On the myopia of macroeconomics

On matters of macroeconomics, I am mostly an agnostic in the classical sense - one who is unsure where everyone else (in the original, stupider people, but that seems presumptuous) seems to be sure.

Of course, the fact that everyone else is sure and manages to come to wildly different conclusions is always puzzling. Should the Greek government be spending more to grow its way out of debt, or spending less to pay off the existing debt? I confess, dear reader, to not being very confident in my answer to this question. Partly this may be because I'm an idiot who didn't learn enough macroeconomics. The latter is certainly true. Although the chances that I know less macroeconomics that half the idiots spouting off about austerity on facebook is also quite slim.

Every now and again, I'm struck by a sense that a lot of macroeconomics seems rather unimaginative, in the sense of focusing only on the current set of institutional arrangements that we have, rather than contemplating very different sets of arrangements and figuring out whether they might be an improvement.

This is fine, if you think that the current arrangements are the product of extended scientific experimentation. But given that a lot of them seem to have come about mostly by historical accident, it's hard to be so confident that we live in the panglossian best macroeconomic world of all macroeconomic worlds.

For example, everyone who's anyone knows that the optimal way to run a money system is to have all currency printed by a central bank on special pieces of paper. These pieces of paper should have a fixed face value, and be backed by nothing but the central bank's presumed desire to avoid too much inflation.

Be honest, how confident are you that all of these assumptions are optimal?

The paper aspect is surely not optimal. As I've said before, we exist on a 'paper standard' - the real money is the electronic dollars recorded at the bank, and people have the notional ability to convert all of these to pieces of paper. Which they do occasionally, for a small amount of their dollars, and over time will do less and less. But already, it would be totally feasible to convert all currency over to electronic forms without too much effort. Should we do it? Should it have already happened?

Once you start doubting, it makes you wonder how sure you are of the rest of it.

What would happen if the US switched to a gold standard? Let's take it as given that the loss of monetary policy would be a problem. But how big, exactly? If you had to forecast the stock returns on the day the policy was announced out of the blue, do you think you could come within +/- 5%? I'm not sure I could. Are you also equally confident that the gold standard wouldn't have any offsetting benefits to at least partly counterbalance the loss of monetary policy?

This ambiguity is especially true when you ponder things like Bitcoin. It's still going merrily along - Stripe now lets you accept it easily as a payment form. Sure, both search volume and price are lower than a few years ago - it seemed like there was probably a bubble at the time.

One way to look at this graph is to think 'Ha, look at how far it's fallen! The increasing scandals and decreasing interest surely herald the end for Bitcoin.'

The other way to look at it, which I think is more relevant, is that Bitcoin is still going after almost 4 years, even though very few academic economists can explain its existence at all.

To wit, the standard requirements for money is that it is a unit of account, a mechanism of exchange, and a store of value. Bitcoin has the first two, but not the third - there's nothing inherently valuable about certain mineable bits of information, hence nobody should be willing to hold it. Yet they are. And in response, few respectable academic theories seemed to have evolved much beyond 'people are idiots' and 'you can't short it'. At some point, this is a bit unsatisfactory. Shouldn't you at least consider the possibility that the third requirement is not actually 'store of value' but rather 'belief that the next guy will accept it'? In which case 'store of value' is just a way of getting there, and Bitcoin seems to be on the way to being accepted without it. And once something becomes widely accepted, this belief becomes self-fulfulling.

The reason that I think it behooves one to have a little modesty in one's own theories here is that I am almost certain that if you took academic economists from 100 years ago and told them that instead of trading gold-backed currencies, people will be entirely comfortable accepting otherwise worthless pieces of paper issued by the government, and nobody will think this odd, they would say you were crazy. And frankly, they'd have a point. After the fact, economists will be around to tell you that the key thing actually is that the bits of paper have a reliable value as a way to pay tax bills. But doesn't this sound like a rationalisation? It's certainly a lot flimsier than 'it's tradable for actual gold', and yet a) here we are, and b) people are now saying that any further decline in the inherent value of currency is absolutely unthinkable, notwithstanding the huge decline we've already made.

There are tons of examples. Central banks themselves were a random populist intervention that economists took decades to even begin to rationalize. So was deposit insurance. These schemes both predated our formal understanding of why they seemed to work.

Given all this, I think it's okay, and probably even desirable, to have pretty darn flat priors about macroeconomic policy. You probably don't want massive deflation, to jack up interest rates to 20% overnight, or to permanently spend more than you earn. But you're a braver man than I if you think our current institutional arrangements are close to optimal.

The worst law in London

What does absurd government monomania in the face technological irrelevance look like?

Back in the early years of the 20th century, before computers had become widespread, the word 'calculator' actually referred to people. They would perform large numbers of arithmetic calculations, essentially being a slow and kludgy version of a spreadsheet.

Let's suppose, hypothetically, that being a human computer was a licensed and highly regulated profession in 1920. The government required you to study for years, and prove that you could do hundreds of long division calculations without making a mistake. A whole mystique grew up about 'doing the sums', the examination required to become a calculator. Only licensed calculators were permitted to perform arithmetic operations for more than half an hour a day in a commercial setting

Then IBM popularises the computer, and  Richard Mattessich invents the spreadsheet, and it becomes totally clear to absolutely everybody that 'doing the sums' is completely worthless as a skill set. Not only is keeping the current regulation raising costs by a lot, but it's producing huge deadweight loss from all the people devoting years of their life to studying something that's now completely redundant.

What do you think the response of the government and the public would be once it became apparent that the new technology was cheap and easily available? Immediate repeal of the absurd current regime? Outcry and anger at the horrendous government-mandated inefficiency?

Ha! Not likely,

I suspect the old regime would trundle merrily along, and the New York Times would write philosophically-minded pieces extolling the virtues of it.

Because, dear reader, there actually exists regulation exactly this disgraceful - The Knowledge, the required examination for London taxi drivers.

The New York Times Magazine wrote a long piece describing just how much taxi drivers are required to memorise:

"You will need to know: all the streets; housing estates; parks and open spaces; government offices and departments; financial and commercial centres; diplomatic premises; town halls; registry offices; hospitals; places of worship; sports stadiums and leisure centres; airline offices; stations; hotels; clubs; theatres; cinemas; museums; art galleries; schools; colleges and universities; police stations and headquarters buildings; civil, criminal and coroner’s courts; prisons; and places of interest to tourists.

 Test-takers have been asked to name the whereabouts of flower stands, of laundromats, of commemorative plaques. One taxi driver told me that he was asked the location of a statue, just a foot tall, depicting two mice sharing a piece of cheese. It’s on the facade of a building in Philpot Lane, on the corner of Eastcheap, not far from London Bridge.

What, in the name of all that is holy, is the purpose of making it a legal requirement of driving a taxi that you can name the location of a foot-tall statue of two mice that exists somewhere in London?

In the first place, the demand for finding the location of a statue like this from your taxi driver is zero. A precisely estimated zero, as the statisticians say. The revenues side of the ledger is a donut. It is literally inconceivable that the location of this statue has been the subject of a legitimate question towards a London taxi driver in the history of the entire profession. The only benefit is rent-seeking and limiting the size of the taxi industry. So why not just make them memorise the Roman Emperors in chronological order, or the full text of War and Peace? It would serve just as much purpose.

Not only is there no value to your taxi driver knowing this, but if I type in 'statue of two mice in London' into Google, the first image lists the location as 'Philpot Lane'. (The only sites that come up, ironically, are ones referencing the damn test, suggesting just how pointless this knowledge is). The internet has made memorising this kind of trivia, for all possible sets of London trivia, irredeemably useless.

Everything a taxi driver needs to know has been replaced by a smartphone. Everything. Which is why every man and his dog can drive Uber around just fine.

So what threadbare arguments does the NYT offer when, three quarters of the way through the article, it finally gets around to discussing the question of whether this damn test is worth anything?

Taxi drivers counter such claims by pointing out that black cabs have triumphed in staged races against cars using GPS, or as the British call it, Sat-Nav. Cabbies contend that in dense and dynamic urban terrain like London’s, the brain of a cabby is a superior navigation tool — that Sat-Nav doesn’t know about the construction that has sprung up on Regent Street, and that a driver who is hailed in heavily-trafficked Piccadilly Circus doesn’t have time to enter an address and wait for his dashboard-mounted robot to tell him where to steer his car.

