans for the long run. When this stability is distorted by economic busts, a common good is being destroyed just as if a factory spews toxic ash into the air of a residential area. The economic cycles have strong negative externalities, and it is the role of government - even small government - to eliminate such externalities. Just like a factory must not pollute the environment - or else must pay for it - banks must not pollute the economy; or else must pay for it. But they cannot pay, because it would annihilate their profit. Therefore their business model us unviable. This is a principled libertarian argument.
  • Also on a small scale, the economic booms and busts are not something that's valuable for the economy. It's not that the busts are damaging, but the booms are beneficial, so it's all worth it in the end. No: the booms themselves are damaging, because they are widespread malinvestment; booms are valuable resources and human time that are largely being thrown away. The busts, in turn, are recognition of this waste, and a return to saner principles. The economy would have been better off if there was no boom and no bust. This is a pragmatic utilitarian argument.
  • On a large scale, when the boom is too long and the bust too large, this can lead to acute and widespread unemployment, threatening the individual existence of a large proportion of people, which in turn threatens the existence of a libertarian state.
Yes, a libertarian state can permit banks, but at the expense of polluting a common good of economic stability; at the expense of large scale waste of resources during lending booms; and at risk of being toppled, and replaced with a much less desirable regime, when a malinvestment boom that lasted too long results in a bust that's too strong and too large for a large proportion of people to survive without expropriating others.

2008-09-29

Banks and libertarianism

I would argue the following.

If banks have negative economic externalities, such as causing boom and bust cycles, and such as causing large-scale economic disruption when failing; then you cannot consistently believe in libertarian principles, while also being in favor of banks.

I have described previously how banks are inherently volatile and prone to collapse based on rumors alone - unless their depositors are insured with a system, such as the Federal Reserve, which can print money freely.

On the other hand, if banks and bank-like institutions are protected like this, then they require regulation to avoid moral hazard leading to exploitation of the money printing facility.

The stability of banks thus inherently goes hand in hand, not only with big government, but big government with the ability to print money freely.

I suppose that, to libertarians, this should be anathema. There is no greater power in the world than to have hundreds of millions rely on your currency, while you have the ability to print it freely. Meanwhile, the marriage of government regulation and banking that is required for banks to be stable, limits competition and encourages the development of a few behemoths who monopolize the banking market - and, by extension, play a vastly (too) powerful economic role. Perhaps leading to an even greater chance of systematic failure.

Libertarian policy calls for a small and effective government that operates based on a few robust principles. These might be:
  • Rule of law.
  • Respect for property.
  • Using coercion only to prevent coercion.
Note that these principles are all reactive. A libertarian small government does not manage the economy. Such a small government is not proactive. It is simply a guardian of people's rights. Such a government only acts when called upon for: when an individual's rights are threatened, or when a dispute needs to be decided upon.

For reasons of principle, a libertarian government cannot get involved in regulating the financial sector, for instance. That would be 'managing' the economy. Instead, the following two states of the world are consistent:
  1. Banks are permitted, but not backed by the government. They frequently fail, often merely based on rumor alone. Depositors lose money, and might therefore consider things more thoroughly next time. But no one else is harmed. Wiser people spread advice that banking is a form of gambling, and that the interest you receive on your account is largely offset by the likelihood that the bank will fail. Unwise people continue to make bank deposits, and periodically lose money, but negative externalities for uninvolved parties are small.
  2. Or, perhaps, it is found that banks do indeed cause substantial negative externalities by causing boom and bust cycles and by spreading a systemic risk of failure. In this case, the libertarian government must react to prevent negative externalities on the uninvolved, and therefore prohibits fractional reserve banking. All loans are thus required to be credited with money explicitly provided for the full duration of the loan.
So: either fractional reserve banking doesn't truly have negative externalities, such as boom and bust cycles and spreading of systemic risks; or else, a libertarian government should prohibit fractional reserve banking.

Is there any third option?

2008-09-27

Monetary supply: The role of borrowing in economic growth

Note: This article is concerned with a less important issue than my previous post. The question of monetary supply becomes simple if we first recognize the fundamental issue of whether, in the first place, we need banks.

In my previous article, Without banks: A proposal for a prosperous and stable economy, I discussed the role of banks in the money supply. I described how an economy with institutions that lend long and borrow short is inherently volatile and exposed to risk. I proposed that this volatility and risk could be avoided by phasing out the institutions that lend long and borrow short - eventually banning this business model altogether; requiring that all loans be covered by credit explicitly provided for the duration of the loan.

Towards the end of that article, I added a monetary proposal: shifting to a fixed, or predictable, volume of currency.

