Economics

UBI via Cryptocurrency?

Posted by Peter on July 27, 2018
Posted in: Economics, Politics. Tagged: , , .

Most Universal Basic Income (UBI) proposals look a bit implausible, because they want to solve poverty overnight, and rely on questionable hopes for how much taxpayers can be persuaded to support[1].

They also fall short of inspiring my idealistic motives, because they want to solve poverty only within the countries that implement the UBI (i.e. they should be called national basic income proposals). That means even those of us living in relatively successful countries would be gambling on the continued success of the country they happen to live in. I imagine some large upheavals in the next century or so that will create a good deal of uncertainty as to which countries prosper.

Political movements to create national basic income run the risk of being hijacked by political forces that are more short-sighted and less altruistic.

Whereas I’m more interested in preparing for the more distant risks of a large-scale technological unemployment that might accompany a large increase in economic growth.

UBI without taxation?

Manna is a somewhat better attempt. It’s a cryptocurrency with a one account per human rule, and regular distributions of additional (newly created) currency to each account.

It provides incentives to sign up (speaking of which, I get rewards if you sign up via this link). It’s less clear what incentive people have to hold onto their manna[2].

It’s designed so that, given optimistic assumptions, the price of manna will be stable, or maybe increase somewhat. Note that those optimistic assumptions include a significant amount of altruism on the part of many people.

Cryptocurrencies gained popularity in part because they offered a means of trust that was independent of their creator’s trustworthiness.

Manna doesn’t attempt to fully replicate that feature, because they’re not about to fully automate the one-human-one-account rule. They’ve outsourced a good deal of the verification to cell phone companies, but the system will still be vulnerable to fraud unless a good deal of human labor goes into limiting people to one account each.

The obvious outcome is that people stop buying manna, so it becomes worth too little for people to bother signing up.

I suspect most buying so far has been from people who think any cryptocurrency will go up. That’s typical of a bubble.

That may have helped to jumpstart the system, but I’m concerned that it may distract the founders from looking for a long-term solution.

Why use a cryptocurrency?

Some of what’s happening is that crypto enthusiasts expect crypto to solve all problems, and apply crypto to everything without looking for evidence that crypto is helpful to the problem at hand. The cryptocurrency bubble misled some people into thinking that cryptocurrencies created free lunches[3] (manna comes from heaven, right?), and a UBI is a good use for a free lunch.

I recommend instead that you think of manna as primarily a charity, which happens to get some advantage from using a cryptocurrency.

Cryptocurrencies provide fairly cheap ways of transmitting value.

The open source nature of the mechanism makes it relatively easy to verify most aspects of the system.

These may not sound like terribly strong reasons, but it looks to me like much of the difficulty in getting widespread adoption of valuable new charities is that donors won’t devote much effort to evaluating charities. So only the most easily verified charities succeed on their merits, and the rest succeed or fail mainly on their marketing ability.

Difficulties

It seems almost possible that the price of manna could be stable or rise reliably enough to act as a good store of value.

But it won’t happen via the thoughtless greed that drove last year’s cryptocurrency buying frenzy. It requires something along the lines of altruism and/or signaling.

It seems to require the “central bank” to use charitable donations to buy manna when the price of manna declines.

It also requires something unusual about the average person’s attitude toward manna. Would it be enough for people and businesses to accept manna as payment, for reasons that involve status signaling? That doesn’t seem quite enough.

It’s also important to persuade some people to hold the manna for a significant time.

Strategies

There’s little chance that can be accomplished by making manna look as safe as dollars or yuan. The only possibility that I can imagine working is if holdings of manna provide a good signal of wealth and wealth-related status. Manna seems to be positioned so that it could become a substitute for a fancy car or house as a signal of wealth. With that level of acceptance, it might provide a substitute for bank accounts as a store of value.

Signaling motives might also lead some upper-class people/businesses to use it as medium of exchange.

To work well, manna would probably need to be recognized as a charity, with a reputation that is almost as widely respected as the Red Cross. I.e. it would need to be a fairly standard form of altruism.

