Monday, April 30, 2012

Government as a Household

It's a popular analogy, government and household.  If a household has a drop in income it spends less.  By analogy, if government has a drop in tax revenues, it should spend less.  Makes perfect sense.  Unless you actually look at the analogy beyond the simplistic first impression.

First, let's stick with the "government is like a household analogy."  If a family loses income they don't instantly cut spending.  They can't, not unless they want to starve, freeze, and get kicked out of their homes.  Over time they can cut back, but that takes time.  Meanwhile, they look for more income.  They look for new work, second jobs, extended hours, and might argue for a raise (though if unemployment is high this isn't likely).  When they balance their budgets they don't only look at spending; they also look at revenues.

An even greater absurdity is the notion that households must balance their budgets.  Over the long-term, yes.  But over spans of weeks, months, even years, they may run debts.  They take out mortgages, which are a massive source of debt which persists for potentially decades.  They get car loans, another source of debt.  They get college loans for even more.  Households can pile on huge amounts of debt.  The last one may even be necessary, as job prospects and income are far greater with a post-secondary degree, so that not taking on debt is the truly irresponsible action.

People have credit scores and incomes and these are used to determine home much to loan them and at what rate.  Excluding the recent lying-fueled financial bubble, markets are pretty good at loaning money.  If they predict an average loss, they don't loan.

They act the same with governments.  Except in a few cases such as Greece, where the public debt was covered up by a joint public-private partnering on a corrupt government and Goldman Sachs (who has engineered it to make money off the default, still showing that the banks look for profit, rather than civic duty), investors are loaning to governments because they think they will be paid back.  They think that the spending that is being done is either stimulative enough to outgrow interest rates or is at least preventing a loss of value, making the loans as safe place to put money even if not particularly profitable.  If they didn't think so, they'd not loan the money.  If you disagree with that, then you're attacking the very notion that actors in markets seek profits or suggesting that they are all incredibly stupid.

If spending were truly "out of control" relative to expected tax incomes, then the market would stop loaning money.  The government isn't forcing banks and individuals to loan it money.  They are doing it willingly.  If the government fails to pay them back, that's part of the risk of investing.

 The analogy with a household eventually breaks down.  Households are a few people and in the US, people have safety nets.  There are charities and welfare and food stamps.  If the breadwinners can no longer afford living expenses, they can cut spending and their children won't die.  I'm not saying the safety net is perfect in terms of being too strong or weak, but it's there and it means that a family isn't a job loss away from starvation and being beset by bandits.

The magnitudes are different, as well as the responsibilities.  If government stops spending, it ripples out, fast and wide, to hit every single family in America.  Social Security stops and suddenly seniors are without income.  But Social Security isn't the fiscal problem anyway: it won't be insolvent for decades and in the meantime, it's actually a net lender to the government: it holds Treasury bills.  We could cut welfare and food stamps, which are about 13% of the budget, thereby driving millions of citizens further into poverty and possibly starvation.  Private charities aren't going to pick up that slack.  There are not enough jobs for them to all "get a job", not in a recession.  So in effect, advocates of cutting the safety net are suggesting that potentially millions of Americans end up homeless and starving, which would eventually fix unemployment by attrition.  Health care could be cut which would at least have the effect of killing them faster than starvation and exposure.

Infrastructure is about 3%, which on one hand covers bridges to nowhere.  On the other hand, it also covers infrastructure, the roads, bridges, trains, ports, and air system which make it possible to do business here.  Look up the barriers to economic development in poor nations and somewhere between lack of education and perpetual war you'll find lack of paved roads.  Speaking of education, cutting funding there is a great way to ensure that future generations are even less employable, prolonging recessions and stagnation across generations.  Science and medical research are a mere 2% of federal spending and are another necessity for long-term growth.  Cutting any of these are equivalent to selling your arms: it might give some budget relief, but it make future growth and employment even harder.

