Showing posts with label law of unintended consequences. Show all posts
Showing posts with label law of unintended consequences. Show all posts

Wednesday, September 2, 2020

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 . . .

Sunday, April 19, 2020

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

Wednesday, April 1, 2020

The Defining Debate of Our Time

The most important debate we should be having and must have eventually is under what circumstances, to what extent, and by whose authority shall we "lockdown", "shutdown", "shelter-in-place", "stay home", and otherwise stop allowing others to live life.

I applaud those thinking critically about this. We need more. Here are some examples:

Roman Pancs via The Big Questions

John Cochrane

Arnold Kling

The Reason Roundtable - this is where I really expect a long-term best efforts, and this might finally be The Libertarian Moment.

Sunday, March 15, 2020

Emergency Situations Call For Proven Failed Policies

The pandemic of the novel coronavirus (SARS-COV-2) is upon us. But rest assured; our fearless leaders are here to help by making sure we keep reality at bay. I'm talking about an old favorite of head-in-the-sand, wish-it-all-away virtue signalers--price gouging laws (aka, price controls).

Because it worked so well exactly never but makes those who don't like an certainly very bad and difficult (but nevertheless necessary) change feel like something is being done, we shall inflict self harm.

Let's turn this into a partial list of things to remember about price gouging laws:
  • Price controls that limit market clearing prices don't change the reality that suddenly and acutely certain goods and services are more scarce--demand has risen while supply is temporarily mostly or entirely fixed.
  • They don't allow us to efficiently allocate goods. I hear you cry, "But what pray tell is so great about efficiency in a crisis?!?" Okay, okay, I sneaked in some technical jargon. When economists speak of efficiency, they are sorta saying how can we do the best for the most. We have to get what we have (water, ice, lumber, medical supplies, etc. depending on the disaster) to those who need it most. Most is key. While we always want to satisfy this to the best of our abilities, in a crisis it becomes crucial. What substitutes do we have for allowing prices to gauge who wants/needs it most? We could use:
    • First come, first served
    • Personal, arbitrary preferences
    • Non-price competition (to the beautiful, the rich and powerful, the special interest, etc. go the spoils)
    • Government or other authorities trying (honestly trying) to determine who should get what (more on this fantasy world below)
  • All other methods listed above have SUBSTANTIAL costs associated with them. And there is very little reason to believe they would outperform the price dimension. They are all subject to manipulation (both malicious and innocent; intentional and accidental). They waste resources including time when resources are especially scarce. They encourage hoarding and black markets (more below). The best they possibly can do is match the outcome price would achieve while avoiding some of the dreaded downsides of allowing prices to rise. But just how bad and realistic are those downsides?
  • The downsides to letting prices rise to the new equilibrium levels are hypothetical straw men. If you are worried or distressed by the idea that someone, somewhere will profit off of a bad situation you need to realize that is a reflection of your own envy and a mischaracterization of who actually is in a position to provide goods and services. If you are worried that only "the rich" will be able to get the precious thing(s), then you are ignoring the fact that "the rich" always will have access, ignoring the charitable impulses of most everyone including those with more wealth, and ignoring that your wrongheaded description of "the rich" still leaves "the not rich" without access--store shelves get emptied when prices don't rise properly (see the Art Carden link at the bottom).
  • Black markets will spawn and propagate where markets in the light of day are prohibited. If you think you are ending the high prices "problem" by stopping prices in stores, etc. from rising, you are woefully naive. Those same "greedy" people who would otherwise raise their price up to the market-clearing, too-high-for-your-comfort level will simply take the items off the shelves and sell them in the alley at a more reasonable (given the new economic reality) level. And who do you think is buying in the alley? I can assure you, it is not the Boy Scouts.
  • Demand is not the only curve that can change. Supply very crucially can and will if we entice it. As also indicated in the next bullet point, one must answer the always important question: "And then what?". Allowing prices to rise sends signals literally worldwide that scream: "HEY, STOP WHAT YOUR DOING! THOSE [goods and services specific to the given situation] ARE DESPERATELY NEEDED ELSEWHERE. Help us reallocate them there. And help us make more of them!" The Mike Munger links at the bottom have a lot on this very important point. In a dire situation I don't just want some (water, medicine, etc.). I want all we can get including that for which it has not yet been economical to access/build/develop. I want the best pharmaceutical firms and minds working on a vaccine today--not just the most altruistic. I want the best doctors out of their personal quarantines and on the front lines--not just the most altruistic or frankly those with lower opportunity costs. If you have a severe, acute, and emergency back injury, you don't want to be paying only enough to entice a chiropractor to help you.
  • Think past the first level--there are strong incentives (social and economic) for businesses to not allow prices to fully rise or to themselves supply the charity we would want to make sure those without means can get the goods and services they truly need.
  • It is a very bad way of forcing charity as it imposes the cost of charity on those supplying goods and services as well as those who otherwise would have access to those goods and services. Think of the guy who really needs ice for baby formula or a nearby hotel room to keep his job but who showed up later than the guy who didn't need those things so badly but wasn't deterred from taking them because the price wasn't giving him the crucial information that somebody else needs it more who isn't yet here to say so.
  • It is immoral as it denies the property right that the owner of the resource has and it disallows her from most easily finding the person who needs it most and it punishes her for having been there in the first place to supply it. In a disaster we want the church to have been built and maintained for Easter Sunday. That is expensive. One way to get that insurance policy against pain in a disaster is to allow those who bear it 99% of the time to reap the reward for having bore it. 
  • Lastly, you want to substitute a market process with a government process in a time of desperate need. Do you really, really, really think those in government are in a better position (access to knowledge, incentives and feedback effects, corruption temptations, organizational structure, etc.) than the market to do the job? I would not trust a group of (non-government) people to have the judgement, knowledge, and ethics to dictatorially make the best decisions. Why would that change for those same people if I simply put them into a government system?
Links to more thorough sources:

Monday, March 2, 2020

Choose Your Own Adventure - Voter Edition

Choose one of the following ideological menu items by candidate:

Welcome to big-government democracy. Democracy is better than the rest, but the strong-state version has big shortcomings that are widely underappreciated. This is not an argument against voting. Let's assume that your vote counts; in fact, let's assume it is the only vote that does. If we assume a strong, powerful government that will be called upon to play a role in most affairs, we are doomed to a world filled with disappointment. This is true even for you, the sole voter. Surely this, a small sampling of each candidate's views, has conflicts with your own preferences. If not, let me present you with a longer list to certainly reveal disagreement.

Beyond you there is the rest of us. If we can find someone for each of the four candidates whose interests align at least in the strongly opposes and strongly supports positions, we will therefore have the ingredients for at least three disappointed people. But the problem is deeper than that. Each issue above is but a category unto itself filled with a myriad of nuanced issues. I would imagine the three candidates who strongly support government involvement in education have important differences in how they would effectuate that desire.

It should be clear from this alone that the will of the people is a silly mythVoting doesn't count in two fundamental ways: (1) in any typical election you can be reasonably certain your vote will not determine the outcome, and (2) even if your vote did determine the outcome, you could be reasonably certain that outcome would be disappointing.

If all you do is vote, the best you can hope for is a political climate that is conducive to the changes you want and resistant to the changes you oppose. In that sense it is like standing in an open field as a storm approaches hoping that lightning does not strike you.

Rather than just vote, I recommend thoughtful advocacy, approachable engagement (pick your battles but be prepared and respectful enough to kindly offer your disagreements), a willingness and ability to change your mind, but also a fundamental resistance to the power and growth of the state. The more we ask the government to do, the more we demand to be disappointed. 

Monday, May 27, 2019

Don't Let the Ideal Be the Enemy of Improvement

This recent Scott Sumner post got me thinking about a truism I like to follow: 

Don't let the ideal be the enemy of improvement--my take on don't let the perfect be the enemy of the good. 

Perfect is overrated. While I might be a libertarian idealist at heart, I have always striven to be a directionalist rather than a destinationist. And I certainly don't want to fall victim to the Unicorn Fallacy.

Consider The Big Five and reasonable milestones of progress to be aiming for.
  • Drug prohibition - Marijuana tolerance is gaining. This is largely good (movement in the right direction). However, it probably will have unintended byproducts like legalization = authority endorsement leading to overuse as well as even stronger resistance to decriminalization, legalization, and tolerance for other illicit products (cocaine, heroin, LSD, etc.) and services (sex work, price "gouging", etc.). Reasonable near-term aspiration: Federal action decriminalizing if not descheduling marijuana despite the before-mentioned byproducts.
  • Education - School choice is on a gradual but tepid rise. Reasonable near-term aspiration: A popular civil-rights figure strongly advocating for a voucher or charter school experiment in a major inner city. 
  • Immigration - These seem to be dark times. Yet I see two aspects of optimism. First, Democrat rhetoric is improving as they attempt to draw a distinction from Trump--this isn't faith in Democrat dogma but rather faith they will paint themselves into a good corner. Second, Republicans will likely need to soften the stance Trump has defined lest they risk losing demographically--this isn't faith in Republican virtue but rather faith in their ability to see a self-serving means to an ends. Reasonable near-term aspiration: A compromise solution to allow much-greater levels of H1B visas and higher levels of "desirable" immigrants (where desirability comes from greater restrictions on immigrant access to benefits or sponsorship by entities such as employers or charities or sanctuary cities).
  • Taxation - The biggest recent improvement has been in this category with the Tax Cut and Jobs Act of 2017. By far the two benefits of this mixed bag of tax changes were the reduction in the corporate tax rate and the increase in the standard deduction. The latter should enable future tax simplifications such as removing deductions and allowances much easier to accomplish. Reasonable near-term aspiration: Increases in tax-deferred savings limits.
  • War - This is the most stagnant category. Across the globe we are still explicitly overtly at war (Afghanistan, Iraq, et al.), implicitly covertly at war (Yemen, Syria, et al.), and potentially at war (Iran, North Korea, et al.). Reasonable near-term aspiration: A critical mass within the electorate of direct opposition to each of these three types of bellicosity. Even if it is a selfishly-derived opposition (stop wasting our resources on lost causes, don't fight other people's battles, regroup in case we need to fight a big enemy), it would be helpful. 

Saturday, February 9, 2019

Government Shouldn't Run Healthcare, Etc. -- Round Basketball Court Edition

Driving by watching this park develop years ago it surprised me as I noticed this circular pavement being built not knowing what it was going to be.