The main UBI movement wants to imagine they can solve poverty with one legislative act. Manna uses a more incremental approach, which provides less hope of solving poverty this decade, but maybe a bit more hope of mitigating larger problems from technological unemployment several decades from now.

Doubts?

Manna seems to be run by the first group of people who decided the idea was worth doing. Typically with a new technology, the people who will manage it most responsibly wait a few years before getting involved, so my priors are that I should hesitate before deciding this particular group is good enough.

Manna currently isn’t fair to people who can’t afford a cell phone, but if other aspects of manna succeed, it’s likely that cell phone companies will find a way to get cell phones to essentially everyone, since the manna will pay for the phones. Also, alternatives to cell phones will probably be implemented for manna access.

The high-level rhetoric says any human being is eligible for manna, but a closer look shows that anyone under 18 is treated as only partly qualified – manna accumulates in their name, and they get access to the manna when they come of age. The arbitrariness of this threshold is unsettling. We’ll get situations where people become parents, yet don’t have access to manna. Or maybe that’s not much of a problem because someone else will enable children to borrow, using their manna as collateral?

The problems will become harder if someone needs to figure out what qualifies a human being in an Age of Em, where uploaded minds (human, and maybe bonobo) can be quickly duplicated.

I’m not too clear on how the governing board will be chosen – they say something about voting, which sort of suggests a global democracy. That runs some risk of short-sighted people voting themselves more money now at the cost of a less stable system later. But the alternative governing mechanisms aren’t obviously great either.

I’d have more confidence if manna were focused exclusively on a UBI. But they want to also enable targeted donations, by providing verified age, gender, location, and occupation data, and “verified needy” status indications generated by other charities. Maybe a one or two of those would work out well, but I see some important tension between them and the “NO DISCRIMINATION” slogan on the home page.

The people in charge also want to solve “instability … resulting from too much money being held in too few hands and used for reckless financial speculation” without convincing me they understand what causes instability.

I’d be concerned about macroeconomic risks in the unlikely event that manna’s use became widespread enough that wages were denominated in it. Manna’s creators express Keynesian concerns about aggregate demand, suggesting that the best we could hope for from a manna monetary policy is that it would repeat the Fed’s occasional large mistakes. I’d prefer to aim for something better than that.

Current central banks have enough problems with promoting monetary stability. If they’re replaced by an organization which has a goal that’s more distinct from monetary stability, I expect monetary stability to suffer. I don’t consider it likely that manna will replace existing currencies enough for that to be a big concern, but I find this scenario hard to analyze.

Like most charities, it depends more on support from the wealthy than from the average person. Yet the rhetoric behind Manna seems designed to alienate the wealthy.

Is current People’s Currency Foundation sufficiently trustworthy? Or should someone create a better version?

I don’t know, and I don’t expect to do enough research to figure it out. Maybe OpenPhil can investigate enough?

Is this Effective Altruism?

The near-term benefits of Manna or something similar appear unimpressive compared to GiveDirectly, which targets beneficiaries in a more sophisticated (but less transparent?) way.

But Manna’s simpler criteria make it a bit more scaleable, and make it somewhat easier to gain widespread trust.

The main costs that I foresee involve the attention that is needed to shift people’s from charities such as the Red Cross or their alma mater as the default charity, toward manna. Plus, of course, whatever is lost from the charities who get fewer donations. There’s no shortage of charities that produce less value than a well-run UBI would, but the social pressure that I’m imagining is too blunt an instrument to carefully target the least valuable charities as the things that manna should replace.

Conclusion

I don’t recommend significant purchases of manna or donations to the People’s Currency Foundation now. Current efforts in this area should focus more on evaluating these ideas further, figuring out whether a good enough implementation exists, and if it should be scaled up, then we should focus more on generating widespread agreement that this is a good charity, and not focus much on near-term funding.

I give Manna a 0.5% chance of success, and I see an additional 1% chance that something similar will succeed. By success, I mean reliably providing enough income within 30 years so that at least 10 million of the world’s poorest people can use it to buy 2000 calories per day of food. That probability seems a bit higher than the chance that political action will similarly help the world’s poorest.