Households can cut spending without major problems.   Governments cannot.  For all the talk of waste and excessive spending, most of what is spent is spent making this a country worth doing business in, worth living in, and safe enough to work and live in.

Beyond all that, taxes interact in a backward way with the economy.  In a recession, revenues fall.  This is where much of the current "Obama deficit" has come from.  Meeting the legal obligations to citizens, the safety net, tends to get more expensive as more people are unemployed.  None of these are due to bad policies or the particular actions of any adminstrations: neither the Obama or Bush administrations caused the recessions, though the tax cuts by both have increased the budget deficit.  Merely having an economic recovery, with no changes in tax rates or spending, will improve the budget situation.

In summary:
- Governments have obligations to their citizens and their actions have dramatic ripple effects.
- Households, and governments, are under no obligations to run balanced budgets at all times.
- Spending can be stimulative and stabilizing.
- Markets are ultimately responsible for debts as they are the ones who allow them.

Tuesday, April 24, 2012

The Republic is a Failed Idea

Among other things, such as mass terror and murder, the French Revolution popularized the concept of the Republic.  It sounds really nice, doesn't it?  I don't mean that in a sarcastic way.  Imagine a government that, rather than being a monarch or oligopoly, is instead created by the people of the country.  If we had a say in government then it would probably be less likely to kill us and might even make the world better for us.  As a person of a country, I must say that on the surface, in theory, this Republic concept sounds pretty neat.

In practice it's a complete failure.  Just look at the world.  The People's Republic of China is a classic model of a corrupt, brutal government, rotting with corruption and cronyism, and definitely not looking out for the people of China.  Not far away at all is the Democratic People's Republic of Korea where we regularly see the product of Republicism: belligerence, mass starvation and murder, technological stagnation, and isolation from the world.

If you read the news you've probably heard of another hostile country, the Islamic Republic, which seeks to develop its own nuclear weapons.  In Africa there is the Democratic Republic of the Congo, a humanitarian disaster spawned by wars and revolutions by a seemingly-endless succession of cruel leaders.

If we look back at history, then there is another big one, the Union of Soviet Socialist Republics.  Stretching across Asia into Europe, this was the greatest enemy to human liberty that the world had ever seen.  It threatened Europe and all of Asia.  It triggered an arms race and wars around the world to spread its ideology.  Thankfully, in 1991 this giant experiment in Republicism collapsed, proving forever the failure of the idea of the Republic.

Monday, April 16, 2012

Sound Money is Unsound

Wouldn't it be great if a dollar was a dollar and you never had to worry about the Fed inflating you into poverty?  Well then I have a great plan for you!  What if we backed the dollar with a fixed amount of gold, or the reverse (it's a matter of phrasing, but the same thing in practice)?  Now your dollar isn't just a piece of paper, it's based on something solid, something real.

Hop in a time machine and see if your dollar is worth something a thousand years ago.  I bet not!  But your gold will be.  So keep that in mind.  It might work in the future too.

A gold bar is a gold bar is a gold bar.  Perfect, right?  Well, a dollar is a dollar is a dollar.

Gold is not magical.  It's a commodity.  It's just another thing subject to supply and demand.  Just like a dollar.  Increase the supply and the price goes down, increase demand and price goes up.  Aha, prices!  There's the key, we want price stability, right?  Price stability makes it easier to predict costs and that encourages investment and gives us that much more information when deciding whether to borrow or lend.  Price stability.

Enter inflation.  But first, let's break that apart and make sure we're all on the same page.  Money inflation will refer to the number of dollars, or gold.  Price inflation will refer to the price of what you tend to buy, so a 'basket', as the economists call it, of food, gasoline, cars (economists have a strange way of counting a typical shopping trip).  Over the long term, these follow each other.