Okay, I'll bite. They beat them in staged races by... how much? One minute? Maybe two? Perhaps 60 or 70% of the time? And the value of this time-saving is what, exactly? How does it compare to the extra time the person waited trying to hail a cab because of the artificial limit on the number of taxis?

It seems that New York Times writers are not required to distinguish between statements like 'the revenue side of the income statement here has literally no items on it' and the statement 'this is a positive NPV project that should be invested in'. Disproving the first statement is sufficient to establish the truth of the second. Look, there's a benefit! Really! See, it shows it must be a good idea to do the project.

Perhaps sensing the unpersuasive ring of this argument to anyone who's ever ridden in an Uber and found it cost 40% of the price, we then get another tack:

Ultimately, the case to make for the Knowledge may not be practical-economic (the Knowledge works better than Sat-Nav), or moral-political (the little man must be protected against rapacious global capitalism), but philosophical, spiritual, sentimental: The Knowledge should be maintained because it is good for London’s soul, and for the souls of Londoners. 

Well, in that case!

But riddle me this - how, exactly, can I tell whether this egregious rent-seeking and artificial deadweight loss monopoly is good for London's soul? 

The Knowledge stands for, well, knowledge — for the Enlightenment ideal of encyclopedic learning, for the humanist notion that diligent intellectual endeavor is ennobling, an end in itself. 

'Enlightenment'. You keep using that word, I do not think it means what you think it means.

Learning is definitely good. Government-mandated learning, especially when used as part of banning the consensual commercial activity of many individuals, is a wholly separate matter.

Just ask someone from the Enlightenment, like John Stuart Mill:

But, without dwelling upon supposititious cases, there are, in our own day, gross usurpations upon the liberty of private life actually practised, and still greater ones threatened with some expectation of success, and opinions propounded which assert an unlimited right in the public not only to prohibit by law everything which it thinks wrong, but in order to get at what it thinks wrong, to prohibit any number of things which it admits to be innocent.

Like, for instance, driving a cab without studying for years to satisfy a ludicrous exam requirement. 

But it's not just the higher taxi fees and difficulty getting a cab at the wrong time of night that make up the real tragedy here. What's the human toll of making every potential taxi driver learn this kind of nonsense, regardless of whether they ultimately succeed?

McCabe had spent the last three years of his life thinking about London’s roads and landmarks, and how to navigate between them. In the process, he had logged more than 50,000 miles on motorbike and on foot, the equivalent of two circumnavigations of the Earth, nearly all within inner London’s dozen boroughs and the City of London financial district. 

 It was now 37 months since he’d paid the £525 enrollment fee to sign on for the test and appearances. “The closer you get, the wearier you are, and the worse you want it,” McCabe said. “You’re carrying all this baggage. Your stress. Worrying about your savings.” McCabe said that he’d spent in excess of £200,000 on the Knowledge, if you factored in his loss of earnings from not working. “I want to be out working again before my kids are at the age where someone will ask: ‘What does your daddy do?’ Right now, they know me as Daddy who drives a motorbike and is always looking at a map. They don’t know me from my past, when I had a business and guys working for me. You want your life back.”

Apparently this must be a strong case of the false consensus effect, because reading this paragraph filled me with furious rage, but the NYT writes about it as one of those quaint things they do in old Blighty.

In the end, McCabe gets his license, so it's all a happy story!

He does not, however, get the three years of his life and £200,000 back.

How on earth do the parasites who run the testing and administration of this abomination justify all this to themselves? How do they explain their role in this shameful waste of money and fleeting human years, the restrictions on free and informed commerce, the ongoing fleecing of consumers, and the massive, groaning, hulking, deadweight loss of this monstrous crime against economic sense and liberty?

They must be either extraordinarily intellectually incurious, morally bankrupt, or both.

As the Russians are fond of saying, how can you not be ashamed?

The limits of expected utility

It is probably not a surprise to most readers of this august periodical to find out that I yield to few people in my appreciation for economic reasoning. Mostly, the alternative to economic reasoning is shonky, shoddy intuitions about the world that make people worse off. Shut up and multiply is nearly always good advice - work out the optimal answer, not what makes you feel good. The alternative is, disturbingly often, more people dying or suffering just so you can feel good about a policy.

But perhaps it may be a surprise to find that I not infrequently end up in arguments with economists about the limits of economic reasoning in personal and ethical situations. There is often a tendency to confuse the 'is' and the 'ought'. We model people as maximising expected utility, usually over simple things like consumption or wealth, because these are powerful tools to help us predict what people will do on a large scale. But for the question of what one ought to do, it is particularly useless to do what some economists do and say, 'Well, I do whatever maximises my utility'. No kidding! So how does that help you decide what's in your utility function? Does it include altruism? If so, to whom and how much? Do you even know? A lot of ethical dilemmas in life come from not knowing how to act, which (if you want to reduce everything to utility terms) you could say is equivalent to not knowing how much utility or disutility something will give you. There's ways to find that out, of course, but those ways mostly aren't economics.

More importantly, this argument tends to sneak in a couple of assumptions that, when brought to the fore, are not nearly as obvious as the economics advice makes them.

Firstly, it's not clear that utility functions are fixed and immutable. This is perhaps less pressing when modeling monopolistic competition among firms, but is probably more first order in one's own life. Could you change your preferences over time so that you eventually got more joy out of helping other people, versus only helping yourself? And if so, should you? It's hard to say. You could think about having a meta-utility function - utility over different forms of utility. For the same amount of pleasure, I'd rather get pleasure from virtue than vice. This isn't in most models, although it probably could be included in some behavioral version of stuff (I suspect it may all just simplify to another utility function in the end). But even to do this requires a set of ethics about what you ought to be doing - you need to specify what behavior is utility-generating behaviour is admirable and what isn't. Philosophers have debated what those ethics should be for a long time, but you'll need to look outside economics to find what they are.

Mostly, people just assume that whatever they like now is good enough. Of course, they're assuming their desires don't raise any particular ethical dilemmas. You can always think about extreme cases, like if someone gains utility over torturing people. Most die-hard economists would probably still not give the torturer the advice to just do what gives them utility. They'd try to find wiggle ways out by saying that they'd get caught, but that just punts the question further down the road - if they won't get caught, does that mean they should do it? You'd probably say either a) try to learn to get a different utility function that gets joy from other things (but what if they can't?), or if they're more honest b) your utility isn't everything - some form of deontology applies, and you just shouldn't torture people for fun simply because you find it enjoyable.

Of course, if you admit that deontology applies, some things are just wrong. It doesn't matter if the total disutility from 3^^^3 dust specks getting in people's eyes is greater, you'd still rather avoid torture. Eliezer Yudkowsky implies that the answer to that question is obvious. How many economists would agree? Fewer than you'd think. I'm probably not among them either, although I don't trust my intuitions here.

But fine, let's leave the hypotheticals to one side, and consider something very simple - should you call your parents more often than you do? For most young people, I'd say the answer is yes, even if you don't enjoy it that much. Partly, it's something you should endeavour to learn to enjoy. Even if this doesn't include enjoying all of the conversation, at least try to enjoy the part of being generous with one's time. Though the bigger argument is ultimately deontological - children have enormous moral obligations to their parents, and the duties of a child in the modern age include continuing to be a support for one's parents, even if you might rather be playing X-Box. If you ask me to reason this from more basic first principles, I will admit there aren't many to offer. Either one accepts the concept of duties or one doesn't.

In the end, one does one's duty not always because one enjoys it, but simply because it is duty. Finding ways to make duty pleasurable for all concerned is enormously important, and will make you more likely to carry it out, but in the end this isn't the only thing at stake. There is more to human life than your own utility, even your utility including preferences for altruism. It would be wonderful if you can do good as a part of maximising your expected utility. Failing that, it would be good to learn to get utility from doing good, perhaps by habit, even if that's not currently in your utility function. Failing that, do good anyway, simply because you ought to.

A little internet privacy is like being a yellow belt in karate

One of the things that Sam Peltzman most famously taught us (or perhaps reminded us) is that one should always pay attention to income effects, because they can show up in odd places.

Income effects are simple at a first pass - if I have more income I can buy more of a product. Most goods are normal goods, meaning that demand rises as income rises. Some goods are inferior goods, meaning that as incomes go up, people buy less of them (e.g. Walmart clothes), because they substitute to better alternatives. So far, so easy.

As microeconomists have known for a long time though, income effects can be induced by changes in the price of goods, rather than directly through income changes. If the price of rice increases, the first order effect is likely to be a substitution effect - rice is now expensive relative to wheat, so I buy more bread and less rice. But there is also an income effect: the real bundle of goods I can now purchase has shrunk, which is effectively a decrease in income.