Footnotes

[1] – e.g. pointing to tax rates that were tolerated for a while after a world war, without noticing the hints that war played an important role in getting that toleration, and without noting how tax rates affect tax avoidance. See Piketty’s Capital in the Twenty-First Century, figures 13.1 and 14.1, for evidence that tax rates which are higher than current rates haven’t generated more revenues.

[2] – Wikipedia says of the original manna: ‘Stored manna “bred worms and stank”‘.

[3] – or maybe the best cryptocurrencies do create free lunches, but people see more free lunches than are actually created. The majority of cryptocurrencies have been just transfers of money from suckers to savvy traders.

Another housing bubble?

Posted by Peter on March 24, 2018
Posted in: Economics, Investing. Tagged: , .

Scott Sumner asks whether those of us[1] who talked about a housing bubble are predicting another one now.

Sumner asks “Is it possible that the housing boom was not a bubble?”.

It’s certainly possible to define the word bubble so that it wasn’t. But I take the standard meaning of bubble in this context to mean something like a prediction that prices will be lower a few years after the time of the prediction.

Of course, most such claims aren’t worth the electrons they’re written on, for any market that’s moderately efficient. And we shouldn’t expect the news media to select for competent predictions.

Sumner’s use of the word “bubble” isn’t of much use to me as an investor. If prices look like a bubble for a decade after their peak, that’s a good reason to have sold at the peak, regardless of what happens a decade later.

If I understand Sumner’s definition correctly, he’d say that the 1929 stock market peak looked for 25 years like it might have been a bubble, then in the mid 1950s he would decide that it had been shown not to be a bubble. That seems a bit strange.

Even if I intended to hold an investment for decades, I’d care a fair amount about the option value of selling sooner.

2.

The U.S. is not currently experiencing a housing bubble. I can imagine a small housing bubble developing in a year or two, but I’m reasonably confident that housing prices will be higher 18 months from now than they are today.

Several signs from 2005/2006 that I haven’t seen recently:

I mostly used to attribute the great recession to the foolish leverage of the banking system and homebuyers, who underestimated the risks of a significant decline in housing prices.

I’ve somewhat changed my mind after reading Sumner’s writings, and I now think the Fed had the power to prevent most of the decline in gdp, unless it was constrained by some unannounced limit on the size of its balance sheet. But I still think it’s worth asking why we needed unusual Fed actions. The fluctuations in leverage caused unusual changes in demand for money, and the Fed would have needed to cause unusual changes in the money supply to handle that well. So I think the housing bubble provides a good explanation for the timing of the recession, although that explanation is incomplete without some reference to the limits to either the Fed’s power or the Fed’s competence.

[1] – he’s mainly talking about pundits who blamed the great recession on the housing bubble. I don’t think I ever claimed there was a direct connection between them, but I did imply an indirect connection via banking system problems.

Warnings

Posted by Peter on January 22, 2018
Posted in: Artificial Intelligence, Book Reviews, Investing, Mideast, Miscellaneous, Politics. Tagged: , , , , .

Book review: Warnings: Finding Cassandras to Stop Catastrophes, by Richard A. Clarke and R.P. Eddy.

This book is moderately addictive softcore version of outrage porn. Only small portions of the book attempt to describe how to recognize valuable warnings and ignore the rest. Large parts of the book seem written mainly to tell us which of the people portrayed in the book we should be outraged at, and which we should praise.

Normally I wouldn’t get around to finishing and reviewing a book containing this little information value, but this one was entertaining enough that I couldn’t stop.

The authors show above-average competence at selecting which warnings to investigate, but don’t convince me that they articulated how they accomplished that.

I’ll start with warnings on which I have the most expertise. I’ll focus a majority of my review on their advice for deciding which warnings matter, even though that may give the false impression that much of the book is about such advice.
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Cryptocurrencies

Posted by Peter on January 16, 2018
Posted in: Investing. Tagged: .

