Reality is often inconvenient, but always right

I’ve mentioned before that I’m skeptical of the rate cuts, bailouts, and stimulus programmes being put forth to “fix” the credit crisis.  Don Boudreaux, being a real economist rather than simply a glib dilettante, cuts right to the heart of one of my concerns:

• Relative price adjustments and aggregate demand (Cafe Hayek)

“Other persons, upon encountering an unusually large number of price adjustments occurring simultaneously, worry that catastrophe looms.  To avoid this awful outcome, they demand more demand.  They demand either more money be injected into the economy, or more direct spending by government.  The idea is to raise demands across the board to levels that will make the old prices — the pre-adjustment prices — work as they worked before the underlying reality changed.”

[...]

One of the many blind spots in this view is that it causes its adherents to overlook the underlying changes in reality that sparked the price-adjustments in the first place.

This is one reason why the “quick, add more credit” fixes of the past year or so haven’t worked.  The problem isn’t simply that there isn’t enough credit to go around — it’s that the underlying understanding of credit (particularly, what constitutes a risky financial security and which packages of credit are good) has changed.  Mostly, people who used to be fairly confident about their investments — who had a strong model of how the credit markets worked — discovered that they’re wrong, and lost a whole bunch of confidence.  Simply giving these people (or their institutions) easier access to credit won’t help.

Another example is the pending (though not entirely certain) American auto-industry bailout.  One reason why the “big 3″ are in shit up to their eyebrows is that they’ve invested heavily in large and high-profit SUVs and crossovers*.  That worked fine when credit and gas were cheap and people were more skeptical about climate change.  Throw in a couple years of rising gas prices, more and more worrisome credit prospects, and the ultimate conversion of climate change from a scientific topic to a religious experience** and all of a sudden you’re not selling Hummer H2s.  The underlying reality of the vehicle market has changed; giving GM ten billion dollars or so isn’t going to do any good by itself.

Of course, seizing upon the symptoms of the crisis — less credit, fewer cars being sold — is a heck of a lot more tractable than first trying to figure out which of the changes are relevant, then trying to figure out how an enormously complex system of markets can adjust and compensate, and finally trying to figure out how to help it along without producing the sort of toxic incentives that got us into this mess in the first place.  That’s the appeal of the “pump in the money” solution — it’s easy to understand, easy to sell, and feels like it ought to work.  Of course, it’s also equivalent to treating cancer with morphine — the cancer’s still there, but the pain’s gone… and opiates make you feel a hell of a lot better than chemotherapy.

——

* Yes, there are lots of other reasons, and if the auto bailout passes I’ll probably get angry enough to rant about them at great length.

** “Do you believe in Global Warming?”  Gah.

I’ve never seen inorganic produce, either

This tidbit of snark comes pre-packaged from the Royal Society for Chemistry:

• £1,000,000 for 100% chemical free material

In particular:

Dr Neville Reed, a director of the RSC, said today: “I’d be happy to give a million pounds to the first member of the public who could place in my hands any material I consider 100% chemical free.

“Should anyone do this, we will see thousands of years’ worth of knowledge evaporate before our eyes. We would have to tear up the textbooks, burn the degree certificates and retrain the teachers.”

And then some.

Can government create wealth?

I’m a bit leery about all the massive sweeping “stimulus plans” being proposed lately to somehow “fix”* the world’s economies.  (It seems to me that a “stimulus plan” is what you get when you have a nerd with a vibrator in one hand and a neurology textbook in the other.  Um.  Or so I’ve heard.)  Mostly I’m skeptical because I can read, and over the last fifteen years some of that stuff about the Soviet Union’s factory farms and Five Year Plans sunk in.  When it comes to things that, taken to extremes, lead to mass starvation and gulags, I prefer to learn from other people’s experience.

As a good grad student, though, I’ve conditioned my poor little brain reflexively to think from generalities to specifics.  Most of these stimulus plans are spiritual successors to the New Deal — itself more of a hodgepodge of heavy-handed quick fixes than a Grand Unified Economic Plan, though your high school history teacher is unlikely to tell you that.  They operate on a simple theoretical model:

1. Drastically increase money supply
2. ???
3. Profit!

Step 2 is the uncertain part, but it deserves a whole heck of a lot of time and effort and I just want to write something quick and snarky.  We’ll leave it for later and concentrate on step 1.

