Income Disparity and the Occupy Wall St. Crowd.

I've posted before about the income gap in this country.  Alas, I have to acknowledge I made a prediction that ultimately turned out to be wrong that the economic downturn would shrink the gap.  Well, as they say, predicting is hard, especially about the future, but even if I can't predict the future well, I stand by my overall points of what we should make of the income gap itself.

Anyhow, income inequality is back in the news with the Occupy Wall Street (OWS) protesters making a big deal of it.  It's certainly a real issue (albeit, as I've said before, a symptom of underlying problems rather than a direct problem itself).  But I think the OWS folks both make the mistake of viewing it as the problem, but also making assumptions about the causes that imply fixes that would not be appropriate.

At a macro level, there are 3 ways that income inequality can arise.  For the sake of illustration (and easy math), let's assume we start with a nation of 100 people, each of whom makes $100/year.  The entire annual economy is thus $10,000, and there is (initially) no income inequality.

How can inequality arise?  I think there are three basic scenarios, and I think it's important to point out that they are not mutually exclusive.  Quite the contrary: I think they all happen, in varying degrees, over time, simultaneously with the others.

Scenario 1: "Malthus Model".  In this scenario, one or two people ("the 1%") enrich themselves at the expense of the rest, but the overall economic pie remains fixed (hence the name "Malthus Model", after the man who predicted starvation due to growth in population that outstripped production).

Bernie Madoff would certainly be an example here, as were the CDOs that sliced and diced mortgages and got rated AAA despite having lots of sub-prime crappy mortgages in it.  I think CEO pay (another OWS complaint) could also arguably be placed here, to the degree that any "excess" pay they get above and beyond the value the create for the company comes at the expense of shareholders and employees.  Whether any CEOs pay is excessive, of course, is a subjective call, but there is good evidence that it has gotten disconnected from CEO value, especially when more than half of company boards target their CEO pay to be above the 50th percentile.  That is, of course, mathematically impossible to achieve, but it results in CEO pay that increases much faster than the underlying fundamentals.

Lotteries, by the way, are also in this model: 100 people spend $1 on a lottery ticket, one person wins $100, so that person gets $99 richer at the expense of the others.

In any case, it seems to me that Malthus-model driven economic disparity is often (though not always, as the lottery example demonstrates) indicative of a problem.

Scenario 2: "Steve Jobs/MicroEconomic Success": suppose that one of the 100 people is Steve Jobs, and he invents Apple Inc.  This creates a huge amount of value, and since the company is Steve's he will keep a significant amount of that value.  Everybody else still makes $100 (or perhaps a they take home little less that year because they buy an iPhone), but Steve makes a lot more money.  So now there is huge inequality between the 1% (Steve) and everybody else.  Two things to note here: (a) the other 99% did not suffer due to Steve (to the degree that they spent money on iPhones, they did so because they felt the iPhone was more valuable to them than the money it cost), and, more importantly, (b) the overall pie grew significantly due to Steve's creation.

I would argue that income disparity from Scenario 2 is not a problem, and is in fact a "good thing."

Scenario 3: "MacroEconomic Changes".  This is arguably a variant on scenario 2, but in this case it isn't that the folks that get rich create disproportionate value and wealth for themselves, but rather that the entire economy grows by some percentage (sometimes negative).  So our economy may grow from $10,000 to $10,400 one year, and then drop to $10,200 the next year.  The inequalities arise here from the fact that the growth (positive or negative) is not spread evenly across the population.

There are many factors why this growth is uneven.  For example, not surprisingly, people with more education and/or more marketable skills tend to weather the downturns better and ride the economic growth more than their less educated or less market-ably skilled fellow citizens.  People who get hurt or sick have trouble even in good times, and may not be able to change jobs due to health insurance concerns.  Our aforementioned lottery winners do well regardless of the economy.  Workers with skills that match open jobs may not be able to take those jobs because it requires them to move and they can't sell their homes because their mortgages are under water (this is proving to be a huge stubborn issue in the current recession given its housing bubble origins).  Macroeconomic trends can change the value assigned to skilled labor, moving jobs to where it can be done more cheaply.  (I can address why I believe fighting this trend rather than adapting to it is generally a bad idea in another post).

There are many moving parts here, many reasons why economic ups and downs affect different populations or economic sectors in different ways.

For that reason, I think that income disparity from Scenario 3, unlike scenarios 1 and 2, does not easily lend itself to a "problem" or "good thing" label.

Furthermore, I think that this scenario is by far the dominant driver of inequality, followed by scenario 2.  I think the Malthus scenario covers too few cases to be a major cause.

And therein lies my issue with the OWS crowd's take on income disparity.  To hear the chanting and slogans and placards, one would think that our income disparity is almost exclusively due to Scenario 1.  If that were the case, then it would be a simple matter of shifting "ill gotten" wealth back to its rightful owners and all would be well again.  But alas, in a Scenario 2 world that sort of explicit wealth transfer truly would be punishing success (hold that thought) and in a Scenario 3 world that probably wouldn't solve anything anyhow.  So I think the OWS crowd is dangerously naive here.

Now before you think I'm totally dissing OWS and everything they believe in, let me put in a defense of the 99%: It is important that we have a strong and vibrant 99%.  If you are a member of the 1%, you need to realize three things.  First, if you think you got to be a 1-percenter in a vacuum, you are delusional.  You did it in a society with good transportation infrastructure, rule of law, low corruption, security, and so forth - all of which are government functions.  Secondly, stability is critical to your success, and places with high concentrations of wealth tend to be less stable than places where there is broad economic participation.  And finally, having a healthy 99% is critical to your continued membership in the 1% club.  Steve Jobs would not have made very much money, after all, if nobody could afford to buy Apple products.