Central banks, with their ability to print limitless amount of money, currently exist for two purposes. One purpose is reasonable, if we are to have banks at all: central banks create money in times of crisis so that they can bail out depositors at failing banks. The other purpose is the subject of this article: creating money in normal times to 'stimulate' the economy. That is, to poke people with the stick of inflation, 'stimulating' them to deposit their money with banks.

I discussed how banks inflate the supply of money by a factor of about 10, and how the varying moods of the banking sector can lead to economic booms as well as busts. A 'boom' occurs when all the borrow-short/lend-long institutions lend freely, to the maximum amount they can. This increases the effective amount of money in the system vastly, and there's a lot of economic activity going on - much of which later turns out to be waste. A 'bust' occurs when it dawns on people that much of the economic activity during the 'boom' was waste. This means that lots of the loans that were made were bad loans that aren't going to be repaid. This threatens the lenders' capital reserves, which are already low because they've been lending as much as they could. So the only thing that they can do is decrease lending. I showed in my previous article how, if lending is decreased as a proportion of incoming deposits only by 10 percentage points, say from 90% to 80%, this eventually reduces the effective amount of money in the system by 50%.

When the effective amount of money in the system is decreasing, how are even those borrowers, whose loans might have seemed sensible before, going to repay their debt? Many of them aren't; there's insufficient money to go around. So now, as banks lend less, borrowers are increasingly going bankrupt, producing what is called the bust.

I argued that, in an economy with no lending long and borrowing short, and with a fixed supply of currency, there would be no boom and bust cycles, while sturdier bridges between prospective lenders and prospective borrowers would arise.

However, if the supply of currency was fixed, the role of borrowing in such an economy would be less.

The reason is that, in an economy where the supply of currency is constantly being inflated, everyone who holds currency has to lend it in order to just stand still. If you keep your money buried in a jar, its value is eroded over time because the amount of money in the economy is steadily increasing, compared to the amount of services and products. Whatever the economic growth, which would normally cause prices to slowly decrease due to increasing production - the money supply grows more. Holding bare currency is thus not an effective store of value.

In an economy where the monetary supply is fixed, the reverse is true. Holding bare currency does become an effective store of value. On the face of it, this sounds good. It may very well be. Banks, however, would have you believe that it isn't. The reason they would have you believe that is, in an economy where currency is a good store of value, their business would do much worse. If money is losing strength, people are forced to put their money into banks. It's common sense: put the money you don't need in a savings account, or else you're losing value.

Since banks are institutions that lend and borrow on a massive scale - a magnitude larger than even the amount of issued currency in the system - it is important for the health of their business that everyone believes that lending and borrowing is crucial to economic prosperity. Since everyone understands that lending and borrowing is not crucial for their day-to-day life, banks would have everyone believe that lending and borrowing is crucial for economic growth. The classic argument is, entrepreneurs need to be able to borrow money to create new products and services that we all need. But do they?

[Edit: removed an unnecessary argument that was probably defective.]

Does Intel need to borrow money in order to build a factory that will manufacture the next generation of faster processors? They do not. They have cash. Does Microsoft need to borrow money in order to build a new software product? They do not. They have cash.

I do not believe that all businesses can be bootstrapped. However, I do believe that investing is best when done by people who already have money - who have proved that they have the capacity to earn it and keep it; who do not need to borrow it from a bank. And the best way for such investors to be repaid is through an equity stake, i.e. by earning a proportion of future profits. If their investment succeeded, i.e. if it has increased production of a resource that is valuable to the economy, then their dividends will pay it back. This is not a zero-sum game, because everyone can be continuously investing in their businesses to improve production, and if all such investments are smart, then everyone will be paid back - not necessarily in a larger total amount of money, but with larger total purchasing ability, than if they chose not to invest.

I do not believe that bank-like loans are as crucial to economic growth as banks and other borrow-short/lend-long institutions would have us think. There is a case to be made for borrowing on a reasonable scale. However, the rampant lending on which our current economy is based, fuels boom and bust cycles, encourages a gambling culture of investment, and introduces a systemic risk.

In a fixed monetary supply economy, people would still borrow and lend, but more investment would be made by people investing directly into things they think are worth investing, acquiring equity stakes. It would be the reasonable way. It in fact already is; however, we now have short-borrowers/long-lenders who make it easy to 'invest' money with them. But it is not 'safe'; and it is not healthy for the well-being of the economy, because the people who might otherwise invest money directly into plans they think are worthy, instead pass on their money onto agents whose activities have more to do with gambling and where genuine production improvement is just one of the possible side effects.

And if it turns out that people in a fixed monetary supply economy do not invest or lend enough, and that growth suffers as a result - we can always cause the monetary supply to start to steadily increase, thus poking people to consider investing their savings. The economy might benefit if people used their minds and spent more time thinking about where to invest; rather than abdicate responsibility and do the default thing, putting their money into equivalents of banks.