If you wake up and everyone has twice as much gold and twice as much gold in their contracts (wages, salaries, bond payments, etc.) then after a brief bit of thinking they're rich, everyone will settle into a new habit of everything being exactly the same as it was before, just with all the numbers doubled, along with the population claiming that candy bars were a nickle back in their day.  Hint: Back when they'd have cost a nickle (by backtracking inflation), candy bars wouldn't have had so much inexpensive refined sugar and wouldn't be worth a nickle anyway.

Okay, so now here we are with price inflation and money inflation seemingly interchangeable because money sets the price.  It looks as if price stability is based on money stability.  But that would be wrong.

If the supply of wheat doubles, what happens to the price of wheat?  It falls.  What if the supply of everything except gold doubles?  The price of everything except gold falls, meaning that the price of gold has risen.  Even without any change in the money supply (gold), the price level has fallen.  Price inflation is not the same as money inflation.  Pour money in and sure, you'll get price inflation, so it's a bad idea to just dump money in willy-nilly (which the Fed knows and if you look at the amount of money actually flowing, it hasn't tripled as Ron Paul supporters would claim).  But even without changing the money supply, you're going to get price instability because money is relative to the economy.

Takeaway: A gold standard does not guaranteed price stability and therefore is not a guaranteed store of wealth or an economic panacea.

We can, of course, mine more gold.  Or less.  As the economy grows and technology advances, or as a recession comes and we produce less, we can change the gold supply.  Really?  No!  Gold is subject to the market like anything else.  It will be mined more when its value goes up (meaning a shortage of gold) and less when the prices go down (the inverse), but there are problems.  One is lag, that the gold supply will not react instantly.  Mining and purifying take time.  There would obviously be people keeping gold in reserve, partially out of the supply, who would then see the benefit of buying low and selling high.  This will help to stabilize the supply shocks, but cannot give price stability because the money supply (gold) will still be variable, managed (regulated?) by people around the world with gold reserves.  But we're not even in the long-term yet.  That's when it gets really bad.  In the long term, we don't know if the gold supply will increase in proportion with the economy.  That means that in the long term, there could be a significant amount of money deflation, relative to the economy, which as we saw before, is what really matters (money/economy moving in sync).  A stable money supply, with a growing economy, will trigger price deflation.

Imagine an economy which produces ten bushels of wheat a year and has ten bars of gold (it's a pretty bad economy).  We can't quite say what a bushel will cost, but I think we can recognize that if it produces twenty bushels, the cost of wheat, relative to gold, will drop.  That is price deflation and relative to the economy, money deflation.

Deflation kills economies.  Hyper[money]inflation will too, but it takes a lot of sustained inflation to do that, whereas just a bit of deflation can do the trick.  And it's a bubble.  Money inflation has a limit in the sense that only a money-printer can cause it (or loose loaning standards, but we're working with gold), and if there is no money-printer (central bank), then there cannot be money supply inflation except to the extent that gold gets dug up and that will be based on the value of that money, so in theory it is self-correcting.  Deflation does not have the same limit.  If gold rises in value, what will I do?  Sell?  Oh no, not if I see a trend, then I buy!  And so do others.  If not buy, then they hold.  After all, if a gold bar guys a ton of wheat today and two tons tomorrow, wouldn't you wait a day?  Of course.  So now we see hoarding and a slowdown in buying.  Which lowers the gold in circulation, raising the value, triggering more hoarding and buying up, and so on.  Eventually the 'flowing' gold is at a trickle and the economy has frozen up.

 So fine, fine, let's do this: let's print money but link it to gold.  Then if the economy grows faster than the gold, we print more money.  But now you're doing something wrong.  You're either assigning more dollars to each unit of gold, inflating the money relative to the gold, and therefore devaluing the very money you were supposed to be protecting with the gold link, or you're just lying and saying that money has gold linked to it, when it doesn't.  That's going to not only cause inflation of the money supply, but it's also going to create a false impression of the supply of gold and therefore the relative value of the dollar, effectively devaluing without telling anyone, which might work just fine... as long as not too many people ask for their gold.