As a result, the fact that income has decreased can induce other changes in demand which can partially or totally offset the original effect. In other words, the first pass effect is that rice consumption goes down (the substitution effect), but because I'm now poorer overall I have to cut my purchases of luxuries and buy more rice than I otherwise would. If the income effect is large enough to offset the substitution effect completely, the good is called a Giffen good - when the price of the good goes up, demand can actually increase. Robert Jensen and Nolan Miller carried out an experiment in China where they showed that for some really poor Chinese people, rice really is a Giffen good. When its price increases, they buy more of it, because they're now so poor it's the only way to get enough calories.

Which brings us to Mr Peltzman. He famously argued that income-like effects can lead to puzzling results in a wide variety of settings, most notably risk-compensation (which became known as the Peltzman Effect). If you spend government money to make roads safer or mandate seatbelt use, people will have a lower chance of dying from a given type of driving (similar to the substitution effect). But there's an income effect too - the budget set of allowable risky driving behavior has increased. Peltzman argued that this can in some cases totally offset the gains, as people drive in a more risky manner on the safer roads to maintain the same overall level of risk.

The classic case of Peltzman-like effects that people do seem to instinctively grasp is self-defence knowledge. In theory, knowing a little karate has only improved one's ability to fight relative to knowing zero karate. But the problem is the income effect. The ability to defend oneself can either be consumed entirely as an increase in safety, or it can be spent by substituting towards talking $#!& to bullies. Thus the overall level of safety can go up or down as a result of being able to fight back. The popular conception is that people overestimate their fighting ability and 'spend' more than they actually had, leading to Giffen-like behavior at low levels of self-defence knowledge.

And now it turns out that there's inadvertent Peltzman effects going on with internet privacy.

Several researchers with Tor have described how using the internet privacy software Tor results in your IP address receiving permanently much greater scrutiny from the NSA. Even searching for Tor online is enough to get you logged.

At high levels of security, this is still probably worth it if you value privacy. Tor is an incredibly powerful tool to avoid being tracked. Unfortunately there's still lots of other exploits they can use to target your computer, but Tor itself is pretty reliable.

Since the NSA doesn't like this, they are determined to raise the income effect stakes a lot. If you get slack and only use Tor sometimes, you have almost certainly increased the chances of your behavior being tracked and monitored. Before you had the blessing of anonymity. When you embark down the road of privacy, the NSA makes sure that goes away for good. Tor is a Basilisk - a single search for it is enough to get you permanently flagged. So if you're going to start down that road, it's got to be the full retard or nothing at all.

The reality is that maintaining anonymity is hard. Really hard. It is a form of tradecraft, as the spies put it. It needs an obsessive attention to detail, and a willingness to forgo a number of aspects of the internet (flash video, for instance, as well as dealing with slow loading times). And unfortunately, the predicament is quite similar to the position of the IRA viz Mrs Thatcher - the NSA only needs to get lucky once, whereas you need to get lucky every day.

The unfortunate reality is that for most people, no protection is probably safer than a little protection. And even then, the only reason that 'no protection' offers any protection is because the internet is simply too large for the NSA to be able to store everything that goes on there. On the other hand, they are able to store everything done by Tor users.

The one saving grace is that the NSA is not actually the NKVD. For the most part, the NSA is only interested in tracking terrorists, and passing the occasional Silk Road drug dealer onto the DEA. Not only that, they are reluctant to blow the details of the data collection process (any more than they already have) by having the details of it disclosed in court cases unimportant to the NSA's mission. So they're probably not going after you for buying that Adderall online, even though they could.

On the other hand, the Snowden disclosures have massively reduced the cost of the NSA using information at trials, since a lot of the details are now already known, so maybe that protection has decreased too.

Income effects are rarely counterintuitive once they're pointed out, but they have a tendency to be lurking in places that you weren't thinking hard about.

Unfortunately, none of them are good in this story.

We have lost one of the giants

The great Gary Becker has apparently passed away. One of the most influential economists of the 20th century, along with Keynes and Friedman. He expanded the tools of economics into areas that had been treated as simply not important problems to study - crime, the family, discrimination, and many others. A most worthy posthumous inductee into the Shylock Holmes Order of Guys Who Kick Some Serious Ass.

Ave Atque Vale, Mr Becker. What little I know of microeconomics I owe to your wonderful instruction. I fear we shall not see your kind again soon.

Currency as a Paper Standard

People often make a distinction between asset backed currency, (where each dollar is a claim to some physical good, such as the gold standard), and fiat currency (where each dollar is simply a government printed piece of paper).

The distinction that people generally draw is that fiat currency can be produced in arbitrarily large amounts (i.e. printing tons of paper money), while asset backed currencies limit the sovereign's wealth to his stocks of the asset in question (unless he wants to dilute the currency, by reducing the amount of gold in each coin if it's literally a commodity currency, or reducing the amount of gold that each piece of paper is claim to for an asset backed currency).

In reality, all these arrangements are arbitrary - money works because people believe other people will accept it, and the gold and paper and whatnot are just coordination mechanisms to help us agree on what to accept.

The idea that the key distinction is the ability to print more money obscures a second aspect of asset-backed currencies that was less prominent historically but is actually more relevant today - the fact that people are accepting a notional instrument as a claim to some other less convenient instrument that they would say that they value more.

With gold, it was inconvenient to actually carry it around, so people were happy to carry around convenient pieces of paper that were claims to a fixed amount of gold, as long as everybody believed that the paper system was always going to work and be accepted. Eventually people got sufficiently used to the paper that the fiction of convertability was unnecessary. The Supreme Court took it away, and people barely noticed.

The parallel today is that we have a 'paper standard'.

The real money in today's society is ones and zeros in bank accounts, in SWIFT computers, and in Federal Reserve bank deposits.

Just like the gold standard before it, people are happy to transact in this fully abstract money because each digital dollar is a notional claim to a piece of paper printed by the US treasury. You can go to the bank and redeem your digital dollars for paper dollars whenever you want.

In the modern world, the digital dollar is vastly more convenient than the paper dollar, just as the paper dollar was more convenient than the gold bar. And while people do still withdraw dollars for some purposes, it's becoming increasingly rare. Can you imagine someone actually taking all their wealth out of the bank and leaving it in dollars under the mattress? The vast majority of the cash holdings for the vast majority of people are already in digital form.

At the moment though, people still like the fiction that they might convert all their digital dollars to paper dollars. If things were entirely on computers, what would happen if the computers crashed?

In reality, that ship sailed decades ago. If the computers crashed, the rich would be left with their houses and that's about it. But most people don't worry about this, just like most people in the 90s in America didn't worry about the government printing zillions of paper dollars, even though people in 1800 would have viewed this insouciance as insane naivete.

It seems likely that eventually the fig leaf of paper convertability will be removed. Young people already would be comfortable with this - they barely use cash, it's all credit cards. Eventually, the anachronism of paper money will be removed altogether.

When that happens, it will raise a number of intriguing economic possibilities.

The biggest of these is that there will no longer be any binding zero lower bound on interest rates. The biggest obstacle to negative interest rates is that people have the option of just hanging onto their dollars and earning zero. When the dollars are only in the bank, that's trivial to change. Every dollar in your account is depreciating at a continuously compounded interest rate equal to 3% per year.

If you could do that, the 2008 recession might have been a damn lot shorter. You don't want to spend and are trying to deleverage and hoard liquid assets? Does your answer change if those liquid assets are earning you -8% a year? Hell, even a Porsche doesn't depreciate much more than that - why not just enjoy the car instead? Hey presto, spending is back.

Don't get me wrong, there will likely be a huge psychological obstacle to negative interest rates. People will view it as the government or the bank taking their money (in a way that they don't view it as the government giving them money with positive interest rates). If the fed wants to do it, there's not much choice though - where are you going to take your money instead when there's no paper to redeem it for? If probably would fuel asset inflation, as people rush to put their assets into anything that will hold its value.

In addition, the difference between fiscal and monetary policy becomes much harder for the average person to see. If the government is taking out 1% per month from your account, does it really matter whether that amount is getting transferred to the government's account (under a tax) or destroyed altogether (under a negative interest rate)?

The eventual disappearance of paper money seems like it will only be forestalled by civilisational collapse or a massive change of governing arrangements. When the first government has the balls to announce negative nominal interest rates is another question.