When basketball goals went up I became irritated and was reminded of this irritation again every day as a drove by. Anyone who plays or watches basketball knows this is not what a basketball court looks like or how it is played. In fact it is dangerous. Not just because anyone who has played much basketball builds a muscle memory of the court being rectangular with corners extending to a baseline, but simply because the natural flow of play will take people off of the edge of this circular court.

Of course, this is not something to go to the mattresses over. As frustrating as it is, this incorrectly built basketball court is not the problem; it is just a symptom.

The problem is that even though a strong public goods case can be made for local government’s role in parks, government is ill-suited to successfully provide parks. It is not for lack of good intentions and not even necessarily for lack of good, intelligent people. Rather it is because of a lack of good incentives or perhaps more accurately a good incentive structure.

Government doesn’t have the right feedback loop. Government actors do not have the tools they need to course correct as they make decisions. It doesn’t matter that it won’t be the same people who designed and built this park trying to run healthcare or trying to guide the financial system or trying to fight wars or trying to [insert whatever grandiose project you want government to do]. And it does not matter that there will be enormously greater resources devoted to the grandiose project; in fact that probably makes it worse.

One High Net Worth Investment Manager's Plea: "Raise Tax Rates to 70% NOW!"

Shout it (and dance it) from the rooftops! We need higher tax rates on the rich. I'm not greedy. This is all I ask.

Please raise rates like in the good ole’ days.

Give me a way to help rich people shelter income from the tax man.

Bring back all the intentional loopholes, the legal methods to ensure that old money stayed on top.

Help me tie up capital in ways that benefit the haves and fill my pockets as well as those of tax lawyers and Wall Street financiers. It isn't just me that is hurting. Plenty of other people were promised lifetime high incomes and prestigious positions. Now we are forced to sully ourselves with talk of "adding value" and "matching the benchmark"--as if I should have to justify my 6-figure bonus. I have an MBA, for God's sake!

I don't mean to lose my cool, but I have had enough. In this world of passive investing, low fees, minimal commissions, and democratized capital we desperately need a way to justify our enormous salaries which fund our lavish lifestyles.

I am so disappointed in recent politicians. I'll tell you something. This country is going to the dogs. You know, it used to be when you bought a politician, that SOB stayed bought. Now they are raising the standard deduction and taking away options like having taxpayers help rich people pay for stuff--no more tax breaks for $100,000 football suites, etc.

We had a great system. It was working just fine during the days of Ike. They warned that kid, Kennedy, not to go down that path of "rising tide lifts all boats". Don't let the camel's nose into the sheikh's tent. He did it anyway.

Dream of a better tomorrow starting today. Imagine how more complex and elaborate our schemes could be in the modern world of international world of finance. Give me a 1,000 billable hours and a few well lobbied-for loopholes, and I could craft a perpetual wealth-shelter machine to ensure no taxman or 99-percenter ever touched a penny of great-granddad's fortune.

First they come for the 150-foot yachts...

Taking my tongue out of my cheek, the sad reality is we are still far, far away from an efficient, effective, fair, and simple tax regime (see also the long version). Progress has been made, but so much remains.

Saturday, April 26, 2014

What Basketball Strategy Can Tell Us About the Growth of Government

I believe there is a fundamental flaw in the U.S. Constitution and federal government structure. As foresightful as the founders were, they failed to appreciate the tenacity and momentum of government's reach for power. Allow me to illustrate with an analogy:

Some time ago basketball coaches realized there was a strategy they could employ to give them a systematic edge over opponents. What they realized was that while physical contact to gain an advantage over the opponent is generally prohibited in basketball, not all fouls as such were called. What's more, the referees exhibited reluctance to call fouls beyond a certain threshold. So a game with 100 fouls in it would only result in perhaps 40 fouls being called (40%) whereas a game with 50 fouls in it might result in as many as 30 fouls being called (60%). Therefore, a team that was naturally more aggressive would have an advantage as aggression escalated--sure they'd be called for fouls more often, but they would also get away with more fouls and they would create a more disruptive environment more suited to their style of play. To take the strategy further these aggressive teams would be built to accommodate the more aggressive style having athletes with more strength than finesse. As a result the officiating landscape of college basketball shifted to the favor of the aggressive teams. Because this was an emergent and unforeseen development, it can be said the rulemakers in basketball failed to appreciate the risk of this.

Similarly, the founders failed to appreciate how more and more government would overrun the checks and balances system created to prevent undesired government growth. Ultimately it is the role of the Supreme Court to prevent government behavior that is prohibited by the spirit or letter of the Constitution. And generally the hallmark cases brought to and decisions made by the court have been to limit government encroachment of freedom. But as the landscape of legislative spending and action and executive regulatory zeal has developed in favor of more not less, liberty has given ground. To wit, when we are debating if Obamacare imposes a fee or a tax, we have already lost.

The implications of this are sobering. We cannot depend on the Supreme Court to undo that which we as a society have evolved to allow--that is, a belief that government rightly and pragmatically provides solutions. Reversing the tide of government growth requires both changing our understanding of the role of government as well as recognizing that stronger impediments to government growth are needed.

Cross posted at

PS. This topic dovetails with the highly recommended recent Econtalk with Steven Teles discussing the "Kludgeocracy".

Saturday, April 19, 2014

The Truth About the Consequences of Limitations

Channelling Andy Rooney . . . Have you ever noticed how the large street signs for businesses remain long after the business it advertised has gone out of business? Sometimes the sign remains even if the building itself is destroyed? You ever notice that? You wonder why? Here's why...

