Economic Sanctions - Failure in Theory and Practice

Imagine you are trying to change someone's mind. How would you go about it? What techniques would be effective? 

Imagine now you are trying to change a group of people's minds. The difficulty multiplies. 

Now imagine you are trying to get a group of people to change their behavior or worse yet to get them to make active changes in their own status quo implementing changes that put them at high risk or involve great hardship. 

For instance, suppose you are strongly opposed to abortion. You believe it is morally wrong--it is the taking of a human life. Suppose you took political power and while you could not yet overturn the legalization of abortion, you could impose sanctions on those who engage or enable it. To bring about change you would like to cut off access to credit for those who have been a customer of or worked for an abortion clinic. This can't be done, though, because you cannot identify those individuals nor can you legally target them. But you do find a technicality in the law allowing you to target an area that has an abortion clinic. All those who live and work in that area suddenly cannot access credit or the banking system. This is crippling.* 

Do you think this would be constructive to your ultimate cause? Think of those marginal or median voters. While they don't have a strongly-held position on abortion, they are not just caught in this crossfire--they are the target. You are aiming to harm them so as to bring about change. At the very least you are willingly harming them because the shotgun approach you are limited to forces the collateral damage.

If that is too politically charged for you, consider this. You are the mayor of Shelbyville. One of the things that really irks you is how many of your citizens root for the nearby town of Springfield's baseball team, the Isotopes. This isn't just a minor annoyance. Your administration is trying to support the local team and economy by building a huge new stadium complex for the home team. The lack of hometown support, though, is making this quite difficult. So what to do? You institute a blackout zone through an indirect tax. All broadcasters are subject to the onerous tax, $10,000/minute of broadcasting, for any broadcast of a sporting event of a team located more than 20 miles from the Shelbyville town center. Viola, problem solved, right? 

The desire to have people change what sports team they root for is not going to be solved by force. Many people who never watched a single game before are likely to take up the cause against you. 

Want to increase vaccine acceptance and injection rates? Well, you could . . . oh, we've been doing that experiment. I don't think it moved many needles [pun intended].

We can extend this hypothetical to all kinds of causes: disuse of fossil fuels, antipornography, zipper merging, etc.

The result is consistently and predictably emboldened and extended resistance. It is not human nature to succumb to external pressure. Any parent knows reverse psychology and distraction are the keys to getting a young child to change course. Tell them they can't, and the deviant battle begins. 

This thought experiment alludes to why economic sanctions applied by governments so often fail to achieve their desired ends. 

Setting aside all of the very important concerns about moral authority and moral culpability given who is actually harmed by sanctions, consider just if they should work to begin with. Stated differently, why do they so often completely fail? The do so because that's not how people change or how they are made to change.

So why do we do it? Partially it is action bias, the fallacy of . . . something must be done . . . this is something . . . therefore, do it!

Perhaps more importantly it relies on social desirability bias. It seems like a strategy that is more humane than active warfare. However, it is arguably much less noble and less morally defensible as it targets noncombatants attempting to turn them into double agents. In an age of high-precision bombs, economic sanctions are carpet bombing combined with landmines. 

*Arguably the linked (trucker convoy and Canada's emergency response to it) is an example of sanctions that worked! But only in the narrow sense of getting the result of disbanding the convoy. I am not sure it won any hearts and minds on net. Rather I think it turned a lot of people against the government of Canada. It also was an arguably more harmful action than simple police action would have been. The greater harm is in the threat and concern of it being used going forward as a regular tool. In this way the actions of the Canadian government are not analogous to economic sanctions but rather analogous to escalating hot-war conflict.

Crony Capitalism (Vacation Rental Edition)

My wife and daughter just returned from a delightful long weekend in Santa Fe, NM. The entire family will return soon to Saint Francis's fine city where, as Hermann Banks reminds us, strangers are kind and beauty is overflowing and the local government is captured by crony capitalists. In fairness to Banks he never has said as much about local government, but I would imagine he wouldn't dispute it. 

Case in point:

A friend of mine has a vacation home there that he purchased a few years ago for both personal use and as an investment. Part of the investment is renting it out as a short-term vacation rental.

About six months ago I booked his place for my family's trip this coming April. In October I received an urgent text message from the rental property service directing me to check my email. Doing so I saw a short message stating that my reservation was no longer available, they were searching for a substitute property, and would be back in touch soon. I somewhat shrugged it off as being a mistake since I knew the actual owner well. But before I had a chance to contact my friend I received another email regretfully informing me that my reservation was cancelled with no substitute.

I reached out to my friend still thinking this was just a clerical error in their system. While a clerical error had occurred, it had a deeper problem behind it. My friend was somewhat upset but a lot calmer about it than I would have been. In fact I was livid for him and ready to go to the barricades. Not because of my vacation plans being disrupted but because of why this was happening and the implications it had for him.

The short version is this: The property management company had failed to make sure that my friend was current in his short-term rental permit with the city of Santa Fe (and yes, this is enough to get me to the barricades--the fact that a city government makes property owners get permission to use their property . . . but wait, there's more). The failure here was pretty significant in that it had expired the prior December 31st. Shame on the management company for sure. 