If you’ve been paying attention over the past year and a half or so, you’ll have noticed that step 1 has been very popular in the form of “central banks lowering interest rates”.  This makes it easier for private banks to borrow money, which in theory ought to make more credit available to just about everyone and (through step 2) improve and/or magically fix the economy.  Yeah, how’s that been working out for us?  Not so fucking much.

Here’s the problem: when government “puts money into the economy”, it’s not coming from some magical hoard of pristine cash that they’ve been keeping around for emergency purposes.  It has to come from somewhere, and that “somewhere” is usually… yeah, the economy.  In the case of lower interest rates, it comes from inflation — same amount of wealth plus more money in the economy yields each existing dollar being worth a bit less.  It’s like a tax that you don’t have to file and can’t vote against come election season.

Since I’m lazy, I’ll quote from View From The Porch:

Look, governments do not generate revenue, okay? They don’t make anything, sell anything, or create anything… (Well, except red tape and bizarre and inexplicable regulations, but those are hard to charge for when you can get them for free at your local church or bridge club.)

(Read The Whole Thing.)

I wouldn’t go so far as to claim that governments are completely useless — they do provide a framework for working out and enforcing contracts, might be able to do something about turning external costs into proper incentives, and that whole “national defence” thing is nice if you have a bellicose neighbour who wants to invade — but these aren’t consumer goods.  Government can’t crank up production on contract law to sell more… uh, see?  The metaphor breaks down immediately, and that’s my point.**  So, no, government can’t create gross wealth in the way we seem to want it to.

That said, it’s not as though there’s nothing that government can do to help along an ailing economy (should it choose to do so).  I’ve suggested that, past a certain point, government can’t create gross wealth, but that’s not really what we’re after — we’d prefer net wealth, the stuff that actually ends up in our pockets.  Net is gross minus expenses, so if government can’t increase gross, maybe it can reduce expenses.

Since it’s Thanksgiving for three hundred-odd million of you, I’ll link to Vin Suprynowicz’s canonical essay:

• For what do we give thanks?

Lookey here:

In his “History of Plymouth Plantation,” the governor of the colony, William Bradford, reported that the colonists went hungry for years because they refused to work in the fields, preferring to steal. Gov. Bradford recalled for posterity that the colony was riddled with “corruption and discontent.” The crops were small because “much was stolen both by night and day, before it became scarce eatable.”

[...]

[T]he Mayflower Compact had required that “all profits & benefits that are got by trade, working, fishing, or any other means” were to be placed in the common stock of the colony, and that, “all such persons as are of this colony, are to have their meat, drink, apparel, and all provisions out of the common stock.”

A person was to put into the common stock all he could, and take out only what he needed — a concept so attractive on its surface that it would be adopted as the equally disastrous ruling philosophy for all of Eastern Europe some 300 years later.

[...]

By harvest time, 1623, Gov. Bradford was reporting that, “Instead of famine now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God.” Why, by 1624, so much food was produced that the colonists actually began exporting corn.

What on earth had transpired?

It was simple enough. In 1623 Gov. Bradford simply “gave each household a parcel of land and told them they could keep what they produced, or trade it away as they saw fit.”

So by the simple expedient of getting the fuck out of the way, Governor Bradford managed to increase the Plymouth colony’s net wealth by so large a margin that they went from starvation to surplus in two years.

Hmm.

Nah, never happen.

——

* I imagine they’ll work fine, though.  Think of the way you “fix” a kitten, and apply that to your economy.  Actually, there’s a strong parallel between government and reproductive veterinary medicine — as another example, government “services” the people the way a bull “services” a cow.  This bears further study.

** Whew, that was close.

Mid-week misanthropy, vol. 22

Remember this?

• GWU fails the satire test

Now, here in Canuckistan, we’re always trying to one-up our neighbours to the south.  One problem, however, is that not all of us are perfectly familiar with the idea of “satire”:

• Ottawa university boots cystic fibrosis from charity drive (National Post)

The Carleton University Students’ Association has voted to drop a cystic fibrosis charity as the beneficiary of its annual Shinearama fundraiser, supporting a motion that argued the disease is not “inclusive” enough.