I do not advocate any solution that has a direct aim to reduce wealth concentration.  Robin Hood is decidedly not the answer.  But there are reasonable steps to help ensure that the broad middle has a fighting chance to be economically significant participants in the economy.

Fortunately, America has long done well with this.  For example, we already have a progressive tax system.  Indeed this is (by definition) a higher burden on the wealthy than on the poor, but as long as it isn't punitive, it is a very reasonable way to ensure that healthy 99%.  A 35% top marginal tax bracket simply is not punitive, but then neither was 39.6% (which we had throughout the boom of the 90s) or even a little higher.  (I think when you start hitting 45% or more things start to get punitive).  There are good arguments that the overall size of government needs to shrink - and if so, the rates obviously could come down.  But unless and until that shrinking happens, the tax rates need to reflect actual costs.  "Starving the beast" has yet to actually work to tame government spending.

Another place where America has long shined is in making the Steve Jobs scenario above an attainable dream for anybody willing to put in the sweat and innovation necessary to achieve success.  There's a reason that Apple, Microsoft, Facebook, etc. are American companies.

But the fact is that there remains much more to "solving" income inequality than having a progressive tax system and a good environment for startups, but I think they revolve around addressing the Scenario 3 issues.  Our housing crisis is exacerbating things.  Health costs are devastating for many people.  Our educational system is a mess, and a huge percentage of people studying STEM (Science Technology Engineering and Math subject) are foreigners who twenty years ago would have stayed here with their skills but who are now going back to their newly-stable and newly-prosperous home countries, while more and more American students are studying far less marketable subjects like journalism.

These are not easy problems to solve, and simply transferring wealth does nothing to address them.  If the OWS crowd is serious about addressing inequality, they would do well to focus their energies on real solutions to the big macro-economic challenges that we face, not just getting angry about some perceived "unfairness" that (gasp) some people have more wealth than others do.  That's simply not productive.

The problem with global warming (or climate change)

I am pessimistic about our ability as a species to deal with the threat of climate change, and I think it's because this is an instance of a larger class of problems that we simply don't handle well.

Let me start by saying that I am not intending this to be a discussion of the science behind global warming. I have no particular scientific background in this area, and discussions/debates about this should really be limited to people who have that background. (I.e., being a politician makes you competent to discuss policy around global warming, but not to make pronouncements about whether or not it is real or man-made).

In any case, my point here does not depend on whether you believe climate change is real or not.

The usual tradeoff matrix for something like climate change is usually expressed something like this (AGW = "Anthropogenic Global Warming"):

	AGW is real and bad	AGW is bunk (or not as bad as feared)
We do nothing	We're hosed	Hooray - we didn't hurt the economy
We do something meaningful	It cost a lot, but we're saved	We killed the economy for nothing

As a broad generalization, conservatives tend to look at the downside of the lower right quadrant, the upside of the upper right quadrant, and the uncertainty of the lower left and conclude that there is no point in taking aggressive action to fight climate change, while liberals tend to look at the downside of the upper left and the upside of the lower right and demand action.

This is a classic tradeoff matrix, of course. But the challenge with climate change that makes this sort of analysis vexing is that if we choose to address it, we end up "making the wrong bet".

(If you believe AGW is bunk, please suspend your disbelief for a moment and assume it is real for the sake of the argument below; I'm not trying to get you to change your mind, you can resume your AGW skepticism afterwards.)

First of all, given all the uncertainties around climate models, there is no way to know for sure if we were to over-invest. So we could end up putting a greater economic drag on ourselves than is necessary (either because we could solve the problem with less cost, or, more pessimistically, because it's all futile anyhow). Actually "could" is the wrong word - there is no way to accurately predict precisely how much would be the right amount of cost to successfully fight climate change, so we would necessarily miss the mark.

But there is a broader challenge: suppose that somehow that we were to nail it: we make whatever changes manage to stop climate change in its tracks. Then it turns out that there is no way to distinguish success in the lower left quadrant above (we defeated global warming) from the lower right quadrant (we wasted a lot of money on something that isn't real). The economic cost of fighting climate change will be relatively easy to measure, but the underlying climate change that didn't happen cannot be measured - suggesting (though not proving!) that AGW was bunk in the first place, or at least that the economic cost incurred to fight it was overkill. And since we can't do a controlled experiment (two earths, one with lots of CO2 and one without), we can't determine if we spent the right amount or if the threat was less than advertised.

As a result, I suspect that the debate about policy will inevitably creep over the line into an (inappropriate for politicians) debate about the underlying science. And the only way that this ultimately gets settled is if we find ourselves in the upper-left quadrant. In other words, we only react well to hard provable evidence; we don't have the tools to deal well with theoretical issues. That doesn't seem like the right way to resolve an issue like this.

In Praise of Crackpots

There are a lot of crackpots out there. Not just political ones (though there's more of them than any other flavor), but conspiracy theorists who believe the moon landings were faked, people who believe that they can subdue tornadoes with electrical fields, people who believe that they have a cure for cancer but are being oppressed, and, yes, the most strident climate-change deniers. (In the latter category, I'm not including the folks who have legitimate scientific questions about the quality of data or the interpretation of that data or with the theories that arise from it; I'm talking about the folks who disregard any data that supports man-made climate change and embrace any and all data that could be seen as refuting it).