I suspect that you and I may well live to see this reality.

Bravo, Mr Fama!

So Eugene Fama was finally awarded the Nobel Prize in Economics, along with Lars Hansen and Robert Shiller. All of them are thoroughly deserving. I suspect in part that the committee might have felt like a parent finally caving to their child's demand for chocolate - it was easier to give Fama the prize than keep dealing with the implicit mockery when his name topped the list of prospective prize winners year after year after year.

I've written about the excellence of Mr Fama before. What I will note, however, is the interesting nature of the prize. It was awarded to the three economists for "for their empirical analysis of asset prices". Both Hansen and Shiller did their most famous work in this area - the Generalized Method of Moments in the case of Hansen, and the excess volatility of prices with respect to dividends in the case of Shiller.

But curiously, Fama's most famous work is developing the idea of market efficiency - that an efficient capital market is one where prices fully reflect all available information. This can work at several levels - weak form, which covers all past price and volume information, semi-strong form, which covers all public information, and strong form, which covers all information, both public and private.

Simple, right? But people hadn't thought about it in that way.

Market Efficiency was a Nobel Prize worthy insight. More importantly, it was a Nobel Prize worthy insight even if markets are not, in fact, efficient. This is because the concept of market efficiency crucially changed the way the debate was framed and the evidence understood. The people that bang on about how markets obviously aren't efficient because of the 87 crash, or the financial crisis, or whatever, still implicitly accept the framework that Fama laid down. It is very difficult to conceive of what asset pricing would look like without Fama.

Of course, people confuse the real contribution of market efficiency with the related point that markets are actually mostly efficient (which Fama has made statements in support of, though by no means universally or dogmatically). But this is the secondary part - the real genius is the idea, regardless of whether efficiency is 'true' or not. The better way of phrasing the question is how efficient markets are, rather than the boo-hiss pantomime of 'all efficient' or 'all inefficient'.

If you come up with a brilliant idea simple enough for people to understand, they'll dismiss it as obviously wrong and unimportant. If you're like Lars Hansen and do something totally brilliant that nobody outside economics will ever understand the importance of, people will assume that your reputation is deserved.

And hence they didn't give Fama the prize for market efficiency directly - they gave it for his body of work on empirical asset pricing. Which is fair enough, as it gets to the main point. By including Shiller, they also added someone whose work tends to suggest that markets may not be efficient, although again by performing novel tests to examine this question. Don't get me wrong, Shiller is a totally deserving recipient. But it still seems to me that Fama's work is the most central of the three, in the same way that Leonid Hurwicz was arguably the most central in the mechanism design prize of 2007. It seems like the addition of a behavioral person in the empirical asset pricing prize was partly a way of saying that the committee doesn't necessarily think markets are efficient (a totally fair opinion), and also, along with the prize label, to insulate themselves somewhat against clowns who misunderstand the importance of market efficiency.

Still, this is all by the by. A great day for Chicago.

It's been a while since anyone has been inducted into the Shylock Holmes Order of Guys Who Kick Some Serious Ass, but Eugene Fama is most deserving of the honour. Congratulations! Apparently some guys in Sweden rate your work too, but that's not so important.

I come here not to bury the Silk Road, but to praise it.

Two days ago, the Feds finally shut down the Silk Road, the online marketplace for drugs, guns, hitmen and other miscellaneous highly illegal items. They arrested a man, Ross William Ulbricht, alleged to be the founder of the site. He went under the alias 'The Dread Pirate Roberts'. This name is taken from the movie 'The Princess Bride', and is actually a pretty excellent alias given the nature of his work:

A pirate of near-mythical reputation, the Dread Pirate Roberts is feared across the seven seas for his ruthlessness and swordfighting prowess, and is well known for taking no prisoners.

It is revealed during the course of the story that Roberts is not one man, but a series of individuals who periodically pass the name and reputation to a chosen successor. Everyone except the successor and the former Roberts is then released at a convenient port, and a new crew is hired. The former Roberts stays aboard as first mate, referring to his successor as "Captain Roberts", and thereby establishing the new Roberts' persona. After the crew is convinced, the former Roberts leaves the ship and retires on his earnings.

If you believe the allegations about Ulbricht contained in the various affadivits, he is (to quote Stephen Hawking's memorable description of Sir Isaac Newton), by all accounts, not a pleasant man. He allegedly tried to organize not one but two attempted murders - first of a former employee that was likely to squeal to the FBI, and second of a person trying to blackmail him by threatening to release information about Silk Road drug suppliers.

(As a side note, the latter reminds me of the Morgan Freeman quip in The Dark Knight):

Let me get this straight. You think that your client, one of the wealthiest, most powerful men in the world, is secretly a vigilante who spends his nights beating criminals to a pulp with his bare hands; and your plan, is to blackmail this person? Good luck.

So it's not hard to see what's ugly and destructive about the Silk Road. Having never been interested in purchasing drugs, murder-for-hire services, guns, or anything else on the site, I had no interest in its continuation. To the extent that the world would be better off with fewer murders and illegal guns (and probably with fewer drugs as well), it's a good thing that it's gone.

But let's just pause for a moment and appreciate what a truly astonishing feat of engineering and business the Dread Pirate Roberts was able to pull off. 

This was a website that let you buy drugs off the internet and ship them to your house via the postal service. 

It did this with remarkable success, facilitating more than a million transactions between strangers. Estimates of its revenues are as high as $1.2 billion, with commissions of almost $80 million.

That's a pretty darn serious business operation right there. How many celebrated startups ever generate revenues of $1.2 billion in their first two years? Or ever?

And think about the constraints the business was operating under. 

As I wrote about in March, anonymous drug sales over the internet have perhaps the steepest challenges of information asymmetry and moral hazard of any market I can imagine. How do you stop people shipping grass clippings instead of marijuana? Or ensure that customers pay when shipments may not arrive? Or convince people to give out their postal address to strangers when ordering drugs online, not knowing whether they're sending it to a federal agent?

Here's a great essay on how they managed to solve these problems. But suffice to say, it's pretty impressive. 

This is also a business that's going to be incredibly difficult to get off the ground in the first place. Suppose you're the chief of marketing for an online drugs site. How exactly are you going to run your campaign? You can't call up Saatchi and Saatchi and arrange a billboard campaign paid from the company checking account. And who do you even contact for customer and supplier outreach? Drug sellers are somewhat cagey about putting their email addresses up to be contacted. Even if the idea of an online drug marketplace seems feasible once it's already going, it would be a nightmare trying to get it started.

What about other challenges from the business environment? If you're creating your hypothetical startup, making the AirBnB of self storage, or the Dropbox of the pets world or whatever, you might get competitors trying to undercut you, or unpredictable shifts in the regulatory environment that make it hard to compete. 

Here, you have every law enforcement agency in the world furious at your existence, sparing no expense to try to hunt you down. You need to run the entire business while being completely anonymous. Remember, this whole site was operating within plain sight of the FBI for over two years. Charles Schumer complained about it back in June 2011. The continued existence of the Silk Road was a massive embarrassment to the US Government, and hell hath no fury like the US Government scorned.

I'll say this - you don't need to like drugs at all to recognise that the Dread Pirate Roberts was a God damn genius. I wish he'd turned his efforts to something more socially useful than selling drugs online. But be that as it may, the Silk Road is one of the most remarkable startup stories in the history of the internet.

(previous Silk Road discussion here)

Amazon: Supporting Ben Franklin's legacy by making one of two certainties more certain

To paraphrase England's greatest prime minister, commercial partners, like nations, have no permanent allies, only permanent interests.

It used to be the case that Amazon was a fairly reliable partner in helping consumers find the lowest cost purveyors of particular products. Of course, it was only limited to those in their network of people selling through them, but this tended to be pretty liquid. For most products I searched for, there would be a sufficient range of sellers that you'd get decent price competition. This is made easier by the fact that once you're comparing literally the same product, it's basically a commodity market - there's some sorting on reliability of shipping and returns policy, but that's about it.

Amazon always privileged themselves slightly by defaulting to selling the item themselves if they stocked it. But it was simple to click on the tab for 'new' and find a range of sellers sorted by the total cost of the item plus shipping, which was what you paid. Problem solved - buy from the cheapest guy, the end.

In other words, as long as you clicked on the tab, Amazon would make it easy to tell if they were the cheapest provider of the goods or not, and the sorting process made it clear how you could purchase the lowest cost item, even if wasn't from them. Amazon were willing to take the hit to some direct sales (though they got some back in fees from the marketplace seller) for the repeat business that came from running a good price comparison service. 