Cystic fibrosis “has been recently revealed to only affect white people, and primarily men” said the motion read Monday night to student councillors, who voted almost unanimously in favour of it.

Now, that ain’t necessarily so.  LabRat writes:

Needless to say, CF doesn’t affect only “white males”. It’s an autosomal recessive that affects males and females in the same ratio, and while it mostly affects those of European descent, that’s hardly universal- one might point out that there has been more than a little gene flow on this continent in the last couple hundred years.

That said: what the fuck is the point, here? If we’re feeling particularly charitable, we might suspect that the CUSA councillor who proposed this motion had some evidence that “white male diseases” get an abnormally large share of research funding, and sought to redress the balance.  (“Sorry, CF sufferers, but you’ve had it too easy with your privileged ‘white male’ disease.  We need to take some of your research funding to make life more fair for everyone.”)  I do find it rather difficult to believe that CF gets more research funding than, say, breast cancer, but I haven’t been able to find much in the way of hard data (which makes me suspect that the CUSA couldn’t find much in the way of data, either).

I suspect, though, that this is a simple matter of knee-jerk ideological posturing: stupidity, rather than malice.  Someone came across the notion that CF is a “white male disease”, and saw the “white male” part rather than the “disease”.  Not wanting to come across as racist and sexist, the CUSA voted to give to a more ideologically acceptable charity.  They were just operating under the heuristic that “inclusive is better”, and now they’re wondering what all the fuss is about.  Turns out you actually have to think about what you’re doing if you want to avoid spectacular fuckups like this one.

——

Some of you may be a bit nonplussed by the above turn of events.  After all, the CUSA is a “students’ union”, and unions are generally supposed to champion and support their members… whereas the CUSA is instead embarrassing them and (presumably) limiting Carleton’s donation income.  But even when unions do what they’re expected to — stick up for employees — things don’t always end up on the clever side of the fence.

• Union fights for Pa. bus driver who hit pedestrian (inyork.com)

ERIE, Pa.—A union is fighting the firing of municipal bus driver in northwestern Pennsylvania who struck and killed a surgeon three years ago and then hit another pedestrian in September. That was the third time the driver hit a civilian since 2000.

(One is given to wonder how many soldiers the driver has hit, but let’s not let a quibble over language distract us from the snark.)

On the face of things, this seems like a pretty dismal case for the union: a bus driver who hits (at least) three people in eight years should probably lose s/h/its job.  But perhaps there’s something deeper going on that makes this firing unjust: maybe, for example, a whole whack of other Erie transit pilots have hit pedestrians — even more than this guy — and our friend from the above article is being unjustly persecuted.

Nah, not so much.

Among the grievance issues is whether Justka’s past driving record is relevant to his current firing.

Really?  The fact that this driver has a history of playing pedestrian pinball is supposed to be irrelevant when he does it again?  I don’t fuckin’ think so, Sparky.  Union charter or no, in this case your position is indefensible and the best way out is to, erm, throw your guy under the bus.

(Sorry ’bout that.)

——

Let’s have a little quiz.

Suppose that your country’s government published a report in which violent crime was shown to be up 22% from the previous year.  You’d probably be upset, maybe even vocally so.  Now suppose that your country’s government reacted to your dismay by telling you, “Hey, it’s not really that bad.  Violent crime has always been this high; we’ve just been deliberately under-reporting it for a while.  For how long?  Well, we’re not quite sure… ten years, maybe?  Longer?”  Would you be:

1. Furious?
2. Despondent? or
3. British?

No points for guessing.

• Violent crime up 22% (Daily Mail)

The Home Office admitted that as many as one in five of the worst attacks has been wrongly classified in published figures.  As many as 4,000 serious assaults each year were mistakenly recorded as minor incidents – and officials conceded they ’simply do not know how far back it goes’.

The tightening of the rules has seen figures for serious violent crimes rocket by 22 per cent compared to last year – and confusion over the figures makes it impossible to say how much of the rise is genuine.

Now, why would they do such a thing?