Gold does have some things going for it.  As a physical substance it is rare, but not too rare.  It is stable: not reactive and not radioactive.  It's shiny, which is not a trivial matter and certainly played a role in its historical use as a standard of value.  It's traditional.  We think it is valuable because we've always thought it was valuable.  Just like a dollar for billions of people who grew up in a world where a dollar was money because that dollar, rather than being shiny or stable or old, was used to buy things in the biggest economy in world.

Money is what we use to buy things and that is entirely a social/economic construct.  Gold is only valuable as long as we thing it is.  In terms of practical value, it has some use in the jewelry industry (where much of the time we think it looks nice because it's expensive) as well as more practical purposes in industrial and electronic use, but "industrial and electronic use" are not strong foundations on which to stand.

If we really do what price stability then what we really need is a money supply that can grow with the economy.  That means some amount of money inflation.  Does that mean that the dollars i your pocket will be worth less?  Sure.  But your paycheck will go up in price, and the next, and so on, so that the supposed loss from inflation is just a small loss on a small amount of money, but in return you get predictable prices and a stronger economy.  Those are going to give you far more wealth than a pocket of gold coins.

This does not mean that a fiat currency is perfect.  It can be over-printed (or over-electroniced), or under-printed.  In part the Great Depression was worsened by a tightening of the money supply through bank behavior, something which could have been compensated for with, yes, some more printing of money to keep the overall flow constant and the economy moving.  It can be managed poorly.  But it can be managed and it can be tuned to work with the economy.

Monday, April 9, 2012

Innocent Until Proven Guilty

Florida's Stand Your Ground law creates a legal paradox.  Our legal system assumes innocence until guilt is proven.  Fortunately, it also has a 'limbo' state of being a suspect, so that when there is sufficient reason to suspect a lack of innocence, the police can apprehend a suspect.  This serves a few purposes, such as preventing escape and making destruction of evidence more difficult.  It may also protect the person.

That's why I think the safest thing for George Zimmerman is a trial.  Arrest him, put him on trial, and see what a jury decides.  He's already lost in the court of public opinion.  He has a bounty on his head, from a ridiculous almost entirely irrelevant fringe group, but it's there.  With tensions so high, with so much hatred flowing, I can easily imagine him being murdered.  Arrest would get him away from that.  A trial would put the backing of the state behind his innocence (if he is), rather than the legal assumption of innocence, which people don't accept very well, particularly when he very clearly did kill someone.  If he is found guilty, then he would receive an appropriate sentence, rather than vigilantism.

But let's return to the event itself and puzzle over the innocence.  We could interpret the Florida law two ways.  One way is just the plain perception of danger.  If someone perceives that they are in danger, they get to protect themselves without any need to retreat.  This is obviously an absurd interpretation because there are far too many situations in which someone may feel threatened, and note that I use the word feel, to distinguish from the reality of whether there is danger or intended threat.  Under this interpretation I could leave a dozen bodies during a five minute walk.  Maybe that homeless man is going to steal my backpack.  Maybe that black man walking in my direction is going to try the same.  Who are those young people there?  They might be drunk and dangerous.  It's very easy to feel threatened.

If we instead restrict the law to actual threats, something which can be proven without needing a mind-reader, then the shooting ends up being much different.  Now we have opposing assumptions of innocence.  If we assume Zimmerman is innocent, then we must be assuming that Trayvon is guilty because he would have been the aggressor.  If we assume Trayvon is innocent, meaning that he was not attacking or threatening Zimmerman, then we're assuming that Zimmerman is guilty of shooting an innocent person.  There is an interpretation of the event which I've not seen covered much: that Zimmerman was following Trayvon, which would make Trayvon the one who can feel threatened, so that even if he had attacked Zimmerman, he would be covered by the stand your ground law while Zimmerman would be an aggressor who escalated the situation without legal justification.