It's very easy to write off crackpots as a bunch of nutjobs. But it wouldn't be wise to do so. Every so often - very rarely indeed, but not never - the crackpot is right.

I think that the thing that makes a crackpot a crackpot is that they grasp on to the non-disprovable. The state of science is such that not everything that is false can necessarily be disproved. In the cases like the moon landing conspiracy, I think the conspiracy theory has been thoroughly disproved and we can ignore these crackpots.

But the are the folks who claim to have a cure for cancer, or who think that there is no anthropogenic climate change are generally in a different place: it's harder to definitively prove them "nutty," and sometimes they aren't.

If 90+% of scientists agree on something (again, take climate change), it is certainly wrong to say that it must be true. It's just super likely to be true. If a huge majority of scientists believe something, then the burden to show them wrong is very high indeed. Science is, after all, based on peer review and you advance if you discover replicable advancements in human knowledge; if it isn't replicable, you don't go very far.

But, ironically, the great leaps in science come from the crackpots. Newton, Galileo, Einstein (just to pick a few of my favorites) were "crackpots", espousing theories that were distinctly in the minority. I think it's fair to say, for example, that much better than 90% of scientists thought time was inelastic prior to Einstein's theory of relativity.

So the great paradox of crackpots is that we should dismiss almost all crackpots almost all of the time, because almost all of them are almost always, well, nuts. But we need to be careful because every now and then one of those "nutjobs" will turn out to be right.

I wonder who the next significant crackpot to be found right will be?

Self-un-fulfilling prophecies

Thomas Malthus is famous for predicting that population growth, which grows geometrically, will eventually outstrip the arithmetic growth in our ability to grow food (or provide any important resource such as energy). Poor guy, he's always been proven wrong (at least so far).

Of course, Malthus ultimately has to be right. For a ridiculous example that proves the point, I think it's pretty clear that the Earth alone cannot support more than, say, 10 to the 25 (1 followed by 25 zeros) people because the people alone would then weigh more than the whole weight of the earth.

But this is indeed a ridiculous limit; the more salient point in the criticism of Malthus has generally been the accurate observation that he neglected to account for the effects of innovation, and indeed innovation has always intervened before Malthusian limits could apply.

A great example of this is the very food production which spurred his theories, where the capacity of 19th century agriculture extrapolated across all potentially arable land would be sufficient to feed perhaps a billion or 2 people. But alas here we are today pushing 7 billion people, with lots of wasted food and an obesity problem in many nations. This is due to innovations in fertilizers and pesticides, which have dramatically increased yields faster than the population has grown.

Yet there is a perverse self-unfulfilling prophecy at work here: human innovation is motivated, at least in part, by the fear that failure to innovate will prove Malthus right. As described in the book "The Alchemy of Air," it was precisely the fear of starving populations that drove the discoveries of new fertilizers.

So I think there is an interesting irony that it is precisely the fear of Malthus being right which has led to his consistently being proven wrong.

Great article about facts and opinions

A friend pointed me to this great article in The Week that, in my opinion, explains so much about partisanship. Note that I'm not talking right-wing vs. left-wing, this is a human artifact. We simply don't like to be wrong.

The rapture is due to happen in 2hrs 10 minutes from now. I'm sure that tomorrow morning, when the rapture didn't happen, the folks who believe in it will have some perfectly "rational" reason for why.

Why the TSA needs to be dramatically overhauled

I know that I've complained about the TSA before. I need to do so again. The TSA is structurally broken.

Allow me an analogy.

I think we can all agree that the acceptable number of murders in, say, Chicago, is zero, that even one murder is one too many.

In that vein, imagine if we proposed that in order to reduce the number of Chicago murders to zero, we are going to impose the following new policies:

• No weapons of any kind, or things that could be weaponized (steak knives, for example) are allowed within city limits.
• Because arson could lead to murder, we ban all flammable liquids within Chicago. For good measure, though, since we can't easily distinguish flammable from non-flammable, we disallow any other liquids over 3oz from being taken into the city.
• Every person, without exception, is subject to a full search of everything in their possession in order to enter the city. They can refuse, but will be denied entry if they do.
• For good measure, a bunch of people who we think might be associated with gangs, or otherwise just don't seem right to us, will simply be prohibited from entering Chicago. The list of these people will be secret, and there is no recourse if you find yourself denied entry into Chicago.
  

This might achieve the goal of reducing the number of murders to zero (then again, it might not). But I think we can all agree that these restrictions would be ridiculous overkill (pardon the pun) to the murder problem, and an unreasonable restriction on people's rights.

Yet substitute "airline system" for "Chicago", and "terrorism" for "murder" (not that there's any meaningful outcome difference on the latter substitution) and it's exactly what we have with the TSA. Why do we treat these two situations differently?

It should not be surprising that the TSA is a one-way ratchet to increasingly intrusive and unreasonable "security" procedures. After all, we've given the TSA a single goal: zero tolerance for any sort of security threat. If they think of anything that could be exploited and don't do something to address it, they will be blamed, yet there is little or no incentive to put limits on how intrusive these procedures are, nor any reason to evaluate their efficacy. (And of course, the TSA is famous for thinking up new threats only after somebody has tried it, not before). As a result, first we take our shoes off, then we can't take liquids on board, now we have a choice between giving up our right to travel or giving up our right to be free from unreasonable searches.

So now we have full-body scanners and/or intrusive pat downs. Is there any evidence that these actually enhance security? Have they found any bad guys with the new procedures and technology that they would have missed with the old metal detectors?