Police have been placed under severe pressure by ministers to reduce the level of serious violence on the street.  Critics may claim this provided an incentive for officers to downplay the gravity of assaults where – while the intent was grave – the actual injuries suffered were minimal.

This critic shall indeed make that claim.  Incentives work marvelously for changing people’s behaviour; of course, the change they make may not be the change you had in mind.  We’ve already seen this with the NHS; I guess we’re going to see more of it.

(How’s that cricket ball control working out for you, anyway?)

——

Speaking of violent crime: domestic violence pisses me all the fuck off.  What really chaps my ass about the situation is the way The Powers That Be tend to brush battered partners off with restraining orders rather than do anything useful to help.  (I’ve written about this before — well, mainly I just linked to LawDog’s blog, but still.  He did a fantastic job, anyway.)  Suppose you’re being menaced by someone who has repeatedly beaten you in the past — do you really think you’ll have time to call 911 and wait for the police to show up and arrest the bastard before you get beaten again?

Erm, the police are going to arrest the bastard for violating a restraining order, aren’t they?

• Ontario to stiffen restraining order law (Globe and Mail)

TORONTO — Joan White sees first-hand that the current system in Ontario for protecting women fleeing domestic violence doesn’t work. As the supervisor of two shelters run by the YWCA in Toronto for battered women, she can reel off numerous examples of victims who live in fear even after leaving their abusive partners and obtaining a court-imposed restraining order.

One woman who arrived at the shelter earlier this year, for instance, had obtained a restraining order that barred her physically abusive husband from coming within 500 metres of her and her two young daughters. But that did not stop him from showing up at the shopping mall where she works and taunting her. The police merely warned her husband not to do it again. The woman, fearing for her safety, quit her job and is in hiding.

Fuck!

Reading on, we discover that the province of Ontario plans to “provide more protection to abused women by treating a violation of a restraining order as a criminal offence.”  Apparently, until now it has just been a cruel joke.

I’m not normally in favour of increasing government spending, but I’d be happy — nay, eager — to pay higher taxes if they’d go to giving everyone granted a restraining order against an abusive partner a Spyderco Delica and a week-long trip to RMCAT.  If more abusive partners started getting gutted like rainbow trout, I bet we’d see a lot less domestic violence.  (It’s that “incentives” thing again.)

——

And while I’m complaining about Ontario:

• Ontario considers ’symbolic’ cost cutting (Globe and Mail)

TORONTO — Several symbolic measures are being considered by Ontario’s government amid a sagging economy, including freezing the salaries of politicians and senior bureaucrats, as Canada’s most populous province heads into what “feels like” a recession.

“Symbolic measures”.  ““Feels like” a recession”.  Do I really need to elaborate?

Well, okay.

Upcoming restraint measures will be “largely symbolic,” Mr. McGuinty said Wednesday, but he stressed “it’s important for us to demonstrate that we are being prudent in our dealings with taxpayer dollars.”

Finance Minister Dwight Duncan said he hoped to have a detailed plan in place by next week, adding that while the new restraint plan will look at more than politician salaries, it won’t create huge savings.

“They won’t generate large sums of money. We’ve already begun a process of slowing down new investments in my fall statement and everything’s on the table,” Mr. Duncan said.

I don’t think anyone’s going to be surprised by the amount of time and effort that politicians will spend pandering to the public-opinion-of-the-week, but it’s unusual for them to be so open about it.

A small meditation on intractability

If you were to ask me why centralized management of an economy large enough to be interesting never works, I’d probably start by talking about how complex economies are.  The classic example is Milton Friedman’s disquisition on how to make a pencil; the story of how I can (if I choose) drink Staropolskie Zlote is perhaps only distantly related, but it involves beer so I’d probably tell that one instead.  There are simply too many things going on in a meaningful economy for one person — or even a group of experts small enough to function efficiently under Coase’s ceiling — to keep track of everything that needs managing.

In a free market, the “things going on” are left to manage themselves, and as price signals propagate around — maybe pencils aren’t selling well this year, so the price of graphite goes down and high-end tennis racquets become more accessible* — they either adapt to changing circumstances or go out of business.  This massively interconnected network of suppliers, applications, and prices is implicit and ephemeral, and that makes grass-eaters acutely nervous.  Shouldn’t someone be in charge of the whole thing before it precipitously implodes?  Once again we run into the problem that economies are too big for one person or organization to get a handle on.