Let me put the Ouija Board up before I stop trimming my eyebrows and start being insensitive and cranky. 

Now on to my answer.

There are at least two reasons at work in most communities, and they are related. First, putting up signs costs money. When a business operation ceases, the owners of the existing property probably hope to replace it with or sell it to a new business operation. That business will likely want a sign; so taking one down, which isn't free, just to put up another, also not free, is inefficient. 

Second, putting up signs costs money--no, I'm not being redundantly repetitive as I restate that again. In the second case I have in mind an artificial cost: a legal permit to put up a sign.

Because high-minded people don't like "ugly" signs that help people navigate to places they'd like to go including places they may not realize they want to go until they see the sign (but I digress), the high-minded people impose limitations on signs and billboards. This has the intended effect of reducing the signs that "blight" our view. The also has the unintended effect of encouraging signs to remain standing even after they don't serve an advertising purpose and are presumably maximizing blight including promoting false information... (Sorry, kids. That wasn't a sign for a Happy, Fun Burger. That was a sign for where a Happy, Fun Burger used to be.) 

I had been thinking about this phenomenon recently when I came across this Megan McArdle article on how limiting divorce may limit marriage in an undesirable way. She adeptly points out that limiting exit can limit entry, which means many couples will not take the generally beneficial step of formal marriage. 

We can say this about the sign permit effect: If you make signs and billboards difficult to put up, you'll make them difficult to take down as well. The unintended consequence of limiting signs coming up is that they will tend to stick around after their use life negating the purpose of the original limitation. We can generalize this to include things like marriage and employment, another issue McArdle brings up: If you make things artificially difficult, you risk discouraging the good versions and encouraging the bad versions of that thing. 

PS. One quibble with a point Megan makes in her last paragraph. She writes, "As conservatives are fond of noting, societies, like economies, are very complex organic systems. We do not understand them, much less control them with a few simple tweaks." I would say conservatives are fond of noting this when it serves their particular purposes. While libertarians recoil at the idea of tweaking society with near-ubiquitous consistency, conservatives are far too tolerant of tweaks in the "right" direction. 

Monday, April 7, 2014

It's Such a Fine Line Between Stupid and Clever

A common and easy mistake one can make is to rush to judgment on some issue and confuse stupid behavior with corrupt behavior. Either can look the same to an outside observer. The point of view one takes may simply be being shaped by the bias one brings to the situation.

To take two examples, consider Chris Christie in bridgegate and the NCAA in the student-athlete unpaid employee affair. I don't buy that Chris Christie is so dumb and unconnected as to have not known what was going on. And I also don't buy that the NCAA really believes the nonsense it espouses. But maybe that is just my bias against politicians and high-minded cronies. Still, I prefer to think that Christie is playing dumb without option (that is, he doesn't have any option but to play dumb, not that he is dumb and that's his only option) and the NCAA is crazy like a fox.

Yet, false conspiracy theories abound due to the mistake of always assuming smart people must be corrupt because the only other option is that they, smart people, acted dumbly. Maybe Obama really did believe Solyndra was a good investment and that the NSA was just playing Minesweeper ...

Bundled within all this are unintended consequences--innocence from corruption and stupidity. Case in point is what Megan McArdle brought up in her article which I linked to in yesterday's post. There can be perfectly legitimate reasons for things, especially emergent things, that have large and in some cases overwhelming side effects. Side effects that are unintended but look either stupid or cleverly corrupt.

Tuesday, February 25, 2014

Highly linkable - on high-minded steriods

I want to go to there. And while we're at it, here too.

So let's talk about misled people doing selfish things. But perhaps it is not as bad as it seems.

Here is a different example of the same kind of high-minded nonsense as above. I particularly like the quote: "It’s time for the altruists to get over themselves. We cannot afford the price of their convictions."

The high-minded Fed controls interest rates, right? Wrong.

Just how bad are the effects of rent control--one of many forms of high-minded real estate planning? Maybe to the tune of about $1 billion dollars on a $3 billion neighborhood. Dr. Evil would be proud.

Lenin was a prohibitionist!?! Shocking . . . well, no; that makes sense. He was high-minded enough to want to help every aspect of Russian life.

Speaking of turn of the 20th century garbage, apparently my Spidey Sense was correct when it picked up on something rotten in Downton. The George Will piece quoted in the previous link deserves its own link. Still a good show; let's just not romanticize how hard life was for most everyone in prior generations.

Enough negative stuff, for the moment. Let's think about a cool new business idea. While we're at it, let's think about how fabulously wealthy cool new business ideas continue to make us.

Okay, moment's over. You know, college football isn't a business; hey, stop laughing! Like all NCAA sports, it is about pure amateurism.

Sticking with sports, I think I am being consistent when I believe both (1) that Oklahoma State's Marcus Smart was potentially justified in pushing a Texas Tech fan (if the fan had been injured and I was on a jury, I would be giving heavy consideration to a self-defense argument in favor of Smart) and (2) people in public (state-owned) spaces or attending official-state-functions have wide latitude to say nearly whatever they want in the act of cheering. The First Amendment doesn't have a carve-out exemption for your or my high-minded respectfulness or proper etiquette. You don't like cussing, hatefulness, and otherwise ugly slurs coming from the crowd? Quit funding sports arenas and sports teams with taxpayer money.

