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?

Drowning in Words

From a reddit post recently:



Just remember, ignorance of the EU's 26,911 word missive on the sale of cabbage is no excuse!

David Foster Wallace memorably wrote an essay entitled 'Some Remarks on Kafka's Funniness from Which Probably Not Enough Has Been Removed', a title which captured the essence of Kafka perhaps better than anything else that could be said about him.

In both his love of brevity and his appreciation of absurdity, I'm sure the great Mr Kafka would find much of interest in the modern regulatory state.

Postscript: Scholars are still debating the authenticity of the the part in the Dead Sea Scrolls that talks about Christ's '10 Commitments'.

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?

Morgan Stanley is not your friend

Not if you are their client. Not if they're underwriting an IPO you're purchasing. And certainly not if they're just trading on the other side of the market against you.

What, did you expect something else? Is this surprising to you?

Then I have bad news for you. You have no business picking your own shares to day trade in equity markets.

The Greek sent me this interesting Atlantic article about the debacle surrounding the Facebook IPO.

It's rather long, and I have mixed feelings about it, so let me give you the quick version.

Facebook had a big IPO coming up. As the date neared, they realised that revenue projections were going to be lower than expected, because more people were switching to (low ad revenue) mobile services than they'd forecast. They released a form with the SEC that buried this news while meeting technical disclosure requirements. Institutional investors figured this out from their brokers and banks. Joe public did not.

There's an interesting story here, but I found it hard to get through, because it started in the following manner:

Uma Swaminathan tuned the television set in the living room of her ranch style home in the suburbs of East Brunswick, N.J. to CNBC. It was 9:00 a.m. on May 18, 2012, a day the retired schoolteacher thought might make her rich. She logged onto her Vanguard brokerage account on her computer and placed an order for 5,000 shares of Facebook at $42 a share.

Like a bad movie, I already knew how the rest of this was going to play out from the first paragraph. The author clearly has sympathy with the lady in question, and invites the reader to as well.

With short hair, brown skin, and few wrinkles, Swaminathan looks much younger than her 68 years. She spent most of adult life as a suburban mom, making tofu for her daughter's friends at theater rehearsals, taking her three sons to soccer practice and Boy Scouts, and volunteering in the local community. She served a term as president of the Indian American Association of New Jersey.

My immediate responses are threefold:

1. These sound like admirable things to do.

2. A similarly glowing list could be compiled about just about anybody.

3. If this is story about financial markets, what about the above listed background made her think she was an ideal candidate to start trading actively?

Her interest in the stock market didn't develop until her husband died about 13 years ago. Her four children had already moved out to attend college or to pursue their careers. Swaminathan was left with her late husband's 401(k) retirement account, when she started dabbling in the market, investing in stable companies like Microsoft. Not long after, she began to follow the news coverage of initial public offerings (IPOs) -- when private companies enter the public market -- and came to know of the phenomenon known as the first day "pop." On the day that companies would debut on the stock market, the price would tend to shoot up before stabilizing. A year earlier, she watched as social networking site LinkedIn's stock price closed up 109 percent on its opening day.

Okay, we're going to hear a lot of sympathetic stuff later in the article. But let's just unpack some of these statements. Roll the tape again:

[She] came to know of the phenomenon known as the first day "pop." On the day that companies would debut on the stock market, the price would tend to shoot up before stabilizing.

So IPOs historically go up, on average (we'll come back to that phase in a second) on their first day. So what? Do you think that you're somehow owed a large first day return? For what? What did you do to earn them?

And in a question that might be viewed as immensely patronising, except for everything revealed by her subsequent actions: do you think that positive average returns are the same as uniformly positive returns?

Financial markets combine two distinct roles. There is a positive sum problem of real resource allocation - prices send signals about which companies should be able to expand their operations, and what the economy should produce more of. But there is also a zero sum problem of trading - if I buy and the share goes up, I make money relative to the alternative case if I hadn't bought. But the guy I bought it off loses money relative to if he hadn't sold.