They cannot be simultaneously innocent, though we act as if they were by granting both of them innocence by default.  The law, and the way it has been interpreted, does this as well.  It doesn't care if there is an actual threat or danger.  It only goes by feeling.  That means that Zimmerman is innocent of murder even if he shoots an innocent person because all he had to do was feel.  That's a strange law.

This is where retreat requirements become useful.  If I retreat and the perceived threat follows, if I run and it runs, that's something more than a feeling, that's an action.  Chasing is an aggressive act.  A retreat requirement essentially generates evidence which supports the innocence of the defender and acts a buffer against biases.  A scary homeless man might just be my perception, but if a homeless man chases me, now the fear is justified (or at least more so than if we're just walking in the same direction).  A retreat requirement protects him from my unreasonable fear while also protecting me legally if I am forced to act.  Similarly, 'castle' laws which allow individuals to use deadly force within their own homes provide this buffer.  If someone is in my home without my invitation, something is clearly wrong.  Assuming locked doors, which if you have a gun handy at home, I'd guess you lock your doors, anyone in your home is either there by invitation or there by force.  Defense is clearly warranted and a retreat requirement for your own home would make no sense at all.

The streets aren't our homes.  They are public property (usually) and as such, are subject to different social and legal rules.  It seems to me that on public property, "avoid shooting people unless necessary" is a pretty good rule.

Monday, April 2, 2012

In Defense of the Vast Unelected Bureaucracy and the Ineffective Politicians Too

I'm going to start out with an assumption.

People do not agree on everything.

Let's add to that another assumption.

People may disagree about important things in which the cost of being incorrect is very big. Imagine red wire vs. blue wire. Are you going to compromise when being wrong is deadly?

Thankfully, politicians are not bomb-disposal technicians.  And thankfully, their decisions aren't such immediate life-or-death actions.  In their position, you can get feedback.  Cut the red wire and the timer keeps going.  Oh, let's cut the green wire instead.  We rejected the blue wire as unconstitutional, but that's for another day.

Unfortunately, politicians aren't often big on experimenting.  There are a few reasons for this.  Selfishly, they might not have time.  An economic or social experiment can take months, years, even decades to yield results.  Also selfishly, they don't want to sign on to failures, perceived failures, successful but unpopular actions, or even imperfect fixes.  These things make it harder to get re-elected.  Less selfishly, have fun interpreting the results of the experimental legislation without disagreeing and ending up back at square one.

You're not helping, and by you, I mean the public.  You're a pain in the ass for anyone trying to accomplish anything.  Do you realize that?  You probably think you have "principles" or "values" or you "defend the Constitution", but eventually what it comes down to is that you're best modeled as a random opinion generator with no bearing on reality or precedent, with the sole exception of Hitler, toward whom everything inevitably points.

 Imagine your job.  Actually, forget that; imagine you're an engineer and you're designing a bridge.  What do you do?  Generally speaking, you'd get the measurements on the span you need to cross, the soil aspects, where bedrock is, how wide a bridge you need, and so on.  Eventually you'll find yourself with a giant pile of numbers to work with and have some objective values, such as costs of various designs, expected lifetime, and so on.  Of course an architect comes in to say that it's all ugly and the hip new thing is building entirely out of glass, but don't worry; he'll put his name on anything as long as you give him a PR guy to help him spin it into something supposedly beautiful.

Now imagine if anyone in a fifty mile radius of the bridge can come in and whine about the design.  Even worse, despite knowing nothing at all about bridge design, they insist on having an opinion and are very convinced that cast iron is the way to go.  Even even worse, if they get enough other people to complain about this issue that they know nothing about, they can get you fired.  In fact, if the bridge design takes more than two years, they have a designated time for trying to fire you and replace you with someone else, someone who is very convinced that suspension bridges should feature as much cast iron as possible.