Should be no problem, though. Just refile as this should be a formality at this point. My friend does so starting a few days before my cancellation email by calling the proper city office. Keep in mind that my friend lives in Tulsa, OK; so all of this is out of direct control for what it's worth. I'm not sure if being able to go down to city hall would have made things better for him. They probably wouldn't have been better for me if I were in his shoes due to the whole ready-to-storm-the-castle attitude I have in these matters. Nevertheless . . . the city official looks it up and says, "Uh-oh, I don't think we'll be able to do this." 

[I swear this is the short version] It seems there exists another, current, valid in-the-eyes-of-the-Duke-of-Santa-Fe short-term rental permit for a property located within 50 feet of my friend's. You see kids, in America Big Hotel has decided that short-term rentals are a threat to their business. They've convinced well-meaning homeowners that people renting out their property could be scary. Soooo, rather than compete they've helped create rules to stop the madness. 

But this no-longer-short story doesn't end with just a Bootleggers and Baptists tale of the hotel lobby working hard to stifle competition along with the help of residents who think they should be able to dictate what happens on other people’s property. We get some government failure and unintended consequences to boot. 

My friend was taken aback at the news he couldn't get a permit because one nearby already existed (a new rule) but was immediately relieved relaying to the official, "Who has a rental? I know all my neighbors, and none of them rent." Upon further inspection, the city official realized that there are two roads with the same name in Santa Fe. The other permit is for a property miles away from my friend's. He could get it after all. Just need to have the local inspector swing by the next day to validate it all. Phew, that was close . . . but wait, there's more . . . as you probably suspect knowing what came next for me. 

The inspector comes out to my friend's house. Presumably begins checking boxes. Sees that there is another property located within 50 feet holding a short-term rental permit by looking it up just like the prior city official did. So he promptly denies the permit and goes about his day. 

This triggers a very fast and unforgiving process in the several rental property agencies my friend uses for his listing. Because I'm sure so as to not fall afoul of city governments everywhere and their crony capitalist controllers, they act swiftly to cancel all of my friend's future rentals. Remember this is October right before a busy Thanksgiving and Christmas season and he depends on repeat business as well as referrals. Along with all of these would-be customers, it is now that I receive a cancellation via email. 

At this point my friend was already on top of getting this reversed--I would not say satisfactorily resolved. He cleared it up with the city and over a LONG weekend was square to lease his property. Then came damage control. Many apologetic messages later with many discounts offered and still a large number of permanent cancellations foregone, he had done all he could to salvage some of his 9+ months of bookings.

It is hard seeing the system work the way it is actually, ultimately intended. It is harder still being a victim of it.

Summer Rental

The Reopening - The View from Hawaii

Earlier this month my family and I spent a week in Maui. In case you haven't heard, it is really, really beautiful--a great vacation spot. Hot take, I know. Here are some observations:

• Two underappreciated qualities that give Hawaii its magical appeal are the remoteness in distance and time. You can go to lots of amazing islands in this world, but almost none are as physically remote as Hawaii. Related to this but not necessarily following except for the particular way our world is populated is the fact that it is very temporally remote. The rest of the world is asleep or done with their day when yours on the island is starting. This forces one to shrink their world down to a few mountains in the vast ocean abyss.
• The reopening from the perspective of Hawaii is perhaps unsurprisingly behind what I've otherwise experienced. Anecdotally this was supported by other travelers who came from places more locked down than Oklahoma such as New York and California. They too were surprised by the policy phase Hawaii was still in.
• Related to this was the part that both caused anxiety for me in preparing for the trip and frustration for me in navigating the travel. This is the Hawaiistan aspects whereby it was as if I were travelling to a third-world country. At the time when we were there (this policy was recently relaxed) the only vaccinations that were meaningful were those given on the island. The same shot from Pfizer, et al. given in another U.S. state gave no privilege--every entrant had to get the same COVID test done before arriving and not more than 72 hours before arrival. Testing in a pandemic is critical, but the various rules laid out for Hawaii, which I won't bother to fully go into here as others have covered this, and the way they were implemented had more to do with health theater and signaling than they did with science.
• This should probably not be a surprise given that the Maui mayor thought it helpful/necessary to beg airlines to bring fewer tourists to the island. I guess that's how they solve for the equilibria in banana republics.
• Speaking of banana republics and their policies, Hawaii generally and Maui specifically suffers from two self-imposed penalties--development restrictions and the Jones Act. 
• On development - I understand that there is a bootleggers (resorts, others in the tourist industry, and current homeowners/developers) and Baptists (current residents who in many cases are self-described natives and who don't want things to change) story going on. I'm not sure everyone close to this issue does understand that. I am sensitive to the good, bad, and sometimes ugly history of how Hawaii is now a U.S. state. Blanket restrictions on and impediments to development imposed by government are not the solution. They are economically harmful making Hawaii poorer than it would otherwise be, which of course harms the poor the most. They are also culturally destructive creating a hostile environment of us versus them as opposed to a constructive environment of negotiated compromise and agreement. Finally they are morally repugnant when they allow the politically powerful to violate property rights.
• On the Jones Act - this is "self-imposed" in that Hawaii is a U.S. state and this is a U.S. federal government policy. Hawaii itself is not responsible for it. However, why isn't the Hawaiian delegation to Washington and Hawaiians as a politically lobby effort not storming the Capitol on this one (figuratively speaking, of course)? 
• Enough griping. Hawaii is awesome. The people I encountered (Hawaiians and tourists alike) were delightful. Aloha is not just a slogan. It is a warm and wonderful way of life that is embraced and practiced everywhere you go. I felt welcomed and appreciated in Hawaii by virtually every person I had the pleasure of engaging with.