Perhaps, although I certainly haven't heard of it in the news. So at the moment, the hypothesis that "The TSA is effective at providing security" seems to me to be without data to support it. One might argue that we haven't had a terrorist attempt to do anything with an airplane originating in the US (the TSA's jurisdiction) since 9/11, and therefore the TSA is doing its job. But I'd counter that with the observation that we hadn't had a hijacking or similar incident with a US-originated flight in the 20+ years prior to 9/11 either (pre-TSA), which is more than double the current lifetime of the TSA, so I don't think a 10-year absence of airline terror in the presence of the TSA proves that they're doing their job.

In fact, I have an alternative hypothesis: it is not the TSA that has kept the skies safe. Rather, it is old-fashioned intelligence gathering and alert passengers. In fact, I can think of 3 attempts to commit an act of terrorism on an airplane in the past several years. One was the plot to blow up airplanes over the ocean using liquid explosives, while the other two were the shoe-bomber and the underwear-bomber. The first, of course, was thwarted by intelligence, long before the TSA would have gotten involved, while the latter two were missed by TSA-equivalents in other countries (the flights didn't originate in the US) and were thwarted by alert passengers.

I recognize that my examples here are anecdotal and don't actually prove anything, but they also don't support the idea that the TSA is actually effectively thwarting terrorism, and they certainly are suggestive that my alternative hypothesis could very well be the accurate one.

I'd love to hear any sort of counter argument supporting the argument that the TSA is providing any meaningful value.

Pakistan: get over it

Pakistan's president yesterday loudly condemned any notion of incompetence or "complicity" with Al Queda and expressed indignation at the violation of his country's sovereignty, particularly over the fact that Pakistan was not consulted prior to the raid.

I understand that of course he has to say that to pacify his domestic audience. It is, after all, them who he serves.

But that doesn't make it total nonsense.

I should start with a few bits of defense for Pakistan. First of all, I believe that the government is in fact our ally. Not a good ally or a reliable ally, and one with decidedly different priorities and interests from us. But Pakistan has also lost many of its citizens to Islamic extremists, and the rational ones in the government realize that the monster they helped to create is dangerous to them. (Hmmm...that wasn't much of a defense, was it?)

Secondly, nobody has yet produced any evidence that the Pakistani military or ISI knew about or protected Bin Laden. Again, I suppose that wasn't a strong defense, but it needs to be said.

But enough of defending Pakistan. The president of Pakistan deserves all of the suspicion and ridicule he is experiencing.

First of all, most of the criticism is that Pakistan should have known that Bin Laden was in their midst. It is perfectly reasonable to ask why the US, halfway around the world, was able to figure out Bin Laden's presence, when the elite of the Pakistani military trained only half a mile away in ignorance. It begs the question of whether the Pakistanis were merely incompetent or actually in cahoots. Not a comfortable question for sure, but I'm afraid it's a perfectly reasonable one to ask. It is, I suppose, possible, that Bin Laden was just that good and his network of support was just that secure (i.e., a third option in the loaded question above), but as we learn more, that possibility seems less and less likely.

Scondly, there is good reason that we didn't coordinate with Pakistan in the Bin Laden raid. Whether or not your military or intelligence organizations knew about Bin Laden's presence, somebody did. Al Queda and the Taliban have a strong presence in the country, and the lack of concrete evidence tying that support to the military or ISI is no reason to assume that there is in fact no such support. As such, any warning or coordination would have had a very real - and very reasonable - risk of tipping Bin Laden off. Pakistan can be indignant about not being told, but the cold fact is that they did not deserve that level of trust. Yes, I suppose we did violate their sovereignty. And if Bin Laden had been in, say, England, with whom we do share common interests and where there isn't a strong base of support for Bin Laden, and where corruption is not endemic, we wouldn't have done it without coordination or permission. But alas, Pakistan is no England, this is a war, and this was not a police action. If a country does not want its sovereignty violated, perhaps it is better to first ensure that the world's most wanted terrorist does not take up residence within its borders.

My message to Pakistan: you'd have done the same if the tables were turned. Your protests are hollow and unjustified. Get over it. If you really want to help defeat Al Queda, after screwing up Bin Laden so badly, you should double down and work with us on the follow up: interrogation of Bin Laden's widows and helping track other cells and other operatives.



Pakistan's government may actually be an ally. And The fact of the matter is that Pakistan

A spending problem? What is the right level of spending?

I saw a Facebook post the other day that mentioned that "the problem with our deficit is that congress has a spending problem." It's a sentiment that I've heard many times, and while it's not surprising that this generally comes from conservatives (it is, after all, not exactly a common liberal complaint), what I find fascinating about the statement is that it's ironic coming from folks who are very market-oriented.

Let me quickly say that I have no problem with the sentiment being expressed here. I am extremely worried about our deficits and debt, and spending is obviously one of the two ways you can address these huge problems (the other, obviously, is revenue). While I personally think we need to address both spending and revenue, my point in this post is not to make an argument about that particular issue, if only because I don't think I have anything particularly enlightening to add to that discussion.

Rather, I want to focus on two somewhat more esoteric points:

1. The amount of spending is "correct".
2. Politicians are not addicted to spending

Huh? Am I making some liberal argument that we aren't spending too much? No, no, don't worry - I do agree we are spending too much. But the amount of spending is nevertheless the "correct" level, in that it is the best level as determined by the relevant marketplace (in this situation, Congress).

