Politics

I attended about 2/3 of the recent Seasteading conference. There were plenty of interesting people there. But I became less optimistic that seasteading will be implemented within the next decade.

The most discouraging news was that floating breakwaters probably won’t work with using propulsion to control location. They might work if anchored (which needs shallow water that only provides a little usable area outside territorial waters), and should still work with seasteads that drift were the currents take them (only suitable for people comfortable with being isolated).

The medical tourism ship business idea had last year seemed the most promising stepping stone on the way to seasteading. This year’s talk by Na’ama Moran on that subject provided better talking points that might be used to interest investors, but had nothing resembling a business plan. A year ago there was some hope that moderate changes to SurgiCruise‘s business plan could turn it into something viable. The seasteaders who were involved in that gave up on working with SurgiCruise recently, and no progress appears to have been made yet on creating an alternative.

I was also disappointed that she described no plans for dealing with the U.S. medical establishment’s ability to smear competitors. A company with no track record and weak regulation by, say, Panama can be made to sound dangerous to patients even if it provides care as good as U.S. hospitals. Could a medical cruise company hope to get accreditation early enough? There are large uncertainties about how much that costs and how soon it would be needed. I want a medical tourism company to prepare to demonstrate ways in which it provides higher quality care than U.S. hospitals (more on this in a later post).

Kevin Overman presented a vaguely promising idea for using RepRap and products from algae to build (print) structures at a cost that he hopes will be an order of magnitude less than with the materials currently envisioned to build a seastead. If he’s right, he should be able to make a nice profit building things on land before anyone is ready to build a seastead. The one drawback that I noticed is that it requires thicker structures (2X?) to get the same strength.

I also stopped by Ephemerisle for Saturday afternoon. It shows some promise as a competitor to Burning Man, but it’s unclear whether anything people learned there is related to skills needed to hold a festival in international waters. Possibly the design of the main platform can be adapted to the ocean without radical changes, but virtually all the other activity was done without any apparent regard for whether it could be repeated in the ocean.

Book review: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods Jr.

This book describes the Austrian business cycle theory (ABCT) in a more readable form than it’s usually presented. Its basic idea that malinvestment creates business cycles, and that central bank manipulation of interest rates can cause malinvestment, is correct. But when Woods tries to argue that only errors by a government can cause business cycles, his ideological blinders become obvious. He’s mostly right when he complains about government mistakes, and mostly wrong when he denies the existence of other problems.

He asks why businesses made a “cluster of errors” that added up to a big problem rather than independent errors which mostly canceled each other out. The only answer he can find is misleading signals sent by the Fed’s manipulation of interest rates. He doesn’t explain why businessmen fail to learn from the frequent and widely publicized patterns of those Fed actions. It’s unclear why groupthink needs a strong cause, but one obvious possibility that Woods ignores is that most people saw a persistent trend of rising housing prices, and didn’t remember large drops in housing prices over a region as large as the U.S.

He shows no understanding of the problems associated with sticky wages which are a key part of the better arguments for Keynesian approaches.

He wants to credit ABCT with having predicted this downturn. If you try to figure out when was the last time it didn’t predict a downturn (the early 1920s?), this seems less impressive than, say, Robert Shiller’s track record for predicting when bubbles burst.

His somewhat selective use of historical evidence carefully avoids anything that might present a picture more complex than government being the sole villain. He describes enough U.S. economic expansions to present a clear case that credit expansion contributed to the ensuing bust, and usually points to a government activity which one can imagine caused excessive credit expansion. But he’s unusually vague about the causes of the expansion that led to the panic of 1857. Could that be because he wants to overlook the role that new gold mining in California played in that inflationary cycle?

He mostly denies that free market approaches have been tested for long enough to see whether we would avoid business cycles under a true free market. He points to a few downturns when he says the government followed a wise laissez faire policy, and compares the shortness of those downturns with a few longer downturns where the government made some attempts to solve the downturns. When doing this, he avoids mention of the downturns where massive government actions were followed by mild recessions. Any complete survey comparing the extent of government action with the ensuing economic conditions would provide a much murkier picture of the relative contributions of government and market error than Woods is willing to allow.

The most interesting claim that I hadn’t previously heard is that a large decrease in the money supply in 1839-1843 coincided with healthy GNP growth, which, if true, is hard to explain without assuming Keynesian and monetarist theories explain a relatively small fraction of business cycle problems. My attempts to check this yielded a report at http://www.measuringworth.org/usgdp/ saying GDP in 2005 dollars rose from $31.37 in 1839 to $34.84 in 1843, but GDP per capita in 2005 dollars dropped from $1884 in 1839 to $1869 in 1843. Declining GDP per capita doesn’t sound very prosperous to me (although it’s a mild enough decline to provide little support for Keynesians/monetarists).