But starting about a year ago, the interests of consumers and Amazon started to diverge. The reason is that for residents of various states (now up to 12) Amazon has to collect sales tax on their purchases. The citizen was always obliged to pay the tax, at least nominally, but in the past Amazon wasn't involved in collecting it. Collection was meant to occur because citizens would voluntarily report the sale tax on their internet purchases to the state (Ha ha! Stop it, you're killing me!). In practice, this made the Greek Tax office look like a model of perfect enforcement.

The loophole, which doesn't get greatly discussed, is that while Amazon is now forced to collect sales tax for its own providers, and for providers in the same state as the purchaser, it isn't compelled to (and in practice, doesn't) collect sales tax for third party sellers outside the state of the purchaser.

So what would a permanent ally do? 

Simple - he'd now sort purchases on total purchase price of Price + Shipping + Tax. That's the end cost to the consumer, let them find the lowest cost item.

But this was apparently a bridge too far for Amazon. This would put their own offerings at a structural disadvantage, and a decent one at that. In California, for instance, the minimum sales tax at the moment is 7.5%. This article claims that Amazon's after-tax profit margin, for comparison, is 1%. Can you see why playing at a 7.5% disadvantage is a game they're incredibly reluctant to play? 

And so we witnessed the internet commerce equivalent of the Suez Canal Crisis between erstwhile allies. Amazon felt that listing the total price would hurt them so much that they were willing to significantly degrade the usefulness of the price comparison function of their website. So they continue to only list cost in terms of Price + Shipping.

It gives me the absolute $#!7s that I can't sort on total cost any more. The only way to find out is to click through various sellers, add them to the cart, see if tax is added on, remove the item if it is, go back, find another seller, and then compare the tax with the difference in price. 

For small items, I won't always bother. But I will always resent the fact that Amazon is deliberately making my life harder for their own purposes. 

To give them credit, Amazon fought damn hard for a long time to prevent the states from forcing them to pay, but in the end, they saw the writing on the wall. Tax was going to get collected eventually, because the bankrupt states saw them as a cash cow waiting to be milked. Maybe I should cut them some slack.

Or maybe not. There are, after all, no permanent allies in commercial transactions. They happily screwed us when it suited them, so I have no compunction in reducing my business to them in response.

I don't know if it's possible, but if someone figures out how to scrape amazon prices for the lowest total cost, I'll direct all my purchases through them.

The only thing that would be even better would be to be able to scale the weight placed on taxes by a fixed amount. I'd probably set it at about 1.1 for small purchases. In other words, I'd rather pay slightly more money just for the pleasure of depriving the State of California of additional revenue.

That's not going to happen, of course, because Amazon makes it hard to just scrape all their data. So in reality, we consumers just have to bend over and take it.

Marketers love to tell you that the customer is always right, but it's not true.

It sucks to spend so long thinking that your purchasing dollars made you Dwight Eisenhower, only to find out that you were actually Anthony Eden all along and didn't know it.

Rent-Seeking vs. Rent-Collecting

When historians of the future are writing the epitaph for the west, I imagine that one of the characteristics that will strike them about the present age is the increasing prevalence of rent-seeking.

As the government inexorably expands in size and scope, it becomes more of a suckers game to simply outcompete the opposition, and more lucrative to lobby the government to have them shut down.

This might take any number of forms - ludicrous licensing requirements that lower supply, absurd restrictions on competitor firms, tax breaks for your particular boondoggle industry - whatever works.

If you want a list of some of the more outlandish ones, browse through the cases the Institute For Justice has fought over the years. It's a Sisyphean task, alright.

The strange thing, though, is that most people profess to hate rent-seeking. So how come we end up with so much of it?

Part of this is simply political economy. A small but organised group fighting for a large benefit will often out-lobby a large dispersed group (e.g. taxpayers, consumers) who each suffer a small harm.

Part of it is just rank hypocrisy - when other companies lobby for their licensing requirements, it's just to squelch consumers, but I'm deeply worried about customers not getting their hair braided correctly.

Nobody is the villain in their own narrative, after all.

But I don't think that's all of it.

I think that to really understand the extent of rent-seeking, you need to appreciate those who enable them - the rent-collectors.

The way I would characterise it is that rent-seeking, properly defined, is about lobbying for socially inefficient laws and regulations that will benefit you privately.  The trial lawyers lobby turns up to argue that we really truly ruly need to have a legal system where the loser doesn't pay the other side's costs, for instance.

Rent-collecting on the other hand, is what happens when a party simply takes advantage of a bad law that is already on the books. Unlike the rent-seeker, the rent-collector does not actively push for socially inefficient legislation. Instead, he simply takes the inefficient law as he finds it - somebody is going to get the rents due to the bad law, and it may as well be me.

These are the much wider circle of folks who are thus corrupted by the process - their own self-interest stops them agitating for a repeal of the bad laws, but their lack of involvement in the initial setup means that their consciences are clean.

For every community organiser who gets a cushy job on the rent-control board, there are hundreds of tenants getting a few hundred bucks a month for free from their landlord.

For every creep in the restaurant lobby fighting to outlaw food trucks, there are hundreds of restaurant proprietors vaguely relieved to not have a truck parked nearby.

And sometimes, the rent-collectors (at least indirectly) will be people who in other circumstances would be the first ones to crusade against rent-seeking.

American securities class action lawsuits are like something out of a Kafka novel. The shareholders of a company collectively own the company. Suppose the company makes some screwup and causes the share price to drop. Based on the fact that the company is a separate legal entity, some lawyer and a gold-digging lead plaintiff will file suit on behalf of the shareholders against the management of the company that they themselves own. The management is of course protected by the company, so money is coming out of the company coffers (which the shareholders own) to nominally compensate the shareholders of the company. Got that? Well, actually, the current shareholders (who don't owe an actual duty to anybody) are indirectly paying money to the old shareholders (who often overlap substantially with the current shareholders). In theory, anyway. Part of the money is coming from insurance companies who write the professional indemnity insurance for the directors, but the company is going to be paying that back in higher premiums in no time flat. You can rest assured that the only people making any money off the whole farce are the lawyers.

Or are they? Who else benefits from this ridiculous charade?

A lot of the time, it's economic consulting firms. They make a decent living defending companies against these lawsuits, and showing that the damages aren't as high as the often ludicrous plaintiff's claims make out to be. These are some of the most free market types you can imagine, with economics degrees from the best universities.

Don't get me wrong, in the scheme of this whole monstrosity, these guys are far and away the most defensible. They're fighting for good guys, so to speak.

But still - how many of them would be out there lobbying to get securities class action reform to eliminate all this absurd waste? How many of them would honestly greet such reform with the same zeal that they would if it happened in any other industry? Even if it put them out of a job?

To ask these questions is to know the answers.

When despotic regimes take prisoners of war, one of the things they often try to get the captives to do is to write out statements that are disloyal to their home country. Sooner or later, cognitive dissonance takes over - the things you wrote down that you originally didn't believe, you come to believe, because you subconsciously prefer this view to the alternative that you wrote cowardly and disloyal things rather than face punishment. The extreme form of the result is Stockholm Syndrome. There's a reason that making disloyal statements is punished as a serious offense.

The reality is that behind every rent-seeking lobbyist are thousands of rent-collecting regular joes who have convinced themselves either that a) the current regime is either downright sensible, or b) at a minimum, it's terribly unfortunate but there's really nothing to be done, old chap.

Thus are the sheep corrupted to be complicit in their own fleecing. They'd all acknowledge that, sure, this is just robbing Peter to pay Paul. They'd further acknowledge that, sure, everyone here thinks they're Paul, and sure, they can't all be right. But still, when all's said and done, I really will be Paul, and that's all that matters, right?

The one ambivalently bright side of the NSA scandal(s)

The great Robert Fogel, sadly recently departed, noted in his discussion about slavery that the system was, for the most part, very efficient. One point he liked to emphasise is that people are so used to the notion of efficiency being applied to good ends that they don't consider the alternative possibility - efficiency as applied to evil in fact produces monstrous outcomes.

A similar tension exists in the way people understand the spy services. Whenever you see Hollywood depictions of the CIA (or just shadowy agents of some secret department, standing in for the CIA), 90-odd percent of the time they are displayed as having a sinister level of competence in their ability to pull off evil actions. They're everywhere, they see everything, and they can hunt you down. Of course, Jason Bourne wins in the end, but you're not left in any doubt that most of the time, the government gets its way.