The classical solution among “planners” is to add more people, despite the fact that adding more people has a dismal track record.  They add more and more people, but because of their atavistic desire to have someone in charge many of these people add nothing but hierarchy and administrative overhead.  Soon they end up with a system which, though it’s still nowhere near as complex as what it’s trying to capture, is itself too big to be reasoned about or kept track of.  Nevertheless, comforted by the very scope of their system, they ask one person or a group of people to do exactly that.

What I’m trying to say, dear friends and welcome guests, is that it’s time for another example of Farm Bill idiocy.

• USDA helps millionaires get millions (SunJournal.com)

A sports team owner, a financial firm executive and residents of Hong Kong and Saudi Arabia were among 2,702 millionaire recipients of farm payments from 2003 to 2006 – and it’s not even clear they were legitimate farmers, congressional investigators reported Monday.

They probably were ineligible, but the Agriculture Department can’t confirm that, since officials never checked their incomes, the Government Accountability Office said.

That’s right: not only is the economy too big and complex to be controlled by regulatory fiat, but the government is too big and complex to be controlled by regulatory fiat.  Y’see, it’s not that the USDA didn’t have access to income information… it’s just that they’re “developing a programme” which’ll be ready in a few years, assuming that it gets approved.

John Johnson, deputy administrator in the department’s Farm Service Agency, said officials there are in touch with the IRS to devise a system for including tax information in its sampling program to determine eligibility.

Of course, such a programme would be hideously complex.

The report said Agriculture field offices have been able to request that recipients submit tax returns for review.

But the administrator in charge of the payment programs, Teresa Lasseter, told the GAO, “Requiring three years of tax returns initially from over 2 million program participants was not a viable option or cost-effective alternative.”

(Dear schoolteachers: please teach even your dim-witted students that commas are neither parentheses nor dashes.)

Even getting one of the details right — income-based eligibility — in a single programme, which focuses on supplementing rather than controlling only one sector of the economy is too much to ask of a gigantic government bureaucracy.  Nevertheless, we’re arrogant enough to think that we can legislate our way out of the credit crisis, and fix by government fiat any real or perceived injustices in not just our economies but society as a whole.  You’d think we’d fuckin’ learn — after all, we’re not extinct yet, so we must be pretty good at something.

——

* Go read Russ Roberts’ The Price of Everything already!

Grasping capitalists in an unregulated market

Earlier I wrote about British Columbia’s ban on selling junk food in schools, and the subsequent and inevitable black market junk-food dealers who popped up in response.  Now the province begins to reap what it has sown.

Y’see, black markets are — by definition — not subject to direct government regulation and control; the only public oversight is “don’t get caught”.  This is why liquor stores (“above the table”) resolve their disputes (if any) in the courts, and drug dealers (“under the table”) resolve their disputes with beatings and murders.  It follows, then, that with necessary government control completely absent, the players in an underground market — in this case, selling junk food in high schools — would display the worst winner-take-all, me-first, dog-eat-dog, hyphenated-cliché traits of capitalist greed normally found only within the pages of Dickens novels.

Heh.

• Students running underground junk food trade donate profits to charity (CBC.ca)

Two high school students in Burnaby, B.C., who made headlines in September for selling junk food out of their lockers are helping others with their earnings.

[...]

Within the first week of business, the two made roughly $200 selling candy and chocolate bars out of their lockers at Moscrop Secondary School. The school has said it wouldn’t punish the young merchants but would try to persuade them to stop selling unhealthy treats.

The formerly clandestine operation isn’t about making a profit — the students are using their earnings to give back to the community.

“Both of us have jobs and we figured we don’t really need the money, so we decided to give it charity,” [one of the students] said. “For each month, we pick a charity and donate as much as we can to that charity.”

On Friday, the two Grade 11 students presented the BC Children’s Hospital with $500, which is the profit they made between September and October.

See?  A shocking lesson in the sort of cataclysmic avarice that naturally occurs in a completely free market.