I’ve donated/sold more than 80% of my cryptocurrency holdings (Ripple and Bitcoin) over the past two weeks, after holding them without trading for around 4 years.

When I last blogged about Bitcoin, I said I would buy Bitcoin soon. That plan failed because I didn’t manage to convince the appropriate company that I’d documented my identity, so I didn’t find a way to transfer money from a bank to an account from which I could buy Bitcoin. (Difficulties like that were one reason why cryptocurrencies used to be priced too low). I procrastinated for two years, then found a convenient opportunity when MIRI needed to unload some Ripple.

My guess is that the leading cryptocurrencies will be somewhat higher a decade or two from now, but the prospects over the next year or two seem fairly poor compared to the risks.

Much of my expected value for the cryptocurrencies used to come from a 2+% chance of a hundred-fold rise. But a hundred-fold rise from current levels seems a bit less than 1% likely.

I compare cryptocurrency trends mainly to the gold bubble of 1980, since gold is primarily a store of value that pays no income, and is occasionally used as a currency.

I made some money once before by predicting that an unusual market pattern would repeat, with the same seasonal timing. So I’ve been guessing that cryptocurrencies would peak in mid-January. Yes, that’s pretty weak evidence, but weak evidence is all I expect to get.

I’ve also tried to extract some evidence from price trends. That usually provides only a tiny benefit in normal markets, but I suspect I get some value in high-volume inefficient markets (mainly ones where it’s hard to short) by detecting how eager traders are to buy and sell.

I watched the markets nervously in December, thinking that a significant bubble was developing, but seeing signs that any peak was still at least weeks in the future. Then I got nervous enough on January 2 to donate some Ripple to CFAR, even though I still saw signs that the market hadn’t peaked.

By January 5, I stopped seeing signs that the trend was still up, but I waited several days before reacting, hoping for rebounds that ended up being weaker than I expected. I ended up selling at a lower average price than CFAR got for what I donated to them, because dissatisfaction with the lower-than-recent price made me hesitant to sell.

An important lesson to draw from this is to always try to sell financial assets before the peak. Endowment effect is hard to avoid.

P.S. – It’s unclear whether cryptocurrencies are important enough to influence other stores of value. My best guess is that gold would be 5 to 10% higher today if it weren’t for cryptocurrencies. And the recent rise in cryptocurrencies coincides with a rise in expected inflation, but that’s more likely to be a coincidence, than due to people abandoning dollars because they see cryptocurrencies as a better store of value.

Peak Fossil Fuel

Posted by Peter on September 22, 2017
Posted in: Investing, Politics. Tagged: .

This post is about the combined effects of cheap solar energy, batteries, and robocars.

Peak oil is coming soon, and will be at least as important as peak whale oil; probably more like peak horse.

First I noticed a good article on the future of fossil fuels by Colby Davis. Then I noticed a report on robocars by Rethinkx, which has some fairly strong arguments that Colby underestimates the speed of change. In particular, Colby describes “reasonable assumptions” as implying “Electric vehicles would make up a third of the market by 2035 and half by 2040”, whereas RethinkX convinced me to expect a 2035 market share of more like 99%.

tl;dr: electric robocars run by Uber-like companies will be cheap enough that you’ll have trouble giving away a car bought today. Uber’s prices will be less than your obsolete car’s costs of fuel, maintainance, and insurance.

As I was writing this post, a Chinese official talked about banning gas-based cars “in the near future” (timing not yet decided). If only I had bought shares in a lithium mining company before that news.

energy costs

Solar costs have dropped at a Moore’s law-like rate. See Swanson’s law.
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Seeing like a State

Posted by Peter on May 16, 2017
Posted in: Book Reviews, Economics, Freedom, Politics. Tagged: , .

[Another underwhelming book; I promise to get out of the habit of posting only book reviews Real Soon Now.]

Book review: Seeing like a State: How Certain Schemes to Improve the Human Condition Have Failed, by James C. Scott.