This view eventually permeates a large amount of social thinking on the matter. Consider the 9/11 truthers - according to their claims, the government managed to organise a massive conspiracy to plant all sorts of explosives inside two skyscrapers, demolish them with people inside, make it look like planes were crashing into them on live television, and blame the Muslims. All while keeping this totally under wraps, except for the keen eyes of the producers of 'Loose Change'.

You could spend hours debating with these clowns about whether fire can actually melt steel, but it seems you might get much further by simply noting, 'Have you been to the DMV recently? What impression did that give you about the competence of the average government employee?'

This is the default Shylock rule - when you're thinking about the government, assume it will be run by folks at the DMV. Can you trust the government to clean up after Katrina? Think the DMV. Is it likely that the next round of financial regulation will prevent the next housing crisis? Think the DMV. Can you create police SWAT teams all over the country in rinky dink places and not have them consistently raiding the wrong houses while looking for marijuana? Think the DMV.

But... what about the CIA? Surely, if competence exists anywhere, it must exist there, right? When it really counts, when the chips are down, these guys are the pros, and they wouldn't screw it up?

Except, you know, with the Iraqi weapons of mass destruction.

The point of the DMV rule is not that it's always right. It's just that it tends to be a fairly good predictor of what's actually going to happen.

I wrote a while ago about the fact that before this latest news broke, you tended to read a lot of stories about Chinese hackers tooling on the US - hacking into Google, diverting all internet traffic to China, that kind of thing. You'd very rarely hear about any US operations - the only exceptions were cases like Stuxnet which accidentally got released into the wild. In other words, you'd hear about the good side of the program (the US is releasing a computer virus to screw up Iranian centrifuges for enriching uranium) at the same time as the bad (this wasn't meant to be in the papers, meaning the virus got found out).

When I didn't read anything about US Cyber operations, I applied the DMV principle and assumed that these clowns just didn't know what they were doing. But the alternative was always that they were so good at what they were doing that you never heard about it. Since, of course, you weren't meant to.

As it turns out, the NSA has been spying on Americans like J Edgar Hoover on a dirt-digging mission to cover up for his cross-dressing proclivities.

Say what you will about the ethics of these programs (and I tend to be considerably wary of them) - they don't seem incompetent. They seem scarily competent. They seem like The Bourne Identity, when in reality I was expecting a cross between Fawlty Towers and Yes Minister (except with everyone being like the Minister).

The bad news is that this the NSA seems to play extraordinarily fast and loose with the 4th amendment, and has enormous power to spy on American citizens in a way that would make the Founding Fathers spin in their graves faster than a virus-ridden Iranian centrifuge.

The good news is that for the fraction of the things the NSA does which are likely beneficial to the country (and even the most jaded skeptic would probably admit that this fraction is non-zero), they can hopefully apply the same level of competence.

And if you can actually get the privacy destroying parts of the NSA's work removed (which, sadly, you probably can't), this whole imbroglio might actually be good news.

In other words, the government may be negative NPV, but it's not pure evil. So jacking up competence will at least have some effects on the revenues side of the ledger.

Why school group work sucks

If you, like me, were a nerdy type-A personality at school, you probably loathed getting put into groups for assignments. Inevitably, you'd be stuck with some bunch of lazy idiots who could credibly commit to either:
a) not caring if they got a terrible grade, and hence being uninterested in working, or
b) not being capable of getting a good grade even if they did work.

Both of these would get you to the most common outcome - the smart kid does all the work, usually ostentatiously announcing beforehand that the dumb kid is going to screw it up and thus insisting that he leave it alone, all the while still resenting the dumb kid for his idleness. The dumb kid laughs at the smart conscientious kid slaving away like a sucker.

Teachers would always spin you a bunch of junk about this being useful preparation for the real world, and how it was important for you to learn to work with people you didn't necessarily pick.

Looking back now, I realise that this was all a crock of crap - school group assignments prepare you for nothing useful, and all the irritation you felt was in fact completely justified.

The standard complaint is that you're being allocated into groups you didn't pick, and with hugely varying levels of skill. Neither of these really describes the real world. You get to pick the company you work for, even if you don't get to choose who is on every project with you. That said, it's highly unlikely that any semi-competent manager would lump together one guy who knows what he's doing and a bunch of morons who don't. Hopefully, there's a minimum level of competence required to maintain gainful employment, and you're unlikely to be stuck with someone truly awful.

That said though, it's become increasingly obvious that this isn't the real problem that makes school projects uniquely worse than real-life group projects.

No, the real problem with school projects is the following:

Everyone has accountability, but nobody has authority.

In other words, everyone is responsible for the performance of the group, but nobody has the authority to actually order anyone to do anything. If someone does a bad job, or hands things in late, or generally is so clueless that you'd rather do it yourself, there's not much you can do. If it gets really bad, you can complain to the teacher. But they generally don't want to deal with your whinging.

The assumption is that general social sanction for shirking, combined with the fact that everyone needs to work together to get the marks, should be enough to make it work. But isn't it obvious that setting up a mini-communist state for mark allocation is always going to produce a free-rider problem? And that the equilibrium is going to be that the guy who cares about it more does all the work?

This is like some Frankenstein version of real world group tasks. In most corporate settings, you're going to have a boss or team leader who is directly responsible for the team's performance, and can order people to do certain things on pain of getting fired. Hand the report in on Friday at 12pm or you get canned. Simple enough. Your boss may be an idiot, in which case it's a huge pain (of a very different sort). But at least there is a single person with the incentives to see the group succeed, and the authority to make it happen and solve the co-ordination problem.

If people get to pick their own groups and there's multiple assignments, the repeated game aspect can deter shirking somewhat.

But in general, teachers create a horrible system for assignments that simply teaches smart kids that the world is full of moochers, and that you'll end up doing a disproportionate share of the work only to see some slacker enjoy the fruits of your labour.

You might argue that this lesson is crucial for teaching them about the operation of the tax system and pork-barrel public-sector employment, and I wouldn't necessarily disagree.

I'd like to think that this was the well-thought-out plan all along, but somehow I doubt it. The only way to fund these taxes is to have businesses whose internal team dynamics are so different that productivity results and there's a surplus to be stolen in the first place.

Let's Eliminate Salmonella. No, wait, let's not.

Over at Hacker News, there was a link to this great Forbes article talking about the differences in regulation in the treatment of eggs. Apparently in the US, eggs are forced to be washed, while in the EU eggs are forced to not be washed. This also relates to the fact that US eggs are stored in the fridge, while EU eggs tend to be left at room temperature.

The whole thing is presented as a kind of 'duelling regulations' thing - in the end, it looks like there's odd biological reasons why being washed or not can impact how you choose to store them, and the chances of disease.

And then, buried at the end of page three, comes this gem:

Since the late 1990’s British farmers have been vaccinating hens against salmonella following a crisis that sickened thousands of people who had consumed infected eggs. Amazingly, this measure has virtually wiped out the health threat in Britain. In 1997, there were 14,771 reported cases of salmonella poisoning there, by 2009 this had dropped to just 581 cases. About 90 percent of British eggs now come from vaccinated hens – it’s required for producers who want to belong to the Lion scheme. The remaining 10 percent come from very small farmers who don’t sell to major retailers.

In contrast, there is no such requirement for commercial hens in the US. Consequently, according to FDA data, there are about 142,000 illnesses every year caused by consuming eggs contaminated by the most common strain of salmonella. Only about one-third of farmers here choose to inoculate their flocks. Farmers cite cost as the main reason not to opt for vaccination –FDA estimates say it would cost about 14 cents a bird. The average hen produces about 260 eggs over the course of her lifetime.

Wait, what? You mean that for 0.05 cents per egg, you can virtually eliminate salmonella poisoning? And this isn't being done in the US, because US farmers have correctly estimated that ignorant consumers aren't savvy enough to insist on this purchase?

Talk about burying the lead.

Wow. That sounds pretty outrageous. I read this piece, and my instinct was the think that the British policy of vaccinating hens sounds like a no-brainer.

But then again, we wouldn't be economists if we didn't shut up and multiply.

Let's assume that the entire reduction in salmonella comes from this policy:  14,771 - 581 = 14,190 cases of salmonella avoided by vaccinating hens.

The cost per egg as we noted is 0.05 cents (14 cents per hen, divided by 260 eggs per hen).

So how many eggs are consumed in Britain each year?