Inevitably, that engineer is going to spend a lot of time just trying to stay in his job, so he can design the bridge.  Maybe he's selfishly clinging to power.  Maybe he knows that the cast iron suspension bridge guy is a danger to the safety of the bridge-using public.  Maybe he's a normal human being and has both selfish and selfless goals.  Yes, by the analogy I am suggesting that politicians are humans and can simultaneously be concerned with keeping their jobs and serving the public.  They can be smooth-talking, grid-locking, fili-bustering, politi-cians, and none of that makes them horrible people: it makes them people in a horrible situation.

Meanwhile you're mad about out-of-control spending and a ballooning debt while praising your pet Congressman for bringing jobs and keeping taxes low.  My point is that you are the true monster.

You're probably either mad or wondering about that bureaucracy.  Well here we go.

You know that engineer?  Thankfully, he's not a politician.  He's not even an elected official.  He might have been appointed by one.  More likely he was hired by the rest of the bureaucracy.  In other words, he is to a large degree, insulated from monsters like you.  Is that undemocratic?  Certainly.  But democracy, unlike alcohol, is not the cause of, or solution to, all of life's problems.  Sometimes what we need are people hunched in corners with too-small desks and nary a hint of sunlight to blind them, with a ravenous appetite for paperwork.  Yes, the bureaucrat, the enemy of accomplishment.  Or is he?

Imagine the engineer again, without the two-year time limit, without the angry cast-iron purists at his door, imagine him as a bureaucrat.  He is told to design a bridge to meet specifications and he does so.  Maybe it takes him three years to get it right.  Maybe thirty.  It doesn't matter so much to him what happens to the shifting winds of the politics in the bright offices above him.  He might be slower than they want, but at least he keeps going.

I'm not suggesting that the bureaucrat is perfect.  But he is necessary.  After the politicians have been wrung out a few dozen times, someone needs to keep things going.  Someone must check that social security checks go to the correct people and that taxes are paid.  Someone must check that the factory next door isn't emitting sulfur dioxide, or at least not too much, too close to the school, because once upon a time a politician heard that children being poisoned by breathing was a bad thing and now a bureaucrat worries about that forever after.

Maybe now you're angry even if you weren't before.  Don't I know that bureaucrats just slow everything down?  Well of course they do!  Imagine if everything happened when we thought of it, unconstrained by any process of double-checking whether the hydrogen fluoride gas would be adequately contained in the event of an accident.  Of course you think you have adequate controls, but as someone living downwind, I might have some concerns.  The bureaucrat enforcing the No Hydrogen Fluoride Gas in Homes Act is my check on your confidence.  Me?  No, I'm not the check.  Remember, I'm part of the public, so I'm just an ignorant pain in the ass.  The bureaucrat, he's an expert.  It's why he was hired, for his knowledge of toxic acid gas cloud dispersion and containment.

To wrap it all up, think about this: once upon a time a politician thought that maybe we should have some better way to kill Nazis, so he sent money to the Defense Department.  A gaggle of bureaucrats sat around some tables, staring at the briefcase of money, wondering what to do with it.  Someone suggesting a money bomb, in which it would be dropped on Berlin and by some theories, cause severe economic disruption.  Someone else suggested that it be used to build more of those things that zap when you touch them.  Eventually, after much negotiating, they sent a ton of money to the electronics labs.  There, a bunch of nerds designed all sorts of cool stuff like giant vats of mercury which could record sound or any other information, which was useful for designing better radar systems, which helped us kill Nazis.  And then we all celebrated and ruled the cool parts of the world for a few decades.

My point is that without the politicians and the bureaucrats and the nerds working for them, we'd not have the internet.  No company is going to invest in returns 50 years down the road.  No one would invest in that company.  So it is government with it's political games and deadlock and bureaucracy, which invests in the ideas and technologies and basic science that pays off 50 years later in a big way.  Then they hand it off to the free market and everyone gets insanely rich.  Or at least some people.  The rest of us get the ability to order anything online and get it in half an hour to three days.