Scott begins with a history of the tension between the desire for legibility versus the desire for local control. E.g. central governments wanted to know how much they could tax peasants without causing famine or revolt. Yet even in the optimistic case where they got an honest tax collector to report how many bushels of grain John produced, they had problems due to John’s village having an idiosyncratic meaning of “bushel” that the tax collector couldn’t easily translate to something the central government knew. And it was hard to keep track of whether John had paid the tax, since the central government didn’t understand how the villagers distinguished that John from the John who lived a mile away.

So governments that wanted to grow imposed lots of standards on people. That sometimes helped peasants by making their taxes fairer and more predictable, but often trampled over local arrangements that had worked well (especially complex land use agreements).

I found that part of the book to be a fairly nice explanation of why an important set of conflicts was nearly inevitable. Scott gives a relatively balanced view of how increased legibility had both good and bad effects (more efficient taxation, diseases tracked better, Nazis found more Jews, etc.).

Then Scott becomes more repetitive and one-sided when describing high modernism, which carried the desire for legibility to a revolutionary, authoritarian extreme (especially between 1920 and 1960). I didn’t want 250 pages of evidence that Soviet style central planning was often destructive. Maybe that conclusion wasn’t obvious to enough people when Scott started writing the book, but it was painfully obvious by the time the book was published.

Scott’s complaints resemble the Hayekian side of the socialist calculation debate, except that Scott frames in terms that minimize associations with socialism and capitalism. E.g. he manages to include Taylorist factory management in his cluster of bad ideas.

It’s interesting to compare Fukuyama’s description of Tanzania with Scott’s description. They both agree that villagization (Scott’s focus) was a disaster. Scott leaves readers with the impression that villagization was the most important policy, whereas Fukuyama only devotes one paragraph to it, and gives the impression that the overall effects of Tanzania’s legibility-increasing moves were beneficial (mainly via a common language causing more cooperation). Neither author provides a balanced view (but then they were both drawing attention to neglected aspects of history, not trying to provide a complete picture).

My advice: read the SlateStarCodex review, don’t read the whole book.

Superforecasting

Posted by Peter on January 25, 2017
Posted in: Book Reviews, Idea Futures, Investing, Politics. Tagged: , , , , .

Book review: Superforecasting: The Art and Science of Prediction, by Philip E. Tetlock and Dan Gardner.

This book reports on the Good Judgment Project (GJP).

Much of the book recycles old ideas: 40% of the book is a rerun of Thinking Fast and Slow, 15% of the book repeats Wisdom of Crowds, and 15% of the book rehashes How to Measure Anything. Those three books were good enough that it’s very hard to improve on them. Superforecasting nearly matches their quality, but most people ought to read those three books instead. (Anyone who still wants more after reading them will get decent value out of reading the last 4 or 5 chapters of Superforecasting).

The book’s style is very readable, using an almost Gladwell-like style (a large contrast to Tetlock’s previous, more scholarly book), at a moderate cost in substance. It contains memorable phrases, such as “a fox with the bulging eyes of a dragonfly” (to describe looking at the world through many perspectives).

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Market Reactions to the Election

Posted by Peter on November 9, 2016
Posted in: Investing, U.S. Politics. Tagged: , .

The stock market reaction to the election was quite strange.

From the first debate through Tuesday, S&P 500 futures showed modest signs of believing that Trump was worse for the market than Clinton. This Wolfers and Zitzewitz study shows some of the relevant evidence.

On Tuesday evening, I followed the futures market and the prediction markets moderately closely, and it looked like there was a very clear correlation between those two markets, strongly suggesting the S&P 500 would be 6 to 8 percent lower under Trump than under Clinton. This correlation did not surprise me.

This morning, the S&P 500 prices said the market had been just kidding last night, and that Trump is neutral or slightly good for the market.

Part of this discrepancy is presumably due to the difference between regular trading hours and after hours trading. The clearest evidence for market dislike of Trump came from after hours trading, when the most sophisticated traders are off-duty. I’ve been vaguely aware that after hours markets are less efficiently priced. But this appears to involve at least a few hundred million dollars of potential profit, which somewhat stretches the limit of how inefficient the markets could plausibly be.