A few recommendations:

• Do some homework before travelling to decide how much of an activity vacation you want (there is plenty to do) and how much of a relaxation vacation you want (it is easy to not have enough as it takes time to drive, boat, walk to various destinations, everyone moves a bit slower than you might expect, and at every turn there is a siren call to spend more time).
• Because of the odd time zone Hawaii has been placed in (it "should" be a hour or two earlier there when compared to most places) and because of the typical jetlag for U.S. travelers, Hawaii wakes up early and you will too. So it follows that it turns in for the evening before you probably expect. Just chalk it up to following Ben Franklin's advice and hope that it adds some wisdom to your life.
• We stayed in Wailea on the southwestern shore. You can't probably go wrong between this area and the rival northwestern shore, but I do think it is easier to traverse from the SW part of the island. 
• We stayed at The Fairmont, which is highly recommended provided you want a resort experience and a resort bill at the end.
• The Road to Hana is highly demanding but can be highly rewarding. Planning here is key. There are good apps to guide your journey. You won't get it all in--the more you stop, the less distance you'll get. We actually went the entire loop around the "dangerous" undeveloped part of the island. It was truly treacherous at times but still doable for a minivan. Not sure if I'd recommend it as opposed to reversing course to head back home. But doing so wouldn't have saved us any time since I wanted to make it to the half-way point of The Pools at 'Ohe'o. 
• From a prior trip, I can highly recommend biking down Haleakalā. 
• Maui Pineapple Tour was very interesting and fun. I've never seen Dole's operation, but I image it to be on the other end of the production frontier--Maui Gold is charmingly but surprisingly a trip back to farming circa 1950.
• Iao Needle state park is underappreciated. For the intrepid, consider disobeying the signs and hiking the prohibited trails. It is an awesome scenic adventure. 
• Unfortunately I didn't get to try the many famous and/or recommended dining spots that are still on my Want To Go list. The two at the hotel, Kō and Nick's Fishmarket, were very good but . . . did I mention resort prices? The labor shortages were most acutely seen here as perhaps only 1/3rd of Ko was open and service in general throughout the island was poor.
• For the price of airfare (explicit cost, time in the air, and jetlag effects) plan to stay in Hawaii for as long as possible--at least one week. There is always more to do including doing nothing.

Aloha!

Trust Is a Fragile Fabric

https://en.wikipedia.org/wiki/Bayeux_Tapestry

Of the many, many lessons to be learned from the COVID-19 Pandemic, one that stands out to me is how important honest communication is. Honesty is a bedrock of trust. Trust is an essential quality for a thriving society.

While fear can enable a society to survive, it takes trust to allow it to flourish. Largely we are only surviving the most recent pandemic. There are many reasons for this from poor understanding and application of science to isolationist responses regarding testing and vaccination driven by nationalist pride (distrust!) to blatant failure to test to failure to properly quarantine to failure to experiment and on and on. Granted that many of these failures came about because we were starting from a poor state of trust, we did not do much to improve the arrangement. In fact we set it back meaningfully along the way.

Suppose we get another pandemic (we will, just wait). Suppose further that it is similar to COVID in terms of virulence and contagion. Perhaps it is dissimilar enough that we have a caught-off-guard type of reaction thus making it even more similar to COVID. But we do remember COVID, so we actually do have some improvements in societal and government response. For example, some communities, large business firms, perhaps the federal government wants to conduct wipe-spread, rapid testing. What might stand in the way of that policy being well received and complied with?

The people that would need to be getting tested would need strong assurance that a positive test would be met with reasonable consequences. What about our response to COVID would give them that assurance? Although people would definitely want to know if they were infected all else equal, pushing back against this desire would be multiple, reasonable concerns. Namely, that they would be subject to harsh treatment if positive (social stigma, rough or indefinite or otherwise undesirable detention, etc.) and perhaps more reasonably that they would be subject to involuntary quarantine, lockdown, social stigma, etc. even if they tested negative. 

Compounding this would be a distrust that they were getting the full story. Vaccination acceptance still suffers from the horrible Tuskegee Study crime. To a lesser degree dismissive elite responses to those with concerns about vaccination, as unfounded as those may be, also deters people from trusting authorities on vaccines. Being told masks are worthless and then that masks were essential sent a clear message--don't trust the authorities. This was one of many noble lies, a short-sighted concept that completely fails to ask the essential question: And then what?

The Chinese government lied to the world at the early stages of the pandemic. They have characteristically been very deceptive as the pandemic has unfolded including apparently not cooperating with the investigation of a lab leak cause. We should expect and demand better from our authorities. In the long run people respect the concept of 'we don't know' especially when coupled with transparent, honest, and updating 'here is what we are thinking'. The 'And then what?' from this approach is productive responsibility and fruitful experimentation. 