Allow me an analogy. What is the correct price of a share of, say, Microsoft? That is fundamentally an unknowable question. There are lots of ways to compute it, but they don't all agree. We generally view markets as the best way to determine such prices, and when we say that a share of Microsoft is worth, say, $25.50, that doesn't mean that everybody agrees that it should be $25.50. Some people believe it should be higher (and they're generally buying), some believe it should be lower, but this is the price where such forces balance out. At a broader level, the level of the Nasdaq index is a similar process, just one level higher. after all, nobody really buys or sells "the Nasdaq index", instead they just do the aforementioned process with each of the constituent stocks of the index and the index rises or falls as a side effect of these thousands of individual price movements. So if you ask "what's the correct level for the Nasdaq," you're really asking a nonsensical question. The correct level for the Nasdaq is not a particular value, but rather a process, and as long as it is computed correctly from its member stock values, then it is at "the correct" level. It may be a bubble, it may be oversold, but it is nonetheless "correct" and it is meaningless really to suggest that the value should be higher or lower. (Predicting where it will go is another matter altogether, but that is not the same thing as saying it is "wrong".)

Congressional spending is really the same way. The total spend is not something anybody formally agrees on really. Rather, it is a whole bunch of individual spending decisions: defense, social security, etc. Like the stock market, each of these individual spending items has people who think spending should be higher and those who think it should be lower, and the ultimate value in the budget is not correctly viewed as a "consensus" level so much as a "market clearing" level. And to continue the analogy, the total budget is analogous to the Nasdaq index: it's just the result of thousands of smaller market-clearing decisions.

The analogy carries one step further as well, actually. The stock market, for all of its efficiencies, is still a rather imperfect pricing mechanism, which is why prices swing, bubbles form and deflate, and so forth. But we use it because it's better than any alternative yet devised. I do not need to point out the flaws in our government's budget process (often compared to sausage making), but democracy, like the market, is also the worst possible way to do this, with the exception of all the others that have ever been tried. (Apologies to Churchill, who I believe is the source of that).

But the larger point here is that if you don't like the level of spending on an individual item (whether you think it's too low or too high), it is generally the result of something akin to a market process. If you don't like the result of it, you really have two options: (a) get involved and start buying or selling in that "marketplace", or (b) get the process changed. Note: the former is generally easier than the latter.

Which brings me to the second point. We don't have a spending problem per se. Politicians do indeed spend money, but they're not spending it on themselves (other than corruption, which thankfully is a minor problem in the US), so it's hard to see them doing it to serve some personal need that they have. I think a far better explanation is that politicians are addicted to their jobs (or to power), and spending is a powerful tool for satisfying that need.

More to the point: politicians don't spend money just to spend it. They do it for constituents. They build roads in their districts, steer contracts to their districts, spend money on things that their voters believe to be important such as national defense or social security and so forth. Which means that in the end, it's the voters who receive the benefits of the spending.

There's an important corollary to this: we all complain about the overall level of the budget and say that spending is too high (and we're right), but the problem is that pretty much all of that spending is going to things that somebody wants. Everybody has ideas about where spending should be cut, but there's very little consensus among those ideas for this reason. So it all gets worked out in the aforementioned budget "marketplace", as a huge aggregation of individual spending decisions.

We have met the enemy and it is us, not the politicians. If we really want to reduce overall spending (and I reiterate that I am in that camp), the only effective and non-reckless way to do it is to slog it out item by item in the budgeting marketplace. Focus on the individual spending decisions and the "budget index" will fall.

Environmentalists hate progress, right?

I keep seeing posts by folks (usually, but not always, on the far right) portraying all environmentalists as extremists who want us to effectively go back to living in caves in the name of reducing carbon footprint, and who are otherwise opposed to freedom and economic growth. In fact, some of the rhetoric here comes right out and says that it's about "control," such as Penn & Teller's episode of "Bullshit" where they "debunk" recycling, in which they declare - without any evidence - that control is in fact the real motive behind getting people to recycle. I'll leave my problems with this particular P&T episode for another day, but I think I need to stand up for environmentalists.

I recall a number of years ago hearing a conservative friend of mine talk about how when environmentalists see a suburb he sees wealth, better lives for people, freedom, etc., but environmentalists just see negatives: sprawl, degraded habitat, etc.

Who is right? Well, of course the answer is "both." Nothing is free; upsides like greater wealth and economic growth come with costs. You can focus on whichever you like, you can decide the where you believe the balance between the two lies, but it is naive to pretend that either upside or downside doesn't exist.

Environmentalists indeed tend to focus on the downsides of growth, and focusing on the downsides of course never makes anybody popular.

But let's use an economic analogy. At most businesses, there are two ways to increase profits: increase sales or lower the cost for each sale (thus increasing the margin for each sale). These are, of course, not mutually exclusive - in fact, they are often self-reinforcing. WalMart, for example, has a laser focus on lowering costs, which allows them to offer lower prices, which helps them to increase sales. And at a successful company like WalMart, I should point out, nobody who points out a way to lower costs gets accused of being opposed to increased sales.

Of course, businesses focus on those costs for which there is an economic signal to which they can respond - i.e., it is usually something that can be represented on the balance sheet or income statement.

Environmentalists are the cost-watchers for the stuff that doesn't have those direct impact on the financial statements. This doesn't mean they aren't costs, just that reducing the impact of these costs doesn't improve the bottom line, so the economic signal to reduce those costs is not nearly as strong, and thus it often requires other forms of pressure, such as that provided by environmental organizations.

I don't mean to imply that companies like WalMart don't respond to environmental costs - in fact, large companies such as WalMart, Coca-Cola, etc., have been leaders over the past decade in recognizing the need to make their practices sustainable, to lessen the impact of their operations on the planet. And they should be commended for this.