So this woman might have made money. But who would have lost? Whose story is not being told here?

Most of the time, the company who sold it to her. The standard answer in the finance literature is that IPO underpricing is about companies getting ripped off by their unscrupulous advisors. So finally, the academics get their way, and Facebook is definitively not ripped off with its IPO price. So instead the story gets written about the woman who bought the Facebook shares and lost money. But that's inevitable - if someone makes money, someone else loses.

[Diversion: Academics have written hundreds of papers on the reason IPOs are "underpriced" because of the first day pop. But really, do you think CEOs look at stories about the 'biggest IPO flop ever' and think to themselves, 'Wow, that's what I want! That Zuckerberg guy managed to get absolute top dollar for his worthless shares!'. And if they don't, can you really blame them?]

But it's more than that - the woman wasn't buying shares in the IPO from Facebook, but in the open market. She was buying them off some other investor. Maybe she was buying them from Goldman. Maybe she was buying them from some other small investor who doesn't get an Atlantic story written about them. Who knows.

The point is, suppose she'd made money. Someone else sold too low immediately on the open. Would you feel equally sorry for them? Maybe if they'd gotten a glowing article written about how they volunteer at their local soup kitchen or whatever, but ordinarily, no, you wouldn't.

As the grievance studies professors are fond of saying - some narratives are privileged, and others are not.

Let's jump back to a statement at the beginning.

[O]n May 18, 2012, a day the retired schoolteacher thought might make her rich.

You thought you'd get rich trading IPO stocks as a retired schoolteacher.

The Greeks have a word for the feeling I experience reading those words, and it is catharsis.

She'd never placed such a big bet on just one stock, but she felt a personal connection to Facebook. She had been using the site to connect with family and friends since 2009, and almost everyone she knew had an account.

...

Facebook shares hit the market at an opening price of $38. Minutes later, Swaminathan's online order was executed, and the retired schoolteacher had just spent approximately half her life savings.

You put half your God damn life savings into a single stock? And an IPO stock at that? Are you out of your mind?

First of all, this shows that you have absolutely no idea about even the very basics of finance. Idiosyncratic risk? Diversification? Anyone? Anyone at all?

Second, it shows that you don't even understand the strategy you're implementing. IPO underpricing is a statement about average returns to a strategy of buying a ton of IPO stocks. It is not  a strategy for putting all your money into a single stock. If you are counting cards in blackjack, you want to place lots of bets over and over because the odds are in your favour. You do not want to put all your money on one hand. If you don't understand this, again, you don't understand the very basics of finance. 

I want you to remember this, reader. Because there's an entire article about how this is all JP Morgan's fault, and Vanguard's fault, and NASDAQ's fault, and FINRA's fault.

Madam, I submit to you the following - your belief that you would make tons of money by putting half your life savings into Facebook stock was not something you learned from JP Morgan, or Vanguard, or NASDAQ, or FINRA. It was not something you got from financial academia, or textbooks, or even moderately sophisticated blogs. I don't know where you got it. I suspect from naive extrapolation.

Don't get me wrong. There is another side to the story, one about investment banks giving selective advice to their favoured clients and the game being rigged against small investors. This is all true. But you don't need me to tell you that story - the whole article is about that. We can argue about what, if anything, should be done to fix this problem.

But to my mind, this is just a smokescreen. Why?

Because if you're putting half your life savings into a totally fair and not rigged IPO stock, there's a large chance that the story would still have the same ending. That's what happens when you take a huge bet on a single volatile asset. If I had to hazard a rough guess without looking at the actual data, I'd say it's a bit less than a 50% chance for a one-off bet, since IPO stocks do rise on average on the first day. But if you're doing this strategy multiple times, it starts becoming way more likely.

Financial markets are like a circular saw. You can use them to fashion a beautiful oak table if you know what you're doing.

You can use them to chop your own leg off if you don't.

You may think this is all rather harsh. Some poor woman still lost a ton of her life savings. Don't I feel sympathy for her?