The Debits, The Credits, The . . . People We Exploit

"Oh, you left out a bunch of stuff." - Thornton Melon

Imagine being a fly on the wall overhearing various nefarious conversations at a major corporation's board of directors meeting. 

Imagine them trying to save money by paying women less, trying to please customers by not hiring racial minorities, contemplating intellectual-property theft, discussing a newfound way they can literally defraud customers, etc. 

These would all obviously be wrong (morally and ethically not to mention in many cases criminally), and these ideas would not be within the scope of fiduciary duty. The board of directors of a public company does owe a fiduciary duty to shareholders. That duty requires it to put the interest of shareholders first including doing their best to maximize shareholder value. Yet that duty does not extend to wrongdoing on behalf of shareholders or the firm nor does it excuse them morally or ethically from guilt. 

I think these examples above are the easy cases. At least they should be easy for you. Let's consider something a bit more challenging.

Should we put cronyism in the same unethical category? Is pursuing special favor from the government at the expense of the public unethical? Are benefits to a firm and its shareholders legitimate when they are derived through socially destructive means? Undoubtedly there are meaningful differences in degree and type. 

At what point does activity like developing and utilizing business relationships, networking, and advocacy cross over to be unethical--cronyism if you will? I believe one clear marker would be when that behavior would be reasonably expected to violate the rights of a third-party either actually or potentially with good likelihood. That is a clumsy test, I know. While it leaves lot left for interpretation, I do think it gets to the essence of the problematic case.

In one realm we have competitive behavior in the pursuit of success. In the other we have coercive behavior in the pursuit of unearned gain.

It is difficult to disentangle behavior and results between these two worlds. In fact people participating in an activity during or after the fact would find it quite challenging even if they could put their natural bias to the side--the bias to believe they were acting in good faith and to good ends using good information and sound logic. It is hard to see when the world generally and the business world in particular is as political as ours has become.

As a result cronyism is perhaps a natural cancer within capitalism that requires active resistance. It extends beyond simply lobbying for advantageous contracts. It includes businesses supporting expensive regulations such as safety standards and minimum wages. When the railroad industry supports limits on truck size and trucker hours or when Facebook asks for the government for Internet regulation or when Amazon lobbies for a $15 minimum wage, they are all doing so for competitive advantage. If those policies would also result in a social benefit, it would be rather coincidental and not at all self-evident. 

Cronyism is endemic and pervasive. The cure is neither obvious nor likely easy. Just identifying the responsible parties is quite hard. As Michael Huemer says, blame everybody and nobody.

P.S. Just how captured is our economy? 

P.P.S. This post's title is taken from a line in this Jake Johannsen comedy special from the 1990s.

Great News, Everybody! They Are Just Stupid. Not Evil.

Consider this graph from the COVID-19 vaccine page on the CDC's website: 

Notice the red trendline, which is the 7-day moving average of first doses, and how it peaks around April 11. Notice also how it is now as of May 8th (as reported May 13th) lower than it has been at any time since January 12th. 

What happened on April 11th??? Well, that was when the CDC and the FDA began floating concerns about the Johnson & Johnson (Janssen) vaccine. Concerns that would manifest themselves two days later in a "pause" of administration of that particular vaccine. 

From not allowing experimentation and wide-scale testing, to not allowing challenge trials, to insisting on doing their own, slow trials on vaccines, to delaying the information and launch of the vaccines, to not doing first doses first, to not approving the Oxford-AstraZeneca vaccine, to not doing half doses or using more efficient needles, etc. we have seen over and over our medical regulatory state fail us. The cost is unnecessary deaths, unnecessary and compounding hardship (emotional and economic), and deterioration in the confidence people have in public health. 

So how is this great news? Consider this:

Summary of Recent Changes

• Update that fully vaccinated people no longer need to wear a mask or physically distance in any setting, except where required by federal, state, local, tribal, or territorial laws, rules, and regulations, including local business and workplace guidance
• Update that fully vaccinated people can refrain from testing following a known exposure unless they are residents or employees of a correctional or detention facility or a homeless shelter

The CDC and federal officials in general are backpedaling fiercely from every policy and limitation they adamantly were insisting upon over the past several months. It is clear they are in panic mode over the plunging rates of vaccination. They probably correctly understand that there was a coming falloff from both the most vaccine resistant as well as those who had COVID and didn't feel a vaccine was necessary. All of this snowballing against vaccination as cases and deaths decline rapidly.

The great news is they actually do care and don't want a good portion of the U.S. population to die. One would be forgiven for thinking otherwise given the above list of mistakes. But it turns out they are not evil. They just are stupid. Hanlon's Razor for the win!

Zoning Laws Suffer From The Fixed Window Fallacy

The Fixed Window Fallacy is an error in reasoning whereby people believe they know or can know what is nice/preferred/optimal. This line of thought is based on unimaginative, linear-thinking and further held back by the Local Maximum Problem. 

It can be summarized as a thought process that goes: "We know what is best. We/they can afford what is desired (after all, it is usually for our/their own good). Therefore, we should make ourselves/them provide it." 