I see one report of Carl Icahn claiming

I thought it was absurd that the market, the S&P was down 100 points on Trump getting elected … but I couldn’t put more than about a billion dollars to work

I’m unclear what constrained him, but it sure looked like the market could have absorbed plenty more buying while I was watching (up to 10pm PST), so I’ll guess he was more constrained by something related to him being at a party.

But even if the best U.S. traders were too distracted to make the markets efficient, that leaves me puzzled about asian markets, which were down almost as much as the U.S. market during the middle of the asian day.

So it’s hard to avoid the conclusion that the market either made a big irrational move, or was reacting to news whose importance I can’t recognize.

I don’t have a strong opinion on which of the market reactions was correct. My intuition says that a market decline of anywhere from 1% to 5% would have been sensible, and I’ve made a few trades reflecting that opinion. I expect that market reactions to news tend to get more rational over time, so I’m now giving a fair amount of weight to the possibility that Trump won’t affect stocks much.

The Moral Economy

Posted by Peter on September 7, 2016
Posted in: Book Reviews, Economics, Politics. Tagged: .

Book review: The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens, by Samuel Bowles.

This book has a strange mixture of realism and idealism.

It focuses on two competing models: the standard economics model in which people act in purely self-interested ways, and a more complex model in which people are influenced by context to act either altruistically or selfishly.

The stereotypical example comes from the semi-famous Haifa daycare experiment, where daycare centers started fining parents for being late to pick up children, and the parents responded by being later.

The first half of the book is a somewhat tedious description of ideas that seem almost obvious enough to be classified as common sense. He points out that the economist’s model is a simplification that is useful for some purposes, yet it’s not too hard to find cases where it makes the wrong prediction about how people will respond to incentives.

That happens because society provides weak pressures that produce cooperation under some conditions, and because financial incentives send messages that influence whether people want to cooperate. I.e. the parents appear to have previously felt obligated to be somewhat punctual, but then inferred from the fines that it was ok to be late as long as they paid the price.[*].

The book advocates more realism on this specific issue. But it’s pretty jarring to compare that to the idealistic view the author takes on similar topics, such as acquiring evidence of how people react, or modeling politicians. He treats the Legislator (capitalized like that) as a very objective, well informed, and altruistic philosopher. That model may sometimes be useful, but I’ll bet that, on average, it produces worse predictions about legislators’ behavior than does the economist’s model of a self-interested legislator.

The book becomes more interesting around chapter V, when it analyzes the somewhat paradoxical conclusion that markets sometimes make people more selfish, yet cultures that have more experience with markets tend to cooperate more.

He isn’t able to fully explain that, but he makes some interesting progress. One factor that’s important to focus on is the difference between complete and incomplete contracts. Complete contracts describe everything a buyer might need to know about a product or service. An example of an incomplete contract would be an agreement to hire a lawyer to defend me – I don’t expect the lawyer to specify how good a defense to expect.

Complete contracts enable people to trade without needing to trust the seller, which can lead to highly selfish attitudes. Incomplete contracts lead to the creation of trust between participants, because having frequent transactions depends on some implicit cooperation.

The book ends by promoting the “new” idea that policy ought to aim for making people be good. But it’s unclear who disagrees with that idea. Economists sometimes sound like they disagree, because they often say that policy shouldn’t impose one group’s preferences on another group. But economists are quite willing to observe that people generally prefer cooperation over conflict, and that most people prefer institutions that facilitate cooperation. That’s what the book mostly urges.

The book occasionally hints at wanting governments to legislate preferences in ways that go beyond facilitating cooperation, but doesn’t have much of an argument for doing so.

[*] – The book implies that the increased lateness was an obviously bad result. This seems like a plausible guess. But I find it easy to imagine conditions where the reported results were good (i.e. the parents might benefit from being late more than it costs the teachers to accommodate them).

However, that scenario depends on the fines being high enough for the teachers to prefer the money over punctuality. They appear not to have been consulted, so success at that would have depended on luck. It’s unclear whether the teachers were getting overtime pay when parents were late, or whether the fines benefited only the daycare owner.