And I also don't mean to imply that there aren't extremist or naively idealistic environmentalists who truly want to reduce freedoms and/or economic growth in the name of saving the planet (or "control", if you are prone to conspiracy theories). Earth Liberation Front comes to mind here. Thankfully, these represent a tiny fraction of environmentalists and are viewed by the greater environmental movement the way the majority of Caucasians view the white supremacy movement - i.e., with great disdain.

But it is irresponsible to paint all environmentalists with a broad "extremist" brush when they fill an important role as the cost-watchers for our ecosystem.

Climate vs. Weather

OK, folks, I feel compelled to weigh in on this. I'm tired of people looking at individual weather phenomenon (Katrina, the recent tornadoes in the south, cold winters, heat waves) and declaring a connection to (or a refutation of) global warming.

It's apples and oranges. Weather and climate are different things.

Allow me the analogy to a roulette wheel in a casino. Imagine that when the wheel is spun, you knew the exact velocity and position of the wheel. You then use that to predict which number will be pointed to at any given moment, using the basic laws of physics. You predict what number will be at the top in 2 seconds, 4 seconds, 6 seconds, and so forth. Your prediction for 2 seconds will likely be pretty good. But due to imprecision in your measurements, your prediction for 4 seconds will not be OK but not as good as the 2-second prediction, for 6 seconds will be not as good as the 4-second prediction, you will not be terribly accurate at all at predicting the final resting number of the wheel. (If you want the details for why the predictive ability falls off, it is due to chaos theory.)

This is analogous to predicting the weather. A roulette wheel is of course far simpler than the weather (and doesn't have nearly the chaos-inducing non-linear variables), so in practice you'd do a lot better than a weather forecaster, but the principle is the same (and this is, after all, an analogy). In particular, you can see that predicting the roulette wheel (weather) gets significantly more difficult as time passes.

If the casino made its money "predicting" the roulette wheel, they'd lose money like crazy and go out of business quickly. But of course, we know empirically that as a rule casinos have a bit of a habit of making, not losing, money.

Why? Simple: they're not predicting the weather, they're looking at the climate. If predicting the weather is analogous to predicting the outcome of given roulette wheel spin, looking at the climate is analogous to predicting the AVERAGE outcome of MANY roulette wheel spins. In other words, it's looking at the statistics of the system rather than any individual outcome.

In the case of the roulette wheel, we know that over the long time, a fair roulette wheel will end on red a little less than half of the time, on black a little less than half of the time, and occasionally on 0 or 00. And that "little less than half" is where they make all of their money at the roulette table.

In the same way, climate is not about individual weather events, it's what the statistical averages and trends are in temperature, precipitation, etc. Having a "warming" climate doesn't mean that winter snowfall stops, or that we have nothing but heat waves and no cold snaps. But it does mean that over a long-ish period of time, when these things are averaged out, there are measurable trends in the statistics.

One heat wave, one hurricane, one deep freeze - it is impossible and thus meaningless to say that any of these would or would not have happened without climate change, or that any such event proves or disproves climate change theories.

This is like saying that 4 spins of the roulette wheel which, in a row, yield 4 reds somehow "proves" that the odds of the roulette wheel favor red. Assuming the wheel is not rigged or flawed, this proves nothing of the sort. People who make similar claims relating weather to climate are doing everyone a disservice by saying so. Climate science has its flaws, but its model and accuracy will be refined and improved in the aggregate, not by the individual weather event.

Being serious about the deficit

I've been a deficit hawk for a long time. I believe that our deficits are woefully unsustainable, that the interest on the debt costs too much, and that our debt will be a long term drag on our economy.

First, a few disclaimers about my own opinions on the budget.

First, I do not have so much of an opinion as to whether our deficit is because of excess spending - certainly much of it is - but that is generally more of a policy question than a financial question. I tend to be pragmatic on this front: if we as a nation decide that something is a priority to spend money on, we should fund it appropriately; if we don't, we should stop the spending. So the question isn't about the level of spending per se, it's about spending responsibly and then generating the right revenue for that.

As I've mentioned previously, I also do not know whether Keynes was right about government stimulus in a recession - whether we are talking about the benefits of increased government spending to make up for reduced consumer demand, or the perils of cutting spending during a recession - but I'm willing to give the benefit of the doubt on short-term basis. A one year stimulus spike is not terrible; when it becomes a permanent new level of spending, it is a huge problem.

Finally, I also do not believe we need to balance the budget. A small deficit can be fine, can provide a bit of upside leverage without much downside risk. Few households are completely debt free; all debt is not bad. The big danger is too much debt, and I believe that the US has too much debt.

Mathematically, there are exactly 2 ways to reduce the deficit: increase revenue or reduce spending. And there are 2 ways to increase revenue: raise taxes or allow economic growth to increase revenues under an existing tax structure. (One could argue that lower taxes leads to disproportionate economic growth such that it too ultimately leads to increased taxes; I don't think this has been either conclusively proved or disproved, though. That, however, is a secondary debate that does not alter my assertion about "increasing revenue.") These approaches are not mutually exclusive - in fact, it seems to me that one must both increase revenue AND reduce spending.

Politicians have talked about the deficit a lot over the past decades, but unfortunately taming the deficit is not something that historically has gotten people elected. I applaud the tea party for changing that dynamic: deficit reduction is finally getting some traction among the already-elected crowd.

The problem is that nobody - neither Republicans (tea-party affiliated or not) nor Democrats - are being serious in such discussions. This isn't surprising - the challenges to real change are structural as they require cutting spending that voters like or generating revenue that ultimately comes from somewhere in the voting economy, so there is a strong built-in incentive for politicians not to actually achieve anything meaningful. And I think that is why we're seeing a lot of meaningless "deficit" discussions.