Of course I do. It's a tragic story. She clearly had no idea what she was doing, and got fleeced by Wall Street.

As the great Theodore Dalrmpyle put it, people can both be figures of sympathy and also acknowledged as being significant architects of their own misfortune.

One can, in other words, be a victim, but also partly responsible. The two are not at all contradictory.

And this is worth mentioning, because this is not really a human interest story. It is, after all, a policy story. The author wants you to believe that this unfortunate woman's losses are primarily the fault of Wall Street Greed and Crony Capitalism.™ More taxes on crooked banks! More regulation!

The real problem here is the one that the author doesn't want to talk about - there are plenty of individuals investing in financial markets who have not the vaguest clue what they are doing, and a number of them are going to lose a lot of their life savings.

One way to deal with this is to load up on paternalism - only let sophisticated people with demonstrated knowledge trade. This might solve the problem. Then again, it might not. It would also come with a number of undesirable side effects.

The other way to deal with this is reflect on the sad and imperfect universe we live in, and the wisdom that the Gods of the Copybook Headings would have told us, much more in sorrow than in scorn:

"A fool and his money are soon parted."

The Intrade End Game

The most useful source of information on US political events, Intrade, is shutting down:

With sincere regret we must inform you that due to circumstances recently discovered we must immediately cease trading activity on www.intrade.com.

These circumstances require immediate further investigation, and may include financial irregularities which in accordance with Irish law oblige the directors to take the following actions:

-Cease exchange trading on the website immediately.
-Settle all open positions and calculate the settled account value of all Member accounts immediately.
-Cease all banking transactions for all existing Company accounts immediately.During the upcoming weeks, we will investigate these circumstances further and determine the necessary course of action.

To mitigate any further risk to members’ accounts, we have closed and settled all open contracts at fair market value as of the close of business on March 10, 2013, in accordance with the Terms and Conditions of our customers’ use of the website. You may view your account details and settled account balances by logging into the website.

At this time and until further notice, it is not possible to make any payments to members in accordance with their settled account balance until the investigations have concluded.

Hmmm.

The outcome of shutting down was bound to happen eventually. But it's hard to know what to make of this press release in particular.

Part of the backstory is this disgraceful attempt by the US Commodity Futures Trading Commission to sue them over the fact that US investors were using the markets. Imagine that! US citizens having a bet on the outcome of an election! How will the republic survive?

They did the same thing with the sports betting version, Tradesports a few years ago. Under the rubric of the standard 'Think of the Children!' argument, the US government had to work hard to stamp tradesports out for a much bigger sin - offering a better sports gambling product at a lower cost than Vegas was willing to offer. And hey presto! Out you go. Tradesports made the Superbowl actually fun (no mean feat), as you could watch each play and see how the price reacted, getting real-time information on the progress of the game.

Tradesports was taken out sooner, because Vegas makes decent money off sports betting. They were willing to let the political side linger a bit longer, because this is small potatoes. Seeing the writing on the wall, the company who originally ran both (Intrade and Tradesports) sensibly decided to split the two parts off into separate companies. This managed to stave off the crocodile a little longer. What they really needed to do was start bribing making donations to some US senators. That would have been more useful. The trouble with being incorporated in Ireland is that you're far enough away that you can't have political influence, but not so far away that you can escape prosecution. Then again Full Tilt Poker was incorporated in Ireland. Then again again, when the DOJ came looking for them, they ended up getting acquired by PokerStars, incorporated in The Isle of Man. I don't know how much the jurisdiction helps. If it were me, I'd try for Macau. You can bet the ChiComs wouldn't bother you. If you are going to do it, though, you need to learn the lesson that DeBeers executives figured out, but David Carruthers of BetOnSports.com didn't figure out - don't plan to set foot in the US.

As with all this stuff, the way they go after you is the Wikileaks trick - they make it illegal for credit card companies to transfer you money. He who controls Visa and Mastercard controls the world. At least until BitCoin gets big. Mencius Moldbug predicted that if BitCoin ever did look like it was getting big, the government would shut it down. Care to take the other side of that wager? I'll give you pretty good odds.