According to this estimate, almost 11 billion. That sounds ridiculously large, until you realise that with a population of 63.182 million, this amounts to a consumption of 174 eggs per person per year, or roughly one egg every two days.

Let's go with that number.

So the total cost of the policy each year is thus roughly 11,000,000,000 *$0.14/260 = $592 million.

This implies a shadow cost of each case of Salmonella equal to ($592 million / 14,190), or $41,741.

Put that way, it seems like more of an arguable proposition. Maybe we should cancel the policy?

Not so fast! Do you know how much weight I should place on your hunch about the value of salmonella? Zero! Shut up and keep multiplying!

According to this PubMed article there were 1316 salmonella-related deaths between 1990 and 2006. The paper abstract reports the mortality per person-year, but what we want to know is the mortality per salmonella case. According to the original article, there are about 142,000 salmonella cases per year in the US. Assuming a constant number of infections over the years, this gives us a probability of death conditional on salmonella poisoning of 1316/(142,000*17) = 0.000545. Using a statistical value of human life of about $7 million, this gives an expected mortality cost per salmonella case of $3816.

Do you value the pain and suffering of a non-fatal case of salmonella at $37,925? I sure don't. If you paid me 38 grand and guaranteed it wouldn't kill me, I'd be pretty keen to sign up for a case of salmonella.

Put differently, the implied cost of human life in the salmonella reduction program is ($41,741 / 0.000545) = $76.57 million, ignoring any value placed on pain and suffering for non-lethal cases.

In other words, despite the intuitive appeal of getting rid of salmonella just by vaccinating chickens, as a society we'd probably be better off spending the money on road safety, medical research, or something else with a lower cost of saving each life.

The interesting thing is that when I started out writing this blog post, my initial reaction was that it was amazing that the US wasn't requiring chicken vaccinations, and the hard numbers changed my mind.

Sometimes the best treatment is to do nothing. Long live NPV!

George Akerlof ain't got nothing on the Silk Road

There was this great piece on Hacker News a little while ago on the Silk Road. Apparently it's possible to buy drugs over the internet using BitCoins, and get them shipped to you in the mail.

No, really.

There are so many great aspects to this story.

It's hysterical that this guy is so confident in the completely shambolic level of drug enforcement that he's willing to post them to his own address in his own name. The standard defence is that you might be able to claim that the drugs were sent to you by some enemy or nasty ex-girlfriend.

I dunno. This strikes me as one of those cases where people confuse the statement 'I won't be able to be proved guilty beyond a reasonable doubt' with 'I can come up with some bizarre cock and bull story about how my enemy wanted to punish me by sending me a hundred ecstasy tablets'. Yeah, that'll teach him! Eat ecstasy, loser!

The forgotten part in all this is that you've got to stand up in front of a jury of 12 ordinary men and women and convince them that this is actually a serious possibility. You got sent a pound of marijuana by an enemy, you say? Which one? Which girlfriend? Let's get her on the stand! What's that? She's now testifying that you guys broke up because she got tired of the fact that you were always smoking marijuana? And she decided to punish you by shipping you some marijuana, not tipping off the police or the post office, and just waiting for a random drug screening dog to sniff out the package?

Yeeeaah. If I were your lawyer, I'd advise you to take the plea bargain.

In addition, the guy is willing to buy adderall online, under the assumption that they don't bother screening for this stuff anyway, and then write about his experiences and post it on the internet. That takes some stones. Given they lock up doctors for prescribing too many painkillers, I can't say I'd share the author's insouciance about the reasonableness of drug enforcement policies.

More importantly, what a remarkable market has sprung up that despite all the enormous potential market for lemons problems, the guy actually reliably got the drugs shipped to his house multiple times. By anonymous strangers. Say what you will, that's some impressive market design right there. Read the whole thing and find out how it works.

Remember this next time someone tells you that the information asymmetry problems in a market are so severe that we absolutely must have yet more government regulation.

The Stupidity of the 'China is a Currency Manipulator' Argument

Sometimes it's hard to know whether stupid-sounding statements by politicians are genuinely believed, or just thrown out there for the rubes. Or both.

One firmly in this category is the line that Mitt Romney kept repeating in the debates, about how China is a 'currency manipulator' and he's going to label them as such on day one of his presidency (presumably so that he can start imposing tariffs. Or maybe just for cathartic value - who knows?)

Romney is not unusually obtuse in this matter - Hillary Clinton has moaned about the same thing in terms every bit as stupid.

Now, is there anything implausible about the claim that China is printing lots of yuan in order to keep their currency low in value? Absolutely not - they are. It's a matter of public record. Is there anything incorrect in the statement that this is hurting  US exports to China, and making Chinese imports in the US more competitive relative to domestically produced goods? No, this too is obvious - it's microeconomics 101.

What is far less clear is the implication that the net effect of all this is negative for the US economy. For a long time, the US deliberately pursued a policy of wanting a strong dollar - i.e. they wanted the yuan to be weak relative to the dollar. Why? For exactly the same reason that politicians are now bitching about - it makes imports cheap, which is great news if you're someone who needs to import things, or if you're worried about keeping inflation low. Frankly I wasn't aware that this policy had even been officially abandoned, but what do I know?

Still, if this were all there were to the debate, I'd let it slide - you don't really expect nuanced economic discussion at these rube-fests.

But what's hilariously unexplored is the question of what exactly China is doing with all those extra yuan they're printing that keeps their currency artificially low. How do these translate into an expensive dollar?

Simple - the Chinese pump tons of money into buying US Treasury Bills. You remember those, right? They're the means by which this thoroughly bankrupt nation keeps running trillion dollar deficits and kicking the can down the road on its untold trillions of unfunded liabilities.

Reader, if China ever took the US up on their offer to stop making their currency cheap by printing yuan and buying T-Bills, do you know what would happen? The viability of US T-Bill auctions would become a hell of a lot less certain. And I can promise you, if (or more likely, when) a US Treasury auction fails, it will create consequences far worse than those of China having a currency that may or may not be too cheap. The specifics of how exactly it would play out is not something that you'd want to explore, as things like stock market crashes, runs on money market funds and bank failures start to become realistic possibilities.

As the Hilltop Hoods put it - like a free trip to Afghanistan, you don't want it.

Do you know who agrees with me about this?

Hillary @#$%ing Clinton, that's who. In between complaining about the Chinese currency being too cheap, she was begging the Chinese to keep buying T-Bills which would keep their currency cheap. At least Romney hasn't descended to that level of stupidity of demanding both [A] and [Not A]. Yet.

It is difficult to help people who know what they want but can't achieve it.

It is nigh on impossible to help people who don't even know what they want.

When those people are running the government, it is even more disturbing.

On the plus side though, there's two positive aspects.

One is that these politicians may not actually believe this nonsense, but might just be cynically manipulating the idiots of the electorate that will determine the outcome of the election.

The other is that the federal reserve is buying so much of the current T-Bill auctions already (by just printing money) that the auctions may never fail, and we'll just get pleasant hyperinflation instead.

Small victories, I suppose.

Revenue (if not NPV) Positive Graffiti

I loathe graffiti. Courts tend to view it as a petty crime, just kids letting off steam.

But I find it aesthetically angering in a way that might make me seem like some crazy zero tolerance fanatic.

Sure, the cost to remove it may not be that high. But the mindset of ruining something beautiful merely for your own enjoyment is barbarism on the most primitive level. It is deadweight loss for the sheer enjoyment of deadweight loss. And I hate, hate, hate deadweight loss. If there is one thing that unites economists, it is that.

To make things more galling, the people who deface property will mark it with their own tag, so that others can know who did it. They may be doing it pseudonymously, but they are proud of their destruction of other people's property. I simply cannot fathom that mindset.

Jason Lee Steorts said much the same thing:

Let me end on a personal note. I hate vandals. My friends ask what makes me a conservative, and sometimes I wonder myself, but there is an answer, and it’s that I hate vandals. The problem with vandals is not that they are wrong about a conceptual matter. The problem is that they smash beautiful things. They couldn’t care less about your rules or your God or your conception of the good. You have to stop them with tools that work.

Recently though, I found something that I didn't think possible - graffiti that didn't strike me as completely value destroying.

I'm not talking about political slogan protests, although that might qualify depending on your view of the NPV of various political causes.

The graffiti that I found interesting was a couple of cases where the spraypaint scrawl gave the URL of either a youtube channel, or a soundcloud link.