Both premises are false, and the conclusion is fallacious (non sequitur) as it ignores the critical questions: do we have a right to do this, and can we successfully do this? 
The only constant is change, and it comes in two types. 

1. Depreciation, which is the natural condition, difficult to counter, and mostly objective.
2. Appreciation, which is the abnormal condition, difficult to achieve, and highly subjective. 

Attempts to stop depreciation such as zoning laws are never done in a vacuum. They are not single events where good replaces bad, and we move on to the next decision. They are part of economic evolution where decisions made affect trend trajectories with uncertain net outcomes and unpredictable magnitudes. 

Similarly collective action attempts to realize appreciation such as subsidizes for development and master plans are fraught with captured interest risk bringing asymmetric outcomes adverse to the presumed collective goal. In other words the rent-seeking developers and their friends in power do what is good for them and costly for society. For those cases where everyone has the best of intentions, we still have the knowledge problem. When artificial outcomes are engineered by those who do not bear the full risk, bad ideas do not get properly punished and good ideas do not get properly rewarded. 

Back to zoning, trying to stop people from doing things they want to do is prohibition. People and markets work to thwart prohibitions in proportion to how much they desire that which is prohibited. The less morally sound the prohibition, the less compliant are those working against it and those third parties who have no dog in the fight. Fortunately the long-term trend is for less and less prohibition. Unfortunately working against a prohibition is costly as is the administration of a prohibition. 

Whether it is in icky markets (e.g., sex work, recreational drugs deemed illicit, kidney transplants, etc.) or in we-know-better markets (e.g., zoning), an underlying force supporting the prohibition is not in my backyard thinking. In fact I believe NIMBY is the last vestige of prohibition rationalization.

The Local Maximum Problem

Ever since being introduced to this concept, I’ve been intrigued by it and see examples of it more and more throughout life, business, and public policy. This is the problem that occurs when people get stuck in a situation that is the best near-term or near-possible outcome but is not the best possible yet reasonable long-term outcome. 

The analogy is to imagine four people playing a game that has them blindfolded and linked arm-in-arm in a square configuration. Each member of this team is responsible for one of the cardinal directions (north, south, east, and west). Their goal is to locate the highest point possible. They experiment by taking steps to see if a step in that direction is up or down. If the step is down, they don’t take it. If the step is up, they take it. They keep walking until none of the four can make a step that is in the upward direction. This point is the conclusion of their game by reaching the local maximum. However it is most likely not the highest point on the surface where they’re walking. They just can’t reach (or detect) a higher point by virtue of their own rules. 

I believe governments are particularly susceptible to this problem. The rewards for experimentation that drive one out of a local maximum are very dispersed or completely irrelevant to those bearing the costs of experimentation. This is more than just people not wanting their cheese moved or having their apple cart disrupted. This is the very legitimate concern that an ambitious idea is going to have significant negative outcomes or the potential rewards will not accrue to those bearing the risk. It is an acute combination of asymmetric risk-reward and principal-agent problems.

The many, many public and private failures in the COVID pandemic are vivid examples. Perhaps the most costly in the United States were the CDC and FDA's insistence on using their own developed testing (staying with the controllable and familiar) and as important if not more so the refusal to allow challenge trials to speed the vaccine development process. Sadly this list goes on and on from "pausing" the Johnson & Johnson vaccine to not approving AstraZeneca's. 

The position those in power have taken are understandable but completely inexcusable. And we have ourselves to blame as these mistakes are just the latest examples of how the FDA works against medical advancement and is a deep net cost to society. 

To be sure individuals, firms, and other organizations are also susceptible to the LMP. Notice, though, the degree to which these entities are somewhat or greatly better structured and incentivized to resist and correct it.  

As a general rule, the more insulated and protected an entity is from competition, the more vulnerable they are to a local maximum. Hence, traditional banks are more vulnerable than are start-up fintech firms. 

To whom a firm or organization is held responsive has strong implications for its fragility to local maximums. As a firm is more responsive to those who reap rewards proportional to risk taken, it will better prevent the LMP. Hence, non-profits (highly responsive to donors rather than customers) are more at risk than are profit-seeking firms (highly responsive to owners and customers). 

Within a firm the dominant force becomes existing and entrenched stakeholders who are in comfortable, conventional positions. Hence, no one in marketing will ever suggest the firm experiment by not running ads. 

The degree to which a person faces public scrutiny or cannot capitalize on public adoration, the more they will rest once finding the local maximum. Hence, a public figure with a lot to lose/little to gain will tend to play it safe. 

Risk bearing requires compensation in the form of return, and this risk-return should be commensurate, symmetrical, and willfully accepted. Those are tough hurdles to achieve. All the more so when we are relying on force rather than persuasion. 

P.S. I believe Arnold Kling deserves credit for introducing me to this concept.

A Paradox of Choice

When well-meaning fools lament the plethora of choices we have in a free market society, they make a crucial mistake. They ignore the necessary condition for which those choices emerge and simply assume a result. 

I can imagine a very well constructed study done that proves, truly proves in a way that most all could agree, that ~99% of why a consumer chooses A versus B comes down to irrational affiliations or random luck. For example the determination of what car one chooses to buy between a Honda Accord and a very similar Toyota Camry would be shown to be nothing more than stuff like a person's prior cars happened to be Hondas or their parents bought Hondas or they buy the car they last saw an ad for or their favorite color is red and the car the dealer first showed them was red, etc.