Whether the CFTC is motivated by the same considerations that make the government put the squeeze on Tradesports is unclear. Frankly, bureaucratic petty jealousy would be more than enough to motivate these pinheads. Look, someone somewhere is trading a financial product without our authority! Shut it down! Sue them into oblivion!

The real question is why Intrade decided to stop trading now. After all, the loathesome CFTC press release was from November. Why now?

As far as I can see, there seem to be two possibilities.

One is that the government is pulling a Conrad Black. This is where they charge you with a crime and then find some pretext to freeze your assets, thereby making it incredibly hard for you to raise the money to pay for decent lawyers. How freezing their members accounts will help them is unclear - I'd be quite surprised if under Irish law they're allowed to used member funds (which are likely in some kind of trust) to pay for legal bills.

The other is that they've figured out that the money simply isn't there. Corporate directors don't use the words 'financial irregularities' unless they really have to. In other words, the reason they can't pay out members is that they've figured out that someone has been skimming money off the top, and now there aren't enough funds there to pay out everyone in full. In which case, you can't pay out anyone until you find out what the hell is going on. This was the substance of the allegations against Full Tilt Poker. If you're skimming money off the top, you're effectively running a Ponzi scheme, although not one with explosive growth.

It's possible the two ideas actually interact. In other words, the member funds are held in trust, but the company has been forced to make some provision for losses under the CFTC action. If you think there's now a chance that you'll be insolvent when it's all finished, it's not clear exactly what steps you'd take as a company, but this may well be one of them. (Not remembering all of my trusts law so clearly, I tried getting some kind of answer for the US here, but it looked rather hard. Actual lawyers would probably know the answer). So even if there isn't anything untoward going on in the company accounts, it wouldn't surprise me if this had something to do with it.

So at last, the government gets their way! The prediction markets in the US get eviscerated, except for BetFair, which actually does make it hard for US investors to take part (which probably doesn't help the accuracy of US election predictions), and, more importantly, is large enough in the UK that they have political power and can't be pushed around so easily.

The government doesn't specifically want inaccurate predictions. It just doesn't want anyone other than Vegas  or Wall Street to make any money on contingent financial contracts, no matter how small the amount, no matter how trifling the event being predicted.

The real winner in all this is Nate Silver. If you want predictions for important events, don't look to markets to save you. The markets would be happy to oblige, of course, but too many important people stand to lose money if that happens. Nothing personal old chap, you know how it is.

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!

How the Sausage is Actually Made

One of things that Mencius Moldbug likes to emphasise is that most Western countries increasingly aren't democracies in a meaningful sense. Sure, we vote for politicians every couple of years. But the vast majority of the important decisions about what becomes law are made by civil servants - professional government officials who decide what's going to happen. Congress has decided that the job of governing is so vast that it will just palm it off to the secretary of the relevant department to figure out what to do. They in turn will palm it off to a bunch of junior guys, who may palm it off to some corporation or lobby group or NGO.

Don't believe me? Check out the 'Patient Protection and Affordable Care Act', a.k.a. 'Obamacare'. Do you know how many times the phrase 'The Secretary Shall' [promulgate regulations, develop standards, award grants, carry out a program, establish a formula...] appears in the act? Quick, see if you can guess.

It appears 883 times.

It's not even like the politicians are even going to any great lengths to hide how little involvement they have in lawmaking. Nancy Pelosi famously declared about the Obamacare Bill, in public, that '[W]e have to pass the bill so that you can find out what is in it'. Not only did she not know herself, she wasn't even afraid of admitting it. So why did she pass the Bill? Someone told her to pass the Bill, and she trusts them enough to just go along with the recommendation. Who wrote it? Who knows! Some combination of lobby groups, civil servants, NGOs, and God knows who else.