First, they are talking exclusively about non-defense discretionary spending. Certainly a good place to start, but as has been pointed out in numerous sources, we could cut this spending to $0 and we would still have a significant deficit.

It's quite simple. If you're not talking about entitlement reform, if you're not talking about whether we need our current level of defense spending to achieve our defense objectives, then you're simply not serious about tackling spending; rather, it suggests that you're serious about tackling spending on programs you don't like, which is a properly described as a policy discussion, not a deficit reduction problem. After all, everybody is willing to trim the deficit by cutting spending that doesn't benefit themselves.

Secondly, nobody is talking about revenue increases. Especially since politicians don't seem to be willing to talk about entitlement spending, the only other way to tackle things is to increase revenue. My preference here - along with everybody else, I presume - would be for the economy to soar, employing lots of people and causing tax receipts to rise. But alas, that doesn't seem to be in the forecast for the next few years, Republicans would argue that the best way for government to achieve this is to get out of the economy (which means that they at that point basically hope to grow our way to fiscal stability), and Democrats would argue that government policies can grow the economy, but they would almost certainly try to do so by spending a lot on programs that would be poorly implemented, would miss the key timing to do good, and which would hang on long after they outlive their usefulness. In other words, I don't see a soaring economy fixing our deficit anytime soon.

That leaves taxes. Of course, raising taxes in a weak economy risks pushing everything back into recession, and politicians again have numerous structural incentives not merely to not raise taxes, but to actually lower them, increasing the deficit in the short term (and quite possibly the long term too).

Even with the tea party's influence and noise about the debt and deficit, nobody is talking about anything that will actually fix it. I think that's too bad; we have a real opportunity to do something useful here, and we're squandering it.

UPDATE April 6 - I posted this blog entry too soon, as it appears that the GOP is proposing to make changes to Medicare/Medicaid. I can't comment on the details of the plan, and it does not appear to deal with social security or to do anything to raise revenue (in fact, it appears to lower some taxes further), but nevertheless I must applaud the GOP for actually dealing with the reality that we have to address entitlements. The Democrats still have their head in the sand that we don't have to touch these programs. Unfortunately, the GOP will likely have their heads handed to them in 2012 over this, but that doesn't change the fact that making a proposal like this is necessary. Kudos to them for having the courage to do it.

Constitutional justification for proposed laws

One of the ideas that's been getting a lot of attention lately, particularly (though not exclusively) from the Tea Party movement, is a requirement that any proposed law state it's constitutional authority up-front. This is undoubtedly motivated by a perception that many laws (such as last year's health care overhaul law) are blatantly unconstitutional expansions of government power.

My perspective is that such a rule would be harmless political theater at best, and at worst would have the unintended consequence of actually killing perfectly good (and constitutional!) bills in the womb.

Any proposed law falls into one of 3 categories: clearly constitutional (for example, an enumerated power of the constitution, such as establishment of the post office), clearly unconstitutional, or “somewhere in the middle.” These are generally fuzzy boundaries and subject to quite a bit of interpretation, though, and even then they don’t guide politicians very much.

For example, laws to ban desecration of the flag are routinely proposed because they are politically very popular, yet these laws are also pretty clearly unconstitutional, having been adjudicated to the supreme court where majorities that include both liberals and conservatives (see Texas v Johnson and United States v Eichman) have found them to be violations of the 1st amendment. Politicians are often lawyers and would be familiar with the constitutional case law here, but politics is politics and the calculus says that support for such a clearly unconstitutional law is far better, politically, than not. Bills like these that are clearly unconstitional simply aren’t proposed for that very reason, or else politics trumps and a constitutional interpretation can be offered (even if courts subsequently would disagree), so I don’t see this exercise adding much value.

The vast majority of proposed laws, though, fall in the middle – they are neither clearly contrary to or authorized by the constitution, they are implied (the commerce clause being a frequent broad justification) or inferred or otherwise subject to interpretation.

So as a legislator you have the option to admit upfront that a politically popular bill is unconstitutional (which nobody will do), to redundantly explain something that is clearly authorized (which is a waste of time and effort), or to point out that the justification is subjective, which doesn’t accomplish anything useful. So I ask what purpose would be served here.

Of course, the constitution does explicitly make clear that the role of interpreting the law is assigned to the judicial branch. So one could argue that legislative opinions as to the constitutionality of a bill are themselves unconstitutional (or at best meaningless in any enforceable way). So we would find legislators offering bills with constitutional justification, only to be later found unconstitutional by the courts, or we would find perfectly constitutional and good bills being self-censored because the legislators cannot form a consensus around the constitutional basis for the law. The latter is, of course, an explicit goal of many conservatives who want to shrink the role of government, but that is a political goal here being presented in the guise of a constitutional process.

Since this is a rule that is largely being pushed by small-government conservatives who favor a strict interpretation of the constitution, I think it is worth pointing out some other unintended consequences that could follow. For example, there is nothing in the constitution that explicitly grants a federal role for the definition of marriage, or the banning of recreational drugs. And pro-life advocates would need to have a constitutional finding that a fetus is a person, which would in turn provide a constitutional precedent towards laws governing behavior of pregnant women (for example, criminalizing drinking or smoking while pregnant), which would perversely be precisely the sort of nanny-state expansion that most small-government conservatives fear.

Unless, of course, any of the constitutional justifications for a given law are later thrown out by a court.

In which case, one has to ask: if the court ultimately gets to decide the constitutionality of a law, then what purpose is served by declaring it up front?

In praise of failure

I think failure has an undeservedly bad reputation. It has many virtues, and we would do well to recognize and encourage those virtues.

Two very disparate things made me realize this recently. One was a Planet Money podcast on the relative rates of defaults and late payments on mortgages between the US and Spain. Another was a discussion about teaching math to young kids who are intimidated about raising their hands in class for fear of giving the wrong answer.

What do these things have in common, and what do they have to do with the virtues of failure? The short answer is that failure is a powerful contributor to success. In both cases, the ability to fail paradoxically stimulates greater overall success.

In the case of the housing market, the fact that there is an orderly process of foreclosure or bankruptcy, where one can start over again if necessary, makes it easier to assume the risks involved in buying a house than it is in a place like Spain, where there are typically no such protections and where the bank can come after you for every last cent for however long it takes. This lowered barrier to home ownership means more people can enter the market, which leads to a healthier and more liquid housing market.

In the case of teaching math, if a child is terrified of giving the wrong answer, they will likely be significantly more timid about raising their hand in class, which will reduce their participation (and increase their stress about the subject). Contrast that with a classroom where wrong answers, while not rewarded (they are wrong, after all), are not stigmatized and lead instead to a discussion about the process that led to that answer as a way of identifying where the process went wrong, the student can feel much more comfortable about participating and will actually learn where they went wrong. (Stated another way, I believe that in math class the best way to achieve correct answers is, ironically, not to focus on the answers themselves but rather to focus on the thought process; if you nail the process, the answers will follow. But that is a topic for another post.)

Let me back up and say that I'm deliberately being provocative in my thesis title here. Failure should not be without negative consequences - after all, it is by definition the opposite of success. If the goal was worthwhile, failure to achieve the goal will have some degree of pain and cost.

But failure does not need to be a bad thing, nor does it need to be stigmatized, provided that two important conditions are met.

First, the failure must not have been due to a lack of effort or diligence in one's efforts to achieve the desired goal; if one is reckless, careless, or doesn't make an effort, then failure is the appropriate reward and is without virtue. I.e., you have to do everything you can to set yourself up for success. I used mortgages as an example of "good failure" improving the health of the housing market. The mortgage crisis of the past few years, however, clearly shows "bad failure", with many people not meeting my reckless/careless condition. No-doc loans to people who can't afford a house is certainly not "setting up for success", I would argue it is reckless.

Secondly, every failure is an opportunity to learn. As Thomas Edison once said, "I have not failed. I've just found 10,000 ways that won't work." Making a mistake is quite forgivable. Making the same mistake twice is not.

These two principles are key factors for America's entrepreneurial success, especially when compared to other countries that do not share this cultural and legal attitude. When an entrepreneur starts a company, does everything possible to set themselves up for success, and the company fails anyhow, our system allows them to stand up, dust themselves off, and try again. After all, they've just found "another way that won't work." In fact, venture capital investors generally view a few failed startups on a resume as a positive. (Successful startups are generally better, of course, but success can often result from a dose of good luck, which doesn't provide learning opportunities). But this is only true if the entrepreneur was not reckless and shows that they learned from their past mistakes.

We can all learn from our mistakes, and we should not fear making them.

Obesity and Limbaugh

So now the Limbaugh/Palin/Bachman crowd is criticizing Michelle Obama's anti-Obesity campaigns, primarily on the grounds that it promotes a "nanny state," where the government tells you what you can and can't eat.

Maybe I missed something, but Michelle Obama is not an elected official or otherwise an employee of the federal government, so I fail to see how anything she does is promoting a "nanny state". And are these folks actually in favor of more obesity? I doubt it; I suspect this is just another example of ideological painting as threatening anybody who is on "the other side" of the ideological spectrum.

Really, all Michelle is doing is using her fame to promote her views on a cause that she believes passionately in. Isn't that precisely what Rush and Sarah do?

The problem with angry people

I don't want angry people in government. Concerned people, passionate people, principled people yes. But not angry. People do reckless things when they're angry. They don't listen to data that doesn't fit their existing world view (this is a problem many people have even when they aren't angry!).

At the moment, I'm seeing a lot more anger on the right than on the left (birthers, "obamacare", the tea-party in general), although the right certainly has no monopoly on this, and in fact I think anger's center of gravity shifts around politically depending on who is "in" and who is "out" of power.

Often I think the anger can obscure perfectly legitimate concerns and overshadow legitimate political philosophy. I agree with the central tea party notion that our deficit and debt are one of the gravest threats to our long-term economic health, for example. I just don't let that confuse me into thinking that all government beyond what we had in 1789 is unconstitutional.

You even see this with the latest fight over the health care law: the law may be good or bad, it may or may not be constitutional (I don't pretend I'm qualified to comment intelligently on the merits of the law), but political affiliation seems to be dictating everything in the debate, down to the name of the law to repeal it, and the stubborn refusal to even use appropriate data in the debate. Heck, here FactCheck.org, whose sole mission is to sort out fact from fiction, pressed Eric Cantor's office to respond to their findings, the response was this:

...spokesman Brad Dayspring, told us: "This is a job-killing law, period. Anyone who argues otherwise is ignoring the construct of the health care law and the widely accepted facts."

It seems that if you say something enough, it becomes truth. This is almost Orwellian.

I get very frustrated with liberals when they clearly show that they don't understand market capitalism, religion, or the unintended consequences of good intentions. I get very frustrated with conservatives when they demonstrate a lack of understanding of the very same things.