The incorrect conclusion a well-meaning fool might jump to is that we have unnecessary redundancy in our free market economy. We should stop wasting resources on the competition because the differences between these artificial choices are illusory. Just build the Acamry and be done with it!

The fact that there are minor, subtle, and hidden differences between all such choices are lost on those drawing such conclusions. But more importantly they are making a dangerous mistake to neglect how we got to the magnificent state of the world where we have such amazing choices that a purchase decision settled by a coin flip likely leaves the consumer equally well off. 

There are no instructions from the universe for how to build the optimal mass-consumer sedan. We need a process to discover this and continually rediscover and improve upon the outcome. We need the right incentives to reward incremental success, punish incremental failure, and fully stop efforts going down a bad path. The capitalist free market is this process. It is the sine qua non for progress--as broadly defined as one can imagine it.

PS. Or maybe this is optimal?

Change in Government Means Winners and Losers

While the fact is obvious that changes in regime leadership imply winners and losers, there are subtle, deeper truths that remain underappreciated. 

Government is costly in two very important ways: it wastes resources (cronyism, corruption, inefficient Rube-Goldberg processes, rent seeking, etc.) and it prevents what could otherwise be (the unseen, gains from trades foregone, etc.). I think the former is most important in the short run while the latter is so in the long run. How a government process will lower trend growth rates is insignificant in any one year but dramatically important in the compounded long run. In contrast the effects on those directly impacted by government actions are quite meaningful in the short run but largely avoidable (if avoidance is desired) in the long run. 

Essentially by definition there are losers in all government actions. This is true even if a given government action is socially beneficial as a perfect correction to a true market failure--if not, then why must it be government (aka, force) that is taking the action? Government is not a magical machine able to create or even simply discover existing free lunches. The market is a magical machine that potentially can create a relaxed notion of "free lunch" whereby an action leaves everyone a party to it better off. 

Mutually-beneficial trades are exactly this despite the fact that resources are used in the process. There might be negative/positive externalities (costs/benefits not borne/enjoyed by those engaging in the trade and therefore a theoretical opportunity for government action to make all of society better off by making parties to the original trade worse off). Just don't be so certain about how easily these can be identified much less corrected.

Those who are benefiting from the status quo (winners) are obviously incentivized to perpetuate the status quo while those who are losers are incentivized to change it. This is true before and after government action. A government action that will create winners and losers comes about because the winners stand to gain more eventually than the losers, and this action will be perpetuated by this same inertia. This is an extension of the public choice lesson of concentrated benefits and diffuse (dispersed) costs. If the losers can see a light at the end of the tunnel via eventual avoidance, they can put up with short-term acute pain knowing they will someday disperse those costs. 

Government's incentives are very poor at best, and it creates strong incentives for bad (socially negative, resource destroying, innocent harming) behavior in others. Its inability or persistent resistance to do the better thing (holding it to a lower bar than the "best" thing) is not for lack of power but for lack of will. This is the major reason why I agree with Caplan on the question of state capacity [here and here].

2020 was sadly the lesson we neither deserved nor will ultimately use to understand this.

I'm As Mad As Hell, And I'm Not Going To Let You Take This Anymore!

Partial list of difficult, unsavory (to the third-party at least), or troubling situations that third parties commonly attempt to help or "correct" but end up simply harming the people in the situation: 

• sex work
• organ donation
• child labor
• drug addiction and misuse
• pay-day lending
• immigrant smuggling
• sudden, high prices in the midst of emergencies - anti-price gouging laws
• high cost of housing - rent control
• low-productivity worker earnings - minimum wages

Simply trying to correct the situation by enacting prohibitions or strict limitations does not address the true problems, almost always causes significantly more harm than good, and tramples on the freedom and dignity of those the prohibition ostensibly aims to help.

There Should Be A Law!

Partial list of areas where there might be a market failure and I might support government intervention:

• Masks and social/physical distancing rules in a pandemic - I much prefer persuasion in the marketplace of ideas backed by good and plentiful information. That said, in a very serious health crisis a government-enforced policy might keep the peace and prevent very costly experimentation from defectors like a business not complying. Bringing this to the news of the moment--I generally do not think SARS-CoV-2/COVID-19 qualifies. A failure on the part of government (and others) to even properly try the persuasion avenue does not then necessitate the force avenue. Further, compliance with practices consistent with most all of the nonpharmaceutical interventions has been remarkably high and widespread as well as ahead of the mandated institution of the NPIs. This is a point the advocates of force ignore until they wish to defend against the accusation that the economic and other costs have come as a result of forced NPIs. Then they are quick to point out that "it is the virus, not the lockdown". Careful thinkers realize it is both and the latter makes matters on net much worse.
• Zoning - but not in the way most people think. This one really is more of a government failure that perhaps needs collective agreement. Zoning way too typically becomes NIMBYism protecting vested current interests at the expense of potential and less powerful interests. Basically we may need higher-order (federal) laws preventing localities from encroaching in private property rights.
• Certain, limited cases of patents - Here is my prior thinking on this subject.

There are at least two problems with most cases of the discovery of market failure:

1. That you're overlooking some critical factor that negates the market failure condition. There is something else going on here; there are needs being satisfied along an unexplored dimension.
2. The market failure does exist but will be short-lived and thus insignificant. Short-lived might be in the eye of the beholder, true enough, but this is definitely an area where a longer than average point of view is needed (near-far mode if you will). 

[Updated 12/1/2020 adding to the partial list]

• Garbage collection
• Subsidies for under-produced goods (e.g., vaccines, General healthcare, education)
• General city planning such as road layout and utilities, etc.

It is best to think of these as coordination problems where a central actor can potentially lower transaction costs. The word potential here is doing a lot of work. Just because government theoretically can solve a problem doesn’t mean government in any way, shape, or form will solve that problem in a desirable manner. And note also that just because government might be desired to be a participant in the solution it doesn’t mean they have to provide the solution. Funding it can be a much better role for government to play with private actors actually doing the operational work. School vouchers are perhaps the best example of this, but garbage collection among many others fits as well.

Oh, you left out a bunch of stuff.

The quick versus the dead. And a more complete review.

Imagine various conversations at a board of directors meeting of a major corporation. For example: Trying to save money by paying women less, trying to please customers by not hiring blacks, contemplating intellectual-property theft, discussing a new found way they can literally defraud customers, etc. These would all obviously be wrong and would not be within the scope of fiduciary duty or any reasonable ethical framework. I put cronyism in the same category. Contemplating how to get special favor and rent seeking from the government is unethical.

I've been thinking about this post for some time. It started five years ago reading this article.

Recently there have been several things that have me thinking on this again--making this as fine a time as ever to actually complete this post. 

Michael Munger has been thinking about this for some time. This EconTalk is a great discussion with him laying out the problem. And this more recent appearance on Free Thoughts is great as well. Still another discussion highlighting the nuances and difficulty of this topic is with Rebecca Henderson recently on EconTalk. 

The question that I think doesn't get asked enough is: At what point does activity like developing and utilizing business relationships, networking, and advocacy cross over to be cronyism? It is difficult to disentangle behavior and results between these two worlds. In fact people participating in the activity during or after the fact would find it quite challenging even if they could put their natural bias to the side--the bias to believe they were acting in good faith and to good ends using good information and sound logic. 

Use of other people's money is a big key, but it isn't necessarily a smoking gun. For example, Facebook uses cash (shareholder funds) to hire lobbyists to advocate for A) onerous regulations for social media companies or B) a continuation of the protections it enjoys under Section 230 of the CDA. The first case (A) is likely a blatant attempt to use the power of government to prevent startup competitors from challenging their market position. The second case (B) is likely a reasonably good protection of their shareholder's and other stakeholder's interests as well as actually a good protection of free speech and enabling force for social media in general. 

Other people's money can come not just from taxpayers and owners (shareholders in public companies most commonly but not exclusively) but from employees as well. Imagine employees of Facebook being asked to participate in a letter writing campaign to Congress. 

It is not so simple to assume that a company can or should endeavor to right the wrongs of society. Not everyone sees the problem the same way. And not everyone will agree on the means even when they agree on the side to take in the cause. I higher a business to do what they do best--make shoes, install tires, store my money, serve me food, etc. I will do my own charitable giving, thank you very much. This is one of many reasons why Friedman was right. 

How do we get out of this downward spiral? I don't believe it is easy. In fact it is quite challenging. Education and communication are likely keys. Transparency helps as well. But as long as government is both powerful and trusted, these problems will persist. 

Related: 

Just how captured is our economy?

Rent seeking: who is to blame?

In Case of Pandemic Break Glass

Here is a message to future generations for when they find themselves in the next pandemic. This is subject to change, but you would already know that if you had started reading the list.

These are the rules and guidelines I would suggest for the next pandemic: 

(Yes, there is redundancy and overlap in this list. That is a feature not a bug.)

1) Be Willing To Change - Adaptation >>> plans. Your plan is great as a starting point. Grey board beats white board. But an eraser and a willingness to use it is best. Your plan will not entirely survive first contact with the virus. This is as ironclad of a law as you'll get in this realm.

2) Protect The Vulnerable - How is this not obvious? Well, it seems it very much wasn't this time around. And know this: you cannot always predict who the vulnerable will be. 

3) Practice Good and Improving Hygiene - Tighten up. Here is an example of where general pushback against conventional wisdom reverses and we need to speedily go in the other direction--side with conventional wisdom of being more hygienic during a pandemic. We have been getting cleaner and cleaner as a society. As we've gotten richer, we have gotten less tolerant of risk in general and health risk specifically. This long-term trend has an unintended consequence: we over protect--especially children. "Rub some dirt on it" is an exaggeration, but it has some truth. We should pushback generally against the tide of puritanical cleanliness. We need exposure to germs. But in the face of an acute and new health threat, this reverses. Then is no time to develop hardiness--at least not until we know a lot more about what we're up against. Hand shaking shouldn't be abandoned per se, but the norm should probably be to quickly pause the practice when a health risk arises.

4) Test, Test, Test, and Test Some More - Each of these links have unique, subtle points along the general line of the importance of testing. Yes, there is redundancy, but that is the point I'm trying to hit you over the head with. At the hope of repeating myself, testing is a key ingredient to knowledge in a pandemic. Here is the idea by analogy: You're suddenly in a pandemic . . . oh, no problem, we know how to pandemic, bro. No, you certainly do not. Each one has different features and each time the environment has changed (economically, normatively, politically, etc.). Image I put you in a large, completely dark room and told you there are dangerous things in the room and you need to escape. I hand you a dim flashlight as your only tool. It works sparingly requiring you to flip it on and off repeatedly to get some light. Not ideal but you would be quite foolish to toss the flashlight to the side and grope around blindly instead.

5) Don't Believe In or Rely On Magic - ..... masks, hand washing, existing drugs with non-obvious potential for help, experimental drugs, ventilators, et al. may help. None are perfect cures or magic bullets. Many ideas will have very large costs that may in fact greatly outweigh the benefits. Try lots of stuff (see #7 below), but don't rely on any one thing or set of things. And don't latch on to that first idea and refuse to let go (see #1 above)

6) Invest in Options Including the Value of Delay - "Flattening the curve" evolved into a constant moving of goalposts in order to justify desired policies. This was a combination of the wrong way to interpret #1 above and the exact problem #5 above and #8 below are opposed to. But the idea had immediate traction because it had a very plausible initial value--delaying even the inevitable can make the inevitable more manageable if not largely reduced in magnitude. Every month after March brought new developments in treatment and most likely a lower severity in the disease itself via natural mutation. But delay isn't costless (see the links in #5 above). Though options require premiums, they are still vastly undervalued. Testing and isolating and distancing (see #3 and #4 above) create options. And don't just do something, stand there actually can be an option-preserving strategy. 

7) Experiment (Let 1,000,000 Flowers Bloom) - Let people take risks. This is both a principled position as well as a pragmatic one. We need ideas from the most unlikely of places. We need discovery.

8) Don't Attempt To Centrally Plan - It never works well for general problems and it is downright disastrous in a fluid, developing emergency. The knowledge problem is most applicable and important in dynamic, high volatility, low confidence environments. For central planning to succeed even in theory the unknowns must be minimal and the variance must be low. Simple is better. Fewer cooks in the kitchen (i.e., Congress and lobbyists and the alphabet soup of agencies and a politically myopic U.S. President and risk-averse though power-happy governors ...) would prevent entangled messes that do little to help, too much to harm, and a lot to hurt. The bureaucracy is the nature of the state. Leveraging government in times of crisis maximizes its every shortcoming, hindrance, and corruption. 

9) Trust The Market - Allow prices to adjust (don't worry about 'price gouging'; rather embrace it). Allow profits. For God's sake if there is ever a time when you want to reward risk takers and resource providers, it is in a time of dire crisis. See below for more on why you don't need to worry about people taking advantage. People want to help. There are many avenues for social and normative guidance. Man desires not just to be loved but to be lovely--let him! Do not let your personal envy or hypothetical fears prevent those standing ready to help.

10) Trust People - Lord of the Flies was wrong. People respond to incentives and information. If you give them good and updating versions of both, you can expect good and improving results. If for no other reason than their personal self-interest, people will tend to make sensible and safe decisions. In fact they are very likely to be overly risk averse. 

11) Question Authority - Challenge the motives and knowledge of every solution provider in direct proportion to how confident or authoritative they claim to be.

12) Communicate, Communicate, Communicate (honestly and don't censor) - Lies undermine productive efforts and credibility.  Censoring prevents much needed experimentation and fosters distrust. If restricting dangerous activities including potential superspreader events is desired, say so. Give guidance and elevation and promotion to good advisors. Be open to and have a high tolerance for new ideas, debates and debatable positions, and mistakes. There will be mistakes. It is not how you prevent them as much as it is how you adapt to them once they occur. Because adaptation >>> plans . . .

Despite or Because

I would like to introduce a new tagline "Despite or Because"--a method of deeper-level thinking.

Specifically, analysis attains sophistication when it is distinguishing between causation and correlation and answering the question: "Is [this result] in spite of or because of [that]?".

The example du jour is COVID-19.

As we stand today a lot remains to be seen including if our efforts will prove successful. Assuming success, we would like to know if the successful flattening of the curve and much below forecast CFR was in fact because of the federal, state, and local governments' lockdown and shelter-in-place orders or despite them?

I'm not just asking if they had no effect. Did they actually impair the battle against the virus? There are three ways I could see the extreme efforts leading to a net harm setting aside the very important social loss of wealth and way of life not to mention that an economy on a strong footing is better able to withstand and respond to a major threat.

• By putting at risk people into high-dose exposures
• By preventing helpfully-quicker herd immunity
• By disallowing the virus to mutate into a milder strand (this ope is very speculative on my part and I might be very off base here)

Or did those efforts have no meaningful effect period? All of it is interesting and very hard to ask in mixed company much less get open-minded thinking on. 

Sweden, South Korea, Taiwan, and perhaps certain states and cities in the U.S. might provide the counter examples as natural experiments we would need to answer this question to some degree of satisfaction eventually.