So far, the Secretary has issued over 12,000 pages of regulations elaborating on the law. And in case it wasn't clear, I'm pretty certain that the Secretary herself hasn't read and understood the intended (let alone actual) effects of all 12,000 pages of regulations. Again, who actually wrote them? Great question. Care to wager on the chance that you'll be able to get a straight answer to that question if you asked the Secretary, or Nancy Pelosi?

This isn't just a Democrat thing. Moldbug has a great example about some ridiculous Executive Order on 'Protection of Striped Bass and Red Drum Fish Populations'. Does anyone imagine Bush knew virtually anything about this subject before passing the order? The mere suggestion is laughable.

The idea that most of the important legislative choices are being made by a bunch of nobody government officials is so rarely discussed in the popular discourse that you suspect most people don't really believe it. Come on, how much power can some random bureaucrat in an obscure bit of the government have to affect my life?

As if to remind you, here comes the latest dreary outrage in government overreach in the name of corporate cronyism - as of last Saturday, it's now illegal to unlock your mobile phone in the USA so that you can use it on another carrier.

As a policy, this is yet one more example of restricting consumer freedom in the name of protecting big business. WHEC helpfully informs us that:

Officials say carriers rarely went after customers that unlocked their phones...

and that's a guarantee you can take to the bank!

...but instead targeted businesses that bought throw away phones, unlocked them and shipped them overseas.

 Which is a clear problem because... um... you see...

But that's not what's shocking here. The real kicker is the following:

In October 2012, the Librarian of Congress, who determines exemptions to a strict anti-hacking law called the Digital Millennium Copyright Act (DMCA), decided that unlocking cellphones would no longer be allowed. But the librarian provided a 90-day window during which people could still buy a phone and unlock it. That window closes on Jan. 26.

 F***ing who? The Librarian of Congress? Who on earth is that? And why are they determining whether I can unlock my cellphone?

If there are any Shylock Holmes readers that can prove that they knew before last week that decisions on copyright were made by the Librarian of Congress, I will personally send them a cheque for $1000.

Who wrote this awful regulation? Who decided that we needed to make criminals out of people who want to use a local SIM card while travelling in Europe before their contract is up?

Beats me. Some flunkie in the US Copyright Office of the Librarian of Congress. And how did the person get the idea to do this? Presumably the phone companies donated to somebody important, and got this disgraceful back room deal.

If you still believe the fiction that laws are made by elected representatives, you may be wondering whom you complain to to get the Librarian of Congress replaced. Oh, the halcyon days of youthful naivete! Do you think the Cathedral cares one whit about your opinion?

Every now and then the public service will step sufficiently far out of line that politicians will occasionally overrule the decision. The public assumes that this means that the rest of the regulation has been given careful oversight and assented to. Care to wager over how many of those 12,000 pages have been scrutinised by any elected official ever, given Congress couldn't be bothered writing them in the first place?

And for the remaining 99.9% of regulations, some group of guys whose titles and positions will be meaningless to you are busily deciding how the power of the state will be administered.

At least in the EU the elites have essentially given up on the farce of pretending that any meaningful decisions will be decided by the popular will.

Here in the US, the charade continues a while longer.

None of this would have been a surprise to the great Robert Heinlein, who described it very memorably way back in 1961 in his book 'Stranger in a Strange Land':

IN THE VOLANT LAND OF LAPUTA, according to the journal of Lemuel Gulliver recounting his Travels into Several Remote Nations of the World, no person of importance ever listened or spoke without the help of a servant, known as a "climenole" in Laputian-or "flapper" in rough English translation, as such a Servant's only duty was to flap the mouth and ears of his master with a dried bladder whenever, in the opinion of the servant, it was desirable for his master to speak or listen. Without the consent of his flapper it was impossible to gain the attention of any Laputian of the master class.

Gulliver's journal is usually regarded by Terrans as a pack of lies composed by a sour churchman. As may be, there can be no doubt that, at this time, the "flapper" system was widely used on the planet Earth and had been extended, refined, and multiplied until a Laputian would not have recognized it other than in spirit.