This is by far the most entrepreneurial use of graffiti that I've come across. At least the vandal is hoping to get something out of it - ad revenue, and perhaps new audience members. If their stuff is actually interesting, there may well be consumer surplus to the people watching the clips.

Looked at this way, it's far more akin to traditional advertising billboards, except a) they're not paying the property owner, and b) it's not as attractive.

Both of these are genuine problems, to be sure. Because the property rights aren't secure, you can't appeal to the Coase theorem. We can't determine whether the value to the property owner to not have the graffiti is higher than the value to the vandal of having it. Presumably, in fact, it's not, because otherwise the vandal would have negotiated with the city to put up their URL (yeah right). It's at least positive revenue, if not positive NPV. Most graffiti is just loss piled on loss.

Still, it inspired in me a curious grudging respect for the guerrilla marketing skills of whoever came up with it. If the counterfactual is more youtube graffiti, I would be unhappy about it. But if the counterfactual is that existing graffiti artists turn their hand to promoting social media channels instead of inane gang logos, moving from 4th best to 3rd best is still a change for the good.

Reply Paid Arbitrage

What charities say on their reply-paid envelopes:

Your stamp on this envelope adds to your gift!

What charities should say on their reply-paid envelopes:

You could put a stamp on this envelope to save us money, but why not donate an extra 45 cents and let us pay the postage, since our charitable institution reply-paid rates are much lower than what you'd pay?

That way our charity gets more money, the post office gets less money, you get a bigger tax deduction, and the government gets less money to start foreign wars and hire meddling bureaucrats to make your life hard!

I guess the people that think hard about  how to arbitrage the government don't tend to end up in the charity fundraising business.

Postal reply arbitrage does have a somewhat checkered past, but I think it's now time to rehabilitate its reputation.

Bad News, Good News

The bad news: Chicago is broke, homicides are up 37% this year, and the police department is feeling the strain.

The good news:  Chicago is so broke that they've decided to stop flushing money and lives down the toilet for marijuana possession:

People caught with small amounts of marijuana in Chicago will be ticketed instead of arrested under a new ordinance passed by the city council on Wednesday, as the third largest U.S. city became the latest to support more lenient penalties for using the drug.

The council voted 43-3 in favor of the measure, which was backed by Mayor Rahm Emanuel.

Under the ordinance, police in Chicago can issue a written violation with a fine of between $250 and $500 for possession of 15 grams (0.5 ounces) of marijuana or less rather than make an arrest.

It turns out that ruining lives for needless drug convictions are a luxury good, and one that Chicago has decided it can no longer afford. This is a great outcome - off the top of my head, this would have to be one of the worst NPV projects the city undertakes, so it's good that this is the one that gets canned when the crunch comes.

Somewhere at HBS, Michael Jensen is muttering to himself, 'I told you so.'

The People's Kleptocracy of China

An interesting theory of the Chinese economic system.

It includes answers to the questions of 'why do the Chinese keep buying US T-Bills', 'why do the Chinese build so many worthless buildings' and 'why do Chinese peasants riot over inflation', among others.

I don't know if I buy the whole thing (if the SOEs are so efficient, and the peasants only earn negative real returns on bank deposits, how would they be so badly off if the SOEs do worse under low inflation? Economic contraction, perhaps, but that seems to imply that the house of cards may have some positive value).

Still, it makes oddly compelling narrative

Heritage Listing is Theft in Disguise

A recurring theme of this blog is that government policies should be honest about what they cost, and who's paying. Few things irritate me more than politicians implementing policies that they pretend to be cost-free, when in actual fact the costs are just being shifted to someone else, or disguised as part of a price increase, or similar such dubious methods.

Another one to file in this category is heritage-listed properties. Some homes have real historical value - period pieces that exemplify a style of architecture, or homes of important historical figures.

So society decides that it wants to preserve those buildings. Fair enough. But how do they do it?

Simple! They slap an order restricting the owner's ability to make modifications to the home.

The home hasn't gotten any more historical. It hasn't gotten any more quaint.

It has, however, gotten a lot more difficult to replace the electrical wiring, or replace the paving in the back, or re-tile the roof, or whatever the hell they've put restrictions on.

Before you had unrestricted property rights over your house.

Now, you're a part-owner of the house, with some government bureaucrat having a part ownership stake that gives them veto-power over your renovation decisions.

So clearly they've taken something of value and paid you nothing for it. How do these thieves justify this to themselves?

Take the New South Wales Office on Environment and Heritage.

What's their justification?

There is growing evidence to support the view that heritage listing has a positive impact on property values, ...

Bulls***, you crooks! Do you know how I know this is a bald-faced lie?

Because no property owner in history has ever lobbied to have their private residence heritage listed. 

... and real estate advertisements are starting to reflect this.

It's the job of real estate agents to put lipstick on whatever turd property they're given. Hence euphemisms like 'charming' (='ugly'), 'vibrant area'  (='boring' or 'terrifying'), 'renovator's delight' (='falling to pieces'). Ensuring that they don't have to deal with disappointed prospective buyers is part of the job, so they screen out the folks (like me) who wouldn't buy a heritage-listed property in a fit.

These vultures actually have the temerity to steal part of the value of your property, and expect you to thank them for it. Talk about shamelessness.

But what are the other benefits they tout?

Heritage listing provides certainty for owners, neighbours and intending purchasers. This is important when people are looking for a particular environment within which to live and work. It explains why certain suburbs, towns, villages and rural properties are sought after.

It provides certainty that you can't add an extra bedroom, that's for sure.

Protection of an item also requires the local council to consider the effect of any proposed development in the area surrounding heritage items or conservation areas. This is positive as it ensures an appropriate context for heritage items.

Your neighbours might soon be in the same hell that you're in!

It confirms a heritage status that is a source of pride for many people. This status can be very useful for commercial operators in their advertising.

It's useful if they've got too many potential buyers coming through, and don't have enough time to show them all around. Drive them away!

The assessment process leading to listing often unearths new information on the history and style of the item.

For values of 'often' equal to 'based on how frequently local government officials go above and beyond the call of duty' (i.e. 'rarely' to 'never')

Through flexibility clauses in local environmental plans, owners of heritage items can request councils to agree to land use changes, site coverage and car parking bonuses unavailable to other owners.

You can beg for some small changes to the nearby area. See how well your requests go down. You sure as hell can't request a land use change for a new apartment on your property.

Listing gives owners access to the free heritage advisory services provided by many councils. Currently 103 councils in the state have such services.

You'll get a free listing on a website, and if you're really lucky, strangers knocking on your door on the weekend expecting your house to be a free museum.

Listing provides potential savings through special heritage valuations and concessions. If the property is listed in a Local or Regional Environmental Plan (individually or in a conservation area) you can request a “heritage restricted valuation” for land tax and local rate purposes from the Valuer-General. If your property is on the State Heritage Register under the Heritage Act, you automatically receive a heritage valuation for both local rates and land tax purposes. Heritage restricted valuations are designed to ensure that valuations of property are made on an existing development basis rather than on any presumption of future development.

When your property price goes down, you'll pay slightly less in property taxes! Score!

Listing enables access to heritage grants and loans through both the NSW Heritage Office and local councils. Listing is generally a requirement for NSW Heritage Office funding.
Listing on the State Heritage Register also enables owners to enter into heritage agreements, which can attract land tax, stamp duty and local rate concessions.

If you decide to actually turn your house into a (completely unattractive) museum, the government might kick in a hundred bucks.

Listing on the State Heritage Register makes the property eligible for consideration under the Commonwealth's Annual Cultural Heritage Grants Program, which is open to both private owners and community groups.

And they give out how much to each person? How often? Are random private property owners included? Want to bet on that?

Heritage listing enhances applications to other bodies where the building or site might be eligible for funding.

In case you want to spend the rest of your life filling in government forms.

This is such egregious theft that I can't believe they get away with it.

You know the Holmes method for heritage listing properties?

Have the government (or even better, a private group) buy them at fair market prices, and preserve them themselves.

That way nothing is stolen. You can also bet your @** that the local council is going to think a lot harder over whether that ghastly 1960s cottage really is such an amazing period piece, or actually an eyesore that nobody wants to pay a cent for.

Until that happens, should I find myself in possession of any vaguely historical property, I'm going to renovate the hell out of it immediately just to make sure that government busybodies don't find it a 'vibrant' example of period architecture. Or just bulldoze it to be on the safe side, and put in a bunch of condos.

Up yours, New South Wales Department of Heritage.