This explains a lot

Shamelessly pilfered from Below the Beltway:

• Civic Literacy Report – Additional Finding (americancivilliteracy.org)

The ISI civic Literacy survey was not designed to test the civic knowledge of elected officials, but it did discover evidence of an interesting pattern that may merit further exploration.

[...]

Among the 2,508 respondents, 164 say they have been elected to a government office at least once. This sub-sample of officeholders yields a startling result: elected officials score lower than the general public. Those who have held elective office earn an average score of 44% on the civic literacy test, which is five percentage points lower than the average score of 49% for those who have never been elected. It would be most interesting to explore whether this statistically significant result is maintained across larger samples of elected officials.

The survey itself is here:

• Civics Quiz

(I scored a 30/33 — missing questions on the Gettysburg Address, the Anti-Federalists, and FDR vs. the Supreme Court.)

One of the most relevant questions is also somewhat deficient:

Which of the following fiscal policy combinations would a government most likely follow to stimulate economic activity when the economy is in a severe recession?

A. increasing both taxes and spending
B. increasing taxes and decreasing spending
C. decreasing taxes and increasing spending
D. decreasing both taxes and spending

The answer they’re looking for is “C” — which amounts to “give consumers lots of spending money so that they’ll buy shit“.  Sound familiar?  It’s philosophically equivalent to the constant interest rate cuts and “stimulus cheques” we’ve been receiving over the past year or so (and, for that matter, to the bank bailout).  We’re also coming to understand that it doesn’t work… or at least that it’s not the right way to solve this problem: panicked dumping of credit on a weak market makes people more worried, not less, and the basic problem these days seems to be confidence, not liquidity.

(In any case, the question makes some pretty broad assumptions about the nature of “a government”, which I suppose are appropriate for an American civics quiz: a Robert Mugabe or Hugo Chavez government would probably respond with hyperinflation and price controls.)

Your final creepy thought for the day:

Officeholders and non-officeholders find it equally difficult to identify the three branches of government. Only 49% of each group can name the legislative, executive, and judicial.

Fuck you, that’s why

I’m riffing off of a post from Living History responding to the everpresent question of “why do you do this horribly inconvenient thing that most people would feel uncomfortable with?”.  The answer is properly summarised by this post’s title.

Hey, Matt, why are you doing a grad degree in computing science rather than going out into industry and making immediate money? Well, first of all, because I want to hang out with people who are on the cutting edge of the state of the art.  I want to do shit that no-one’s done before; I want to solve hard problems, rather than just problems that my supervisor thinks his boss thinks his boss thinks his VP will think the CTO thinks will be profitable.  I want to do — and I have done — shit that no-one’s ever done before; I want to advance the state of human knowledge and understanding.  And because FUCK YOU, that’s why.

Hey, Matt, why do you study martial arts when your taxes are paying for a national police force with shotguns and tasers and shit? Because they can’t be everywhere whenever I need help; because I don’t want them to be everywhere I might possibly need them.  Because I enjoy learning how to deal with physical situations (heh heh… euphemisms, anyone?) without anyone else’s intervention.  And because FUCK YOU, that’s why.

Hey, Matt, why are you so interested in the mechanics of the credit crisis? Well, maybe i give a shit about how we got into this situation so that I can vote in a way that minimizes our likelihood of getting into the same trouble twenty (or eighty) years from now.  More realistically, maybe I want to be able to tell my kids how we got fucked over by the Boomers and why I’m not responsible.  Maybe I have a wildly optimistic hope that I’m not going to be fucked over by my parents’ generation.  But mostly, FUCK YOU, that’s why.

Hey, Matt, why do you play violent video games? Because it’s an entertaining technical challenge.  If you’re looking for a moral hazard, here, you probably ought to look elsewhere better supported by modern sociology.  And, by the way, FUCK YOU.

The notion that I ought to tailor my behaviour to appease those with little imagination who might dare to judge me for what I do that doesn’t affect them offends me.  And to those who are sufficently self-satisfied to take time out from their own problems to question my own actions… hey, sugarplum, FUCK YOU!

If you think I have to answer to your own insecurities, you’re just a tad bit mistaken.  Go on and die in a fire.  My problems are my own, and as long as they don’t concern you, they’re none of your goddamn business.  So, sweetheart… FUCK YOU!