In an earlier, simpler day one prime duty of any Terran sovereign was to make himself publicly available on frequent occasions so that even the lowliest might come before him without any intermediary of any sort and demand judgment. Traces of this aspect of primitive sovereignty persisted on Earth long after kings became scarce and impotent. It continued to be the right of an Englishman to "Cry Harold!" although few knew it and none did it. Successful city political bosses held open court all through the twentieth century, leaving wide their office doors and listening to any gandy dancer or bindlestiff who came in.

The principle itself was never abolished, being embalmed in Articles I & IX of the Amendments to the Constitution of the United States of America-and therefore nominal law for many humans-even though the basic document had been almost superseded in actual practice by the Articles of World Federation.

But at the time the Federation Ship Champion returned to Terra from Mars, the "flapper system" had been expanding for more than a century and had reached a stage of great intricacy, with many persons employed solely in carrying out its rituals. The importance of a public personage could be estimated by the number of layers of flappers cutting him off from ready congress with the plebian mob. They were not called "flappers," but were known as executive assistants, private secretaries, secretaries to private secretaries, press secretaries, receptionists, appointment clerks, et cetera. In fact the titles could be anything-or (with some of the most puissant) no title at all, but they could all be identified as "flappers" by function: each one held arbitrary and concatenative veto over any attempted communication from the outside world to the Great Man who was the nominal superior of the flapper.

This web of intermediary officials surrounding every V.I.P. naturally caused to grow up a class of unofficials whose function it was to flap the ear of the Great Man without permission from the official flappers, doing so (usually) on social or pseudo-social occasions or (with the most successful) via back-door privileged access or unlisted telephone number. These unofficials usually had no formal titles but were called a variety of names: "golfing companion," "kitchen cabinet," "lobbyist," "elder statesman," "five-percenter," and so forth. They existed in benign Symbiosis with the official barricade of flappers, since it was recognized almost universally that the tighter the system the more need for a safety valve.

The most successful of the unofficials often grew webs of flappers of their own, until they were almost as hard to reach as the Great Man whose unofficial contacts they were . . . in which case secondary unofficials sprang up to circumvent the flappers of the primary unofficial. With a personage of foremost importance, such as the Secretary General of the World Federation of Free States, the maze of by-passes through unofficials would be as formidable as were the official phalanges of flappers surrounding a person merely very important.

So it was, so it is, so it will continue to be.

Just Circling the Drain Isn't Nearly Fast Enough! We Need A Vacuum Pump!

Some people think that Europe is a bloated, worthless bureacratic state that has managed to transform an attitude of self-important entitlement amongst its citizenry into some of the most inflexible labour regulations on the planet.

Some people may think that such regulations, making labour ever more costly and ever more difficult to fire, contribute to the massive unemployment and economic stagnation that has seen large parts of Europe unable to repay their national debt, thereby threatening the existence of the Euro and the economic security of European countries.

Some people may think that as the Euro, and European economies, appear to be on the brink of collapse, it would behoove any sensible leaders to be doing all they can to address these problems.

Some people may think that Europe's leaders, institutions, and ultimately, voters, have proven themselves unwilling or unable to address these issues, and would rather vote for more government-provided lollipops even as their countries collapse around them.

Such people are clearly nothing but embittered, Euro-hating capitalist pigs. And here to prove this to them comes the European Court of Justice! Their latest ruling is, as the New York Times puts it:

[W]orkers who happened to get sick on vacation were legally entitled to take another vacation.

Yep, that's going to be just the shot in the arm that sluggish European economies need. All those unemployed citizens who were afraid to take jobs because they worried that being sick might eat into their holiday time will now flood back into the labour force, reinvigorating national output and tax coffers.

Master of moral hazard, these clowns at the ECJ don't appear to have considered the possibility that claiming you were ill while in Tahiti is very difficult to disprove, and thereby easily allows workers to effortlessly expand their vacation time. Which, in case you Yanks had forgotten, currently is between four and six weeks.

Somebody give these countries a bailout!