He tries to blame the “mistakes” of credit rating agencies on an SEC-created cartel of rating agencies. That “cartel” does have some special privileges, but he doesn’t say what stops bloggers from expressing opinions on bond risks and developing reputations that lead to investors using those opinions in addition to the “cartel”‘s ratings (Freerisk is a project which is planning a sophisticated alternative). I say that anyone who understands markets would expect the yield on the bonds to provide as good an estimate of risk as any alternative. Credit rating agencies must be performing some other function in order to thrive. An obvious function is to mislead bosses and/or regulators who don’t understand markets into thinking that the people making investment decisions are making choices that are safer than they actually are. It appears that the agencies performed that function well, and helped many people avoid being fired for poor choices.

His discussion of whether WWII spending cured the Great Depression points out that mainstream theories falsely predicted a return to depression in 1946. But it’s unclear whether all versions of Keynesianism make that mistake, and it’s unclear how ABCT could predict the U.S. would be much more prosperous in 1946 than at the start of the war.
Here’s an alternative explanation that lies in between those theories: wages were being kept too high for supply and demand to balance through 1941. Inflation and changes in government policy toward wage levels during WW2 eliminated the causes of that imbalance.

Arnold Kling has a good quasi-Austrian alternative here and here.

Book review: The Return of Depression Economics and the Crisis of 2008 by Paul Krugman.

Large parts of this book accurately describe some processes which contribute to financial crises, but he fails to describe enough of what happened in crises such as in 2008 to reach sensible policy advice.

He presents a simple example of a baby-sitting co-op that experienced a recession via a Keynesian liquidity trap, and he is right to believe that is part of what causes recessions, but he doesn’t have much of an argument that other causes are unimportant.

His neglect of malinvestment problems contributes to his delusion that central banks reach limits to their power in crises where interest rates approach zero. The presence or absence of deflation seems to provide a fairly good estimate of whether liquidity trap type problems exist. If you recognize that malinvestments are part of the problem that caused crises such as that of 2008, the natural conclusion is that the Fed solved most of the liquidity trap type problem within a few months of noticing the severity of the downturn. There is ample reason to suspect that the economy is suffering from a misallocation of resources, such as workers who developed skills as construction workers when perfect foresight would have told them to develop skill in careers where demand is expanding (nurses?). Nobody knows how to instantly convert those workers into appropriate careers, so we shouldn’t expect a quick fix to the problems associated with that malinvestment. It appears possible for he Fed to make that malinvestment have been successful investment by dropping enough dollars from helicopters to create an inflation rate that will make home buying attractive again. Krugman’s suggested fiscal stimulus looks almost as poor a solution as that to anyone who sees malinvestment as the main remaining problem.

His claim that central bank policy is ineffective is misleading because he pretends that controlling interest rates is all that central banks do to “stimulate” the economy. If instead you focus on changes in the money supply (which central banks can sometimes cause with little effect on interest rates), you’ll see they have plenty of power to inflate.

He dismisses the problem of sticky wages as if it were minor or inevitable. But if you understand the role that plays in unemployment, and analyze Singapore’s policy of automatically altering payroll taxes to stabilize jobs, you should see that’s more cost-effective than the fiscal stimulus Krugman wants.

I’m not satisfied with his phrasing of lack of “effective demand” being caused by people “trying to accumulate cash”. If we apply standard financial terminology to changes the value of a currency (e.g. saying that there’s a speculative bubble driving up the value of the currency, or that there’s a short squeeze – highly leveraged firms have what amounts to a big short position in dollars), then it seems more natural to use the intuitions we’ve developed for the stock market to fluctuations in currency values.

He doesn’t adequately explain why most economists don’t want a global currency. He says labor mobility within the area that standardizes on a currency is important for it to work well. I’m unconvinced that much mobility is needed for a global currency to work better than the mediocre alternatives, but even if it is, I’d expect economists to advocate a combination of a global currency and reducing the barriers to mobility. How much of economists dislike for a global currency is due to real harm from regional fluctuations and how much is it due to politicians rewarding people like Krugman for biasing their arguments in ways that empower the politicians? Or do they not give it much thought because they’ve decided it’s politically infeasible even if desirable?

His description of the shadow banking system clarifies quite well how regulatory efforts to avoid crises failed. His solution of regulating like a bank anything that acts like a bank would work well if implemented by an altruistic government. But his “simple rule” is too vague for his intent to survive in a system where politicians want to bend the rules to help their friends.

Book review: The Law Market by Erin A. O’Hara and Larry E. Ribstein.

This book describes why it has become easier for parties to a contract to choose which legal system will be applied to their contract, both in terms of the political forces that enabled choice and why it’s good that choice is possible.

The political forces include the ability of some parties to physically leave a jurisdiction if they have inadequate choices about what law will be applied to them. Often enough those parties are employers that legislators want to remain in their jurisdiction.

The benefits include simple things like predictability of contract interpretation when the contract covers things that involve physical locations associated with multiple jurisdictions where there otherwise would be no reliable way to predict which court would assert jurisdiction over disputes. They also include less direct effects of providing incentives for legal systems to improve so as to attract more customers.

The book mostly deals with contracts between corporations, and is much more tentative about advocating choice of law for individuals.

The book provides examples showing that as with most markets, competition for law produces better law. But is also mentions more questionable results, such as competition for most effective tax shelters or the easiest terms for divorce (for divorce, the book suggests those who want divorce to be hard should try to arrange contracts that allocate assets in a way that discourages divorce; it would be harder for easy-divorce states to justify ignoring those contracts). There’s also a risk that the competition will sometimes benefit lawyers rather than their clients, as clients often rely on lawyers to decide which legal system to use without having a practical way to check who benefits from some of those choices.

The book is often dull reading because it often describes case law to explain quirks of current law that will be of interest to few non-lawyers.

One part that disappointed me was the assumption that the choice of jurisdiction should dictate the physical location in which plaintiffs must argue their case (the travel costs can make some lawsuits unpractical to a consumer suing a company if the company decides the location at which a suit is argued). Why are we trapped in a set of rules that requires travel to a possibly distant court when we have technology that provides reasonable remote communications?

Book review: Greatness: Who Makes History and Why by Dean Keith Simonton.

This broad and mediocre survey of psychology of people who stand out in history probably contains a fair number of good ideas, but it’s hard to separate them from the many ideas that are questionable guesses. He’s inconsistent about distinguishing his guesses from claims backed by good evidence.

One of the clearest examples is his assertion that childhood adversity builds character. He presents evidence that eminent figures were unusually likely to have had a parent die early, and describes this as the “most impressive proof” of his claim. He ignores the possibility those people come from families with a pattern of taking sufficiently unusual risks to explain that evidence.

In other places, he makes mistakes which seemed reasonable when the book was published, such as “Mendelian laws of inheritance are blind to whether an individual is first-born or later-born” (parental age has a measurable effect on mutation rates).

He avoids some of the worst mistakes that a psychology of history could make, such as trying to psychoanalyze individuals without having enough information about them.

He mentions some approaches to analyzing presidential addresses and corporate letters to stockholders, which have some potential to be used in predicting whether leaders have the appropriate personality for their jobs. I wonder what would happen if many voters/stockholders demanded that leaders pass tests of this nature (I’m assuming the tests can be scored objectively, but that may be shaky assumption). I’m confident that we’d get leaders with rhetoric that passes those tests. Would that simply mean the leaders change their rhetoric, or would it be hard enough to maintain a mismatch between rhetoric and thought patterns that we’d get leaders with better thought patterns?

Mike Linksvayer describes a good perspective on why it’s important to have most information in a commons rather than restricted by copyright.
Most economists have a strong bias toward assuming transaction costs are unimportant. Coase has fought this. It sure looks to me like the Coase Theorem ought to be understood as demonstrating that one of the most important tasks for economists is to improve our understanding of how to reduce transaction costs. Economists have invested too much in models which depend on transaction costs being insignificant to easily be persuaded to adopt such a different focus.

Lessig’s book The Future of Ideas: The Fate of the Commons in a Connected World describes why having some commons can be as valuable as having some resources protected by secure property rights, and why it matters for science and technology. But his argument style is designed for ordinary political debates, and doesn’t provide the breadth or power that a good economist would produce when attempting to reform economics.

I have little idea whether Creative Commons will put additional money to good use, but the value of its goals should not be overlooked.

There are lots of small Chinese companies trading on U.S. stock exchanges that look at first glance to be ridiculously underpriced. One reason for the low prices are that it’s harder than you might expect to enforce U.S. law on Chinese companies that have few or no assets in the U.S.

The most blatant example I’ve seen is Eternal Technologies Group Inc, which has ignored a judgment in a lawsuit that seems minor compared to the cash the company reports having, with the result that a receiver has been appointed who is likely to collect some money in ways that badly hurt stockholders who bought before the lawsuit.
Another hint at how little the company cares about stockholders (at least those in the U.S.) is the careless way their press releases are written: “5. Radification of the elecrion of the auditors” (they managed to spell election correctly on the prior line, so it’s not simple ignorance).

I’ve noticed problems with other U.S. traded Chinese companies that leave me uncertain which of them can be trusted. I’ve been trading stocks listed on the Hong Kong Stock Exchange a fair amount, and haven’t noticed any similar problems there. I presume the stronger cultural and/or legal ties are more effective than anything that can be accomplished by U.S. law.

A number of people have compared the final forecasts for the election (e.g. this), but I’m more interested in longer term forecasting, so I’m comparing the state-by-state predictions of Intrade and FiveThirtyEight on the dates for which I saved FiveThirtyEight data a month or more before the election.

Here is a table of states where Intrade disagreed with FiveThirtyEight on one of the first four dates for which I saved FiveThirtyEight data or where they were both wrong on July 24. The numbers are probability of a Democrat winning the state’s electoral votes, with the Intrade forecast first and the FiveThirtyEight forecast second.

State 2008-07-24 2008-08-22 2008-09-14 2008-10-01
CO 71/68 60/53 54.5/46 67.5/84
FL 42/29 34.5/28 30/14 55.2/70
IN 38/26 34.1/15 20/11 38/51
MO 50/26 32.9/13 22.1/11 42.5/48
NC 30/22 25/21 14/7 51/50
NV 51.2/49 49/45 44.9/32 55/66
OH 65/53 50/38 40/29 53.5/68
VA 60.5/50 52.3/36 42/22 59/79

On July 24, both sites predicted Florida, Indiana, and North Carolina wrong. FiveThirtyEight got Indiana right on Oct 1 when Intrade was still wrong, but Intrade got North Carolina right on that date (just barely) while FiveThirtyEight rated it a toss-up.
Intrade got Nevada right on July 24 (just barely) while FiveThirtyEight got it wrong (just barely).
For Virginia, Intrade was right in July and August while FiveThirtyEight was undecided and then wrong.
FiveThirtyEight got Colorado wrong on September 14, but Intrade didn’t.
FiveThirtyEight got Ohio wrong on August 22, while Intrade got it right.
Intrade rated Missouri a toss-up on July 24, while FiveThirtyEight got it right.

On September 14, FiveThirtyEight was fooled by McCain’s post convention bounce by a larger margin than Intrade, but by Oct 1 FiveThirtyEight was more confident about correcting those errors.
For states that were not closely contested, there were numerous examples where Intrade prices where closer to 50 than FiveThirtyEight. It’s likely that this represents long-shot bias on Intrade.

In sum, Intrade made slightly better forecasts for the closely contested states through at least mid September, but after that FiveThirtyEight was at least as good and more decisive. Except for Intrade’s Missouri forecast on July 24, the errors seem largely due to underestimating the effects of economic problems – errors which were also widespread in most forecasts for other things affected by the recession.

In the senate races, I didn’t save FiveThirtyEight forecasts from before November 1. It looks like both Intrade and FiveThirtyEight made similar errors on the Alaska and Minnesota races.
[Update on 2009-01-13: contrary to initial reports, they apparently got the Alaska and Minnesota races right, although there’s still some doubt about Minnesota.]

On the other hand, Intrade had been fairly consistently (but not confidently) saying since early July that California’s Proposition 8 (banning same-sex marriage) would be defeated. Pollsters as a group did a somewhat better job there by issuing conflicting reports.

I had been half-heartedly planning the past few months to vote for Libertarian presidential candidate Bob Barr. I had previously considered voting for Obama when it looked like he would make an important difference in the Iraq war, but it now looks like the Iraqi government will persuade the U.S. to leave soon enough for that difference not to matter. If I lived in a swing state and the election was close, I might persuade myself that Obama’s personality and intelligence make him more qualified, but my track record for evaluating politicians that way is sufficiently unimpressive that I ought to be uncertain whether I’ve been fooled by his eloquence.
Voting Libertarian is normally the best way to encourage whoever wins to adopt a better policy, but this time it’s unclear whether that would send the message “I want more unprincipled opportunists”. Barr’s past support for the war on some drugs and his current mixed opinions on that subject are damaging the Libertarian party’s reputation.
The final straw that has convinced me not to vote for him is in this New Yorker piece:

For Barr, the terrorist attacks of September 11, 2001, and the subsequent expansion of executive power under President Bush, were a political turning point. “I went through Reagan National after 9/11, and saw guardsmen with automatic weapons,” he told me. “It dawned on me that we’ve entered a whole new world. It may have made other passengers feel more secure, but it made me feel dramatically less free.”

An NRA director saying the presence of armed men is a threat to freedom? There’s no shortage of dishonest pretenses of security that directly interfere with the average passenger. I haven’t heard any