When it comes to sports and high-mindedness, you don't get any higher than the Olympics. And you'd have to be high not to see through the veil of virtue and right into the corruption, state run-amok wastefulness, and panglossian denial of oppression that is the Olympic gathering. I very much like the stories of so many of the athletes. I like the history of competition. I detest the desire to pretend there hasn't been and doesn't continue to be intense nationalism (an illogical and evil conception) at the heart of The Games. Don't get me wrong. I root for Team USA, but I also root for others. These sports aren't my sports, and some aren't even sports. These are interesting curiosities that viewing for just a few moments will satisfy my interest for four years at least. But if you're really into it, great! Just don't tell me we are obligated to root for our country. And don't tell me it is "us" versus "them". And PUH-LEASE don't tell me how great The Olympics are for world peace, the economy, or NBC ratings.

Saving the best for last, Megan McArdle busts the high-minded bubble of paint-by-numbers educational excellence cum success. "Let your kids fail!" is perhaps the best advice one can give a parent.

Sunday, February 9, 2014

Crime and Punishment, Law and Order, Optimal Rulebreaking

From Advanced NFL Stats:
Last week a WSJ article about the Seahawks' defensive backs claimed that they "obstruct and foul opposing receivers on practically every play."  I took a deeper look in to the numbers and found that as long as referees are reluctant to throw flags on the defense in pass coverage (as claimed in the article), holding the receiver is a very efficient defensive strategy despite the risk of being penalized.
That is from a guest post by Gary Montry, a professional applied mathematician. The article is very interesting, but gets a little deep into the statistics beyond the points I want to discuss here. Nevertheless, it is a rewarding read that I encourage including being as Brian Burke puts it, "a great refresher on conditional probabilities and Bayes' theorem".

The article made me think a little about how economic efficiency many times runs counter to our intuition and ideals when it comes to wrongdoing. Novices often get confused by the fact that the economically optimal level of pollution, crime, et al. is not at all zero. It is not that a certain level of pollution is a pure good or that some amount of crime is desirable in an absolute sense--these are still and always "bads" rather than "goods". It is just that at some point the benefit of eliminating the next (aka, marginal unit of) crime or amount of pollution is not worth the cost. At that point we tolerate the "bad". Fortunately, economic progress implies that the cost curve for fighting problems is ever declining.

Tying this back to the article, the question is how could the rules or enforcement be restructured so that this manipulation, which is arguably against the spirit as well as the letter of the law of the game, is corrected or reduced. Howard Wasserman's new paper on Football and the Infield Fly Rule, which is on my to-read list, may offer some help here. The paper is an exploration of how some football situations may imply and incite behavior that is counter to the spirit of the game and sportsmanship. I don't expect him to address this specific issue, but I do expect the analysis to offer some help in situations such as this.

The article also got me thinking about how my neighborhood's HOA is considering instituting fines for uncorrected violations of the neighborhood's covenants. At issue mainly is roof-mounted satellite dishes that are visible from the street--because we all know that things like this "obviously" lower property values by "a lot" (economic research forthcoming I'm sure). Here are some of my concerns assuming we even have the authority as an HOA to do this and assuming (a BIG assumption) the covenants are optimal as written:

  • Will the punishment (fine) fit the crime? How would we know? If the fine is set so that the behavior is undoubtedly discontinued, we've probably set it too high. If the fine is always paid with no change in behavior, it is not necessarily but could be too low. In fact the optimal fine probably has some of the violations corrected and some continued. But the same people who roll their eyes when economists say we want some level of pollution to continue probably roll their eyes in uproar to think that the neighbor gets to just pay a pittance to continue their property-value-destroying activity. Mrs. Kravitz would be shocked!
  • Do we set the fine equal for all violations (that is the proposal on the table)? Is parking a trailer or a boat for "long periods" in a driveway equal to satellite dishes being visible and equal to trash cans out of compliance and equal to dead trees not removed or not replaced by the right kind/size of tree etc.? It seems the answer to the second question is most likely "no", which implies the problems of getting the fines right is growing in magnitude.
  • Do we really want the reputation as the neighborhood who runs around assessing fines on one another? Is that property value maximizing? The list and litany of compliance violations came out a bit during the recent HOA meeting. The implication seemed to fall on deaf ears.
  • Have we given up on neighborly persuasion? Can't we all just get along? 
Rule making and rule enforcing are endeavors fraught with unintended consequences. Just desires and outcomes are almost always highly debatable and are always evolving. Simplier is usually better. Persuasion is generally preferred to force. Tread lightly. 

PS. I knew I was in trouble when the HOA asked if the trees I had planted were "free-range" or "farmed". 

Sunday, January 26, 2014

It Was My Party, And I'll Deny Its Demise If I Want To

You are in the cocktail party business. In this business you throw parties every Friday and Saturday night. There are two characteristics of this business that would have probably surprised those who originated the "industry" 150+ years ago: it is highly profitable and tends to have a natural monopoly aspect. These are self-reinforcing phenomena. Upstart competing party suppliers face strong headwinds namely because the first mover advantage is high--who wants to risk going to the new party if most of the desirable partygoers still attend the incumbent party. Further, being at the right party is everything. It is a who's who of the local scene. Being there exposes one to all the good gossip, but more importantly it is a status-establishing and trust-creating event. Business partnerships and marriages come out of the encounters the gatherings foster.

It is also not cheap to enter this business or do it well. Startup costs include building a facility large enough and entertaining enough to sustain the business, which means accommodating nearly all tastes. Running the business means straddling a delicate balance between indulgence and moderation. Know thy customer is paramount as what will fly at a San Francisco party might be verboten at a Bible Belt party.

The on-going costs are steep as well: music, drink, food, performers, etc. require scale operations done efficiently. Here good supply-chain management has strong rewards.

Thankfully the locals tend to be fairly loyal and almost defensive about their party supplier. When travelling to other cities, people tend to long for the hometown party and feel out of place navigating their way through another town's party.

The typical revenue model holds across the industry. To wit, there is a membership fee that is low on a per-party basis but is high in absolute terms because there are so many parties in a given year (~150 when the special holiday parties are considered). Added to that are the many locals from businesses to individuals who actually pay to have special privileges at the party. These range from reserving/sponsoring rooms some of which are invitation only to being the bartender in a choice corner which grants exposure to desirable partygoers to having a charismatic escort introduce them to interesting attendees and even to having people paid to spread whatever news the sponsor wants spread.

As one can imagine, this is a complex business with a deep and wide book of both accounts payable and accounts receivable. Although it is highly profitable, what actually drives the profits is poorly understood. The salespeople believe that nearly every patronage deal makes not just a profit but a high profit at that. Likewise, the regular staff including performers, waitresses, bartenders, et al. believe the membership fee covers almost all of the revenue the business brings in--this is a false belief as it is nearly the reverse that is true. Additionally, the regular staff is virtually in the dark about how profitable the business actually is suspecting it is only moderately profitable. But although it is highly profitable, nearly all of the profit is driven by just one business line--room sponsorship. What's more these sponsorships are more "bought" than "sold"; in other words there is little the sales staff can do to drive this business, but this truth is poorly understood. Sponsors tend to be large, national companies. If sponsors are interested, they buy across many markets--hopefully yours is included.

Now, the naive interpretation, that this means many business lines can be cut so as to grow the bottom line, is patently false. The party is a bundled good. As such there are many loss leaders when looked at on an individual basis. But these all tend to contribute to being in the business of cocktail parties. It ain't a party unless A, B, C, . . . X, Y, and Z are there. Even if only Z is truly profitable. So if you properly build "it" (a thriving cocktail party), profitable factor Z will come. The rest is necessary but insufficient (for business-sustaining profitability).

Everything is going great until one day someone introduces the world to commercial websites on the Internet. Most importantly businesses who currently are buying room sponsorships now have a new, much lower cost alternative--rooms not just sponsored by a firm but owned and maintained by that firm and open all the time. At the same time individuals are realizing they can have cocktail parties at their homes as well as afternoon parties in the park and get togethers in a large variety of venues that include only their select friends or associates and cater specifically to their tastes and desires. These parties are as small and limited as the industrial cocktail parties were big and open.

Suddenly the cocktail party industry is subject to competitive threats like never before. The business is eroding quickly. Because it was misunderstood, the business's adaptation is clumsy. Efforts to shrink run into threshold problems--you can only get so small until you are no longer truly in the cocktail party business. Efforts to break up into small, nimble units (small parties for select partygoers) falter because efficiencies from economies of scale are lost. Everything the business was good at is now working against adaptation. No one element of the cocktail party was the best in class. It was the whole party itself that was great--value of the whole exceeded the sum of the parts. But that synergy is now gone.

Questions like "Who will supply parties?" are misguided distractions. People will always find ways to get their party on. They don't need the cocktail party industry to do it for them. At least not anymore.

This is my analogy for the newspaper industry. Specifically, cocktail parties are newspapers; memberships are subscriptions; the entertainment and refreshments are journalism; patronage deals are advertising; the Internet is, well, the Internet. In six years as an internal financial analyst learning the business inside and out, top to bottom, I think this analogy best encapsulates the dynamics at work. One thing I learned from my own efforts was that four relatively distinct business units exhausted all the sources of profit--employment ads, national-firm ads, preprint insert ads, and color newsprint or run-of-press (ROP) ads. There was no amount of "feet on the street" that was going to drive this business. My understanding of the business's sources of profit was overwhelmingly met with dismissal. I understand why. It was an awkward thing to hear--that most of the things you as a business are doing are just means to an end. And generating and sustaining a profitable business is a complex process filled with nuance.

The things you do as a business are not necessarily the business you are in. For decades most of McDonald's profits have not been from selling hamburgers, et al. per se. They have been from the real estate fees from franchisees. Newspapers were no more in the profitably selling content business as they were in the putting ink on paper business. It was simply a necessary but insufficient (for business-sustaining profitability) part of the process. I am not saying they didn't do content well. They definitely did. They also were very efficient in running press and delivery operations and great at relationship management with businesses seeking advertising. But ultimately they were cornering the market on an invented commodity--access to eyeballs. The newspaper bundle was a great medium for a very long time with strong competitive advantages. And the culture of the industry was rightfully resistant to change--don't rock the high-profit boat. But add this to the list of advantages that became hindrances.

Journalism (more broadly defined than the very important people would like) will go on. Advertising will go on. Newsprint in some fashions will go on. But the newspaper industry is on the back nine of a decade-or-so-long process of ceasing to exist for all practical purposes.

Denying that the party is over doesn't change the fact that the guests have gone home.

Tuesday, December 17, 2013

The Regulator's Dilemma

Imagine two rooms: one is a group of consumers and one is a group of producers. For now the rooms are completely isolated from one another. As they are labeled, these two groups will interact in trade.

Now imagine a regulator whose job is to, well, to do something. The regulator has imperfect information but is guided by a few beliefs about the job to be done. The first is a belief that the job exists somewhere along the dimension of necessity, which extends from anti-necessary to necessary. At the extreme of necessary the regulatory job is required for a good outcome. Anti-necessary is not the same as unnecessary; rather it means the job of regulation is in fact destructive—that the execution of the regulatory job brings a clear net harm.

The second belief is about where the need exists. Is it the consumers or the producers who need "help"? Let's call this dimension need.

The third belief is that he as the regulator will do a good job of fulfilling the regulatory mission. Let's call this dimension effectiveness. This dimension obviously extends from positive to negative meaning he does a good job or a bad job regulating.

The regulator has limited resources in addition to imperfect information. He must make tradeoffs. The interaction of where his beliefs land on the three-dimensional grid of necessity, need, and effectiveness will determine how he approaches the job of regulator (of course, it may not just be his beliefs that guide that decision, but he is a good proxy for the fact that something guides those beliefs).

For example he can concentrate his efforts on the group of consumers. In this case he surveys the room of consumers with the underlying belief that 'there are people in this room who can't be trusted to make good decisions even if there is no fraud involved. I must protect those idiots from themselves.' Call this option 1.

Alternatively he can concentrate on the producers thinking 'there are people in this room who can't be trusted to act ethically. I must stop those crooks.' Call this option 2.

And of course there is the more likely option that he divides his efforts between both groups. Call this option 3.

Here are my thoughts:

  • We unfortunately tend to view the job of regulation and regulators as highly necessary and highly effective. This means they punch hard and with impunity. The only thing left to decide is where they punch.
  • Option 1 can be a realistic point of view or it can be a disgusting point of view. People do make poor choices—all the time, every day. But the magnitude of those poor choices matters. So does the incentive arrangement—who is in the best position to benefit from a good choice and hurt but learn from a bad choice. At the extreme this point of view relies on a paternalistic philosophy that assumes the best way to make decisions is through a poorly incentivized and poorly informed regulator. Free market processes are highly superior to a regulator if option 1 is our focus for regulation.
  • Option 2 is the best case that can be made for regulation. There will be fraud and with it real blood. But again the role of the regulator can and should be limited here. The regulator can be a blunt and poor instrument for discovering and preventing fraud in all its forms including unintentional harm. Liability law via common law and contract law (both emergent processes) can be equal or better regulators than a pure regulator himself.
  • Option 3 is where most regulation tends to land from the SEC to the FDA. And think about how the more dynamic real world plays out. The rooms aren’t actually isolated from one another nor are the groups mutually exclusive. Everyone is in one big room wearing multiple labels. The imperfectly informed regulator is going to look for the help of the relatively informed producers to help guide his attempts at helping consumers. He is asking people, some of whom are crooks and many of whom have ulterior motives, to structure and enforce option 1. He will also look to define fraud from the point of view of the “victim”. The relatively injured consumers (who will self-select among those who have suffered a harm—happy people don’t complain) will help guide the regulator. He is asking people, some of whom are notoriously making bad decisions but not bearing the full burden of those choices, to structure and enforce option 2. This is a formula for regulation that is anti-necessary, ineffective at all the wrong times, and fulfilling mythical needs.

Friday, December 6, 2013

The rent is too damn high!

One of the growing pains associated with getting wealthier is that things change in value and thereby the dynamics of tradeoffs change in turn. Here is a great example of this phenomenon. As I heard this story driving into work the other morning, I was struck by how poor the reasoning was for those who are "fighting back".

The essentials in this story are indicative of something happening in many places. San Francisco is a very desirable place to be. It is not just my opinion that it is awesome. As evidenced by the story, it is many people’s opinion and those opinions are strong (as measured by the willingness to put lots of their money behind that opinion). As the San Francisco desirability has grown, the value of real estate there has grown too. Ah, but there is the rub. Not everyone benefits from that increase in value. Now that new additional people and their wallets have arrived, the current residents who were enjoying it for less cost than what it is worth today are screaming, "There goes the neighborhood!"

It has always been the case that a rising value of real estate meant that the use of that real estate would change over time, but for some reason it has become a popular media topic. There are a few of ironies in these stories that don't get adequately reported if they are mentioned at all:

  1. A large part of why the cost of living rises quite rapidly as popularity rises in many highly desirable places like San Francisco is because of legal impediments to growth and development. The same government that creates the zoning laws et al. that limit development is the government those "fighting back" would like to see prevent the cost from rising.
  2. Dovetailing with that is the irony that rent-controlled living, artificially shielding renters from the full cost of living, discourages real estate development that would then be subject to rent control. A viscous cycle emerges of artificial scarcity begetting higher costs and hence higher value for the cost shielded (rent-controlled) space.
  3. As evidenced by some of the comments in the written piece, there seems to be a huge intolerance for change (and those bringing the change) by those who espouse tolerance as a virtue of the current neighborhood.

But here is what really struck me—the poor reasoning of those "fighting back". I put fighting back into quotes because the use of it in the reporting is pejorative towards those being fought against. Those "fighting back" (the renters) actually are attacking those who were already being disadvantaged through rent control. My points are the following:

  1. It sucks to see things around you change in ways that you don't desire. Part of that in this story is the composition of the neighborhood. But I think that is a sideline issue and a distraction. The renters would not be bringing it up if it did not put a more high-brow spin on the real fight—namely, the desire to continue to get something for less than the full cost at someone else’s expense. Nevertheless, let’s take seriously the consideration that change isn't always beneficial to all involved. But that is a fact of life. Don't be mad at those changing the neighborhood. Be glad to live in a place that largely allows change.
  2. No one said you deserve to live in the same place for the same cost for as long as you like. That is a promise no one can reasonably keep. Don't be mad that the real estate owners have found a "loophole" to evict the rent-controlled tenants. Be glad to have benefitted at the owner’s expense up until now.
  3. You are the RENTER. You chose to RENT the place you lived in, which meant you weren't responsible for all the risks and expense associated with being an OWNER. Now that the OWNER, the one who is entitled to the property, has seen a return potential for the risk he bore, he has the natural right to realize that return. Don't be mad that the OWNER has new options. Be glad you didn't have to bear costs and risks you chose to avoid.

Yes, this change isn't working out very well for those who were benefiting from rent control. And I do indeed sympathize with the difficulties and emotional stress and loss that all come from having to move. But think about it this way. Suppose San Francisco had instead grown to be very undesirable. Suppose rental rates had plummeted. Suppose that come renewal time those in rent-controlled apartments either had cheaper rent options in different apartments or simply wanted to leave San Francisco altogether. Would it be in any way right to force the renters to renew the now more expensive rent-controlled lease and to force those who wanted to leave to stay in San Francisco?

Tuesday, December 3, 2013

Highly linkable

NFL overtime is broken. Fortunately, Brian Burke is here to fix it.

Be happy because, well, Cause it's getting better; Growing stronger, warm and wilder; Getting better everyday! (be sure not to miss the second link, Fool!).

But I had the best of intentions; I didn't mean for that to happen.

The real reason Henry Ford raised his worker's wages--standard high school history is lies and garbage.

Something to be thankful for.

The Pope has a lot to learn about economics. Reviewing the extensive Library of Economics and Liberty would be a good start. Here is a recent piece by Bob Murphy to get him started.

Wednesday, November 20, 2013

How would a tax on employment help workers?

I was asked to comment on this tweet from Michael Pollan and the study he references:

Michael Pollan (@michaelpollan)
Taxpayers pay $1.2 billion in public assistance to make up for MacDonald's lousy pay and benefits. Fascinaing [sic] study.

The "study" from the National Employment Law Project (NELP) basically makes this argument:

  • Many employees in the fast-food industry are also on some kind of public assistance.
  • The fast-food firms are profitable.
  • Therefore, the firms are costing the taxpayers for the amount of public assistance their employees consume. 

My review: In a word, that "study" is stupid. Totally nonsensical. It is so absurd it is closer to a parody than an actual public policy argument. Would we rather the employees not have jobs? That is the alternative. Not above market wages. Does NELP or Pollan have an argument that these employees are paid below market wages? If so, it is not in this report. CEO and top-executive pay should be disconnected from other employees' pay. An economy that would base employee pay on CEO pay would be a poor economy with lots of unemployment or very low wages. Likewise, an economy without profit flowing to owners is an economy without profit.

Thinking more about it I realize that what Pollan and NELP are essentially advocating is a tax on employment to be paid by the employers. Rather than have society in general pay for benefits we presumably want to provide for those in need, the businesses who employ them and lighten the load should shoulder the entire burden. Not only does this proposal fail an economics test; it fails a fairness test as well. 

I guess Hammer was right. It takes wages to make wage slaves.

Saturday, November 2, 2013

Did we really expect Big Bird to be good at running the world's largest health insurer?

In 2009 in the midst of an economic and financial crisis, the President of the United States chose to direct his administration's efforts toward solving the problems of health insurance as he saw them. For some reason he believed massively increasing third-party payment (a condition that we have no evidence and no theory to suggest should work) was the key solution along with price controls, production quotas, and government-provided alternatives. There were lots of reasons to believe this would not work out well, but the generally overlooked one was the world's largest mega-conglomerate has a horrible track record of getting from intentions to effective and efficient execution.

The virtues of Obama's intentions were well disputed. Arguments were also strongly and sufficiently offered against the effect these policy changes would bring about. But few, Megan McArdle the exception, predicted the websites wouldn't work. Yet we shouldn't be surprised. All reasonable philosophies of political economy leave room for the failure of democratic governance. Coming from a libertarian, free-market philosophy, I believe these schemes are destined to fail because government lacks the proper incentives. But others coming from a progressive philosophy should expect that sinister Republicans, conservatives, tea-partiers, et al. will thwart the efforts of the enlightened. It only becomes utopian nonsense when after the supposed thwarting the defense of failure is "It would have worked if it weren't for you meddling kids."

The website failure is a demonstrative microcosm for why Obamacare is doomed. These aren't glitches, this is a canary in the coal mine.