At least the New York Times Reporter seems to have a sense of humour about the whole thing, evidenced by his closing line:

The ruling does not apply to the 25 percent of the Spanish labor force that is currently unemployed.

Ha! You don't say.

Why does the Post Office always lose money?

This hilarious story from the Consumerist provides a clue:

The Styrofoam cube enclosed in this envelope is being included by the sender to meet a United States Postal Service regulation. This regulation requires a first class letter or flat using the Delivery or Signature Confirmation service to become a parcel and that it "is in a box or, if not in a box, is more than 3/4 of an inch thick at its thickest point." The cube has no other purpose and may be disposed of upon opening this correspondence.

Alec Baldwin: They're just sitting out there, waiting to give you their money! Are you gonna take it? Are you man enough to take it?

United States Post Office Worker: No! Not unless their money is in an envelope at least 3/4 of an inch thick!

Alec Baldwin: *picks up set of steak knives, proceeds to stab Post Office worker in rage*

Welcome to the Hotel USA

You can check out any time you like, but you can't leave until the IRS says so.

The Globe and Mail reports a story about the situation of many American citizens living abroad - they left the US years ago, didn't think twice about filing a tax return because they lived and worked overseas, and now are in the crosshairs of the IRS for potentially huge amounts of money.

The USA is almost unique among countries for the extent to which it pursues its citizens for tax payments after they emigrate. US citizens are required to file a tax return every year and report their worldwide income. Even if you haven't lived in the US for years. And if you've worked in a low-tax jurisdiction like Singapore, they'll demand the difference in tax between the Singapore tax rate and the US tax rate.

The only way you can get out of this is to renounce your citizenship. But in a delightful catch 22, they won't let you renounce your citizenship until... you guessed it... you file your back tax returns!

As a matter of practicality, if you've given the US the middle finger and don't plan to return, it's not really a problem - they're not going to travel to Kazakhstan to file suit against you. But if your elderly mother is in America and you might want to visit her at some point? Well, let's just say things get a bit complicated:

“It’s not the back taxes that will kill you,” Brian told me. “It’s the penalties.” It turns out the IRS can fine you for every unreported bank account, mutual fund and RRSP – at a rate of $10,000 per offence per year. It can also confiscate as much as 25 per cent of the maximum amount you’ve held in each account. This is so absurd it can’t possibly be true. But it is.

...
So I called our accountant. “Do I have to do it?” I wailed. “I can’t advise you,” he said. He told me that I might be able to get off the hook for only a few thousand dollars. “Can they come after me for more?” I asked. “Yes,” he said. “Nobody knows what they’ll do.”

Representative government at its best! Arbitrary penalties may be imposed upon you, and there's no way of finding out in advance how big they'll be.

Sadly, I see no chance of this changing. The federal government is desperate for money, and the cynical political calculus is that people who've lived overseas for years are unlikely to vote in elections, so f*** 'em.

I suspect that a lot of people will make the sad decision to just turn their back on the US for good than deal with the hassle of the IRS. I remember when London mayor Boris Johnson did the same in 2006, renouncing his US citizenship publicly in The Spectator. His reasons were even less - he fell victim of the fact that if you ever held a US passport, you can't travel into the US on anything other than a US passport. Yes, they're serious. Yes, they'll refuse you entry if you try. Yes, they won't even let you renounce your citizenship.

Last Sunday lunchtime we were boarding a flight to Mexico, via Houston, Texas, and we presented six valid British passports. As soon as the Continental Airlines security guy saw my passport, he shook his head. ‘Were you born in New York?’ he asked. ‘Have you ever carried an American passport?’

Yes, I said, but it had long since expired. ‘I am afraid we have a problem,’ he said. ‘The US Immigration say you have to travel on an American passport if you want to enter the United States.’ 

When the ranking officer arrived, the story was the same. ‘I’m sorry, sir,’ he said, ‘but you’ll have to go to the US Embassy tomorrow morning and get a new American passport.’ But I don’t want an American passport, I said, inspiration striking me. I tell you what: I renounce my American citizenship. I disclaim it. I discard it.

‘That’s not good enough, sir,’ he said. ‘I need some official document saying that you are no longer American,’ and that, of course, is the point of this piece.

... 

So I circumnavigated America. I flew via Madrid, managing to beat the rest of my family to Mexico by 45 minutes; and yet I still seethe. It’s not just the stupidity of the rule that gets me. It’s the arrogance. What other country insists that because you can be one of its nationals, then you must be one of its nationals?

... 

Well, I love America. But I don’t like being pushed around and kicked off flights to what, after all, they claim is my home country.

Can you blame him?

The IRS and US Immigration authorities have succeeded in the admirable task of driving away a good number of their most ambitious and adventurous citizens who spent years abroad, and might otherwise be at risk of travelling back the USA to work in productive jobs and contribute to the economy.

If you cannot leave your country, you are not a citizen but a slave. If you prevent someone from leaving without paying money in perpetuity, you are either a mob boss, someone who traffics in sex slaves, or the IRS. As they say in Russian - how can you not be ashamed?

How to Fail in Business Without Really Trying

Over at Paco Enterprises, Paco has an interesting post on Solyndra, the glorious new bankrupt solar energy company that managed to finagle $500 million in loans from the government and proceeded to send the money (and the company) down the rathole.

The more that comes out about this company, the more it becomes apparent that this was a horrible investment of money to start with. From the Government! I know, you must be as shocked as I was. As Zero Hedge noted, when you're producing a low-margin commoditised product like solar panels, and you've got revenues of $58 million versus cost of goods sold of $108 million, that's a recipe for the fast track to insolvency. Coyote's description is almost right:

Even in the worst run late 90′s Internet company I ever encountered, they were not selling dollars for 50 cents.

True enough. My only quibble with this metaphor is that if Solyndra were actually selling dollar bills for 50 cents, it would be a big improvement, because at least the final product would be re-salable for a full dollar. Here, it's more like they took a dollar bill to the 7-11, got change in quarters, melted two of the quarters into a blob of metal and proceeded to flush the blob down the toilet.

There is only one silver lining that I can see in this whole mess. At least the company actually went bankrupt, and now hopefully will be liquidated. In other words, taxpayer losses appear limited to only (only!) $500 million of yours and my money. By contrast, had Solyndra managed to limp along long enough to become a large political constituency, we probably would have been on the hook for much larger ongoing bailouts. It could have been added to the pantheon of dollar-bill blast furnaces of General Motors, Chrysler, Fannie Mae, Freddie Mac and the Post Office that no matter how badly they perform, the government picks up the tab and nobody ever gets fired.

The best thing Solyndra did for us was to fail fast enough and spectacularly enough that even the most coked-out green energy fanboys in the government couldn't justify throwing more money its way. You'll forgive me for not celebrating this fact too highly.

Adventures in Big Government

1. Courtesy of the Greek, comes pictures of the latest rioting in Greece.

I had previously described these people as being on strike against double-entry accounting, but the Greek had an even better description - the 'Time Machine Enthusiasts'. They don't know what policy they want exactly, they just know that they want things to go back to the way they were in 2007. How that's meant to happen, who knows? If the government can't deliver, they must be crooked or evil.

Yeeaaah. Great plan. The Government may well be crooked and evil, but the straightest, most benevolent government isn't going to be able to put the Greek Fiscal Humpty Dumpty back together to 2007 days.


2. Still on the topic of Big Government, Mark Steyn eviscerates Michael Bloomberg's tendency to be enthusiastic for nanny-state policies, but less so for ordinary tasks of local government like clearing the streets of snow:

That’s the very model of a can-do technocrat in the age of Big Government: He can regulate the salt out of your cheeseburger but he can’t regulate it on to Seventh Avenue.

Oooh, the burn!

3. Meanwhile in California, regulation shuts down startup businesses and benefits incumbents! Well, sometimes. Sometimes it benefits nobody. Pundits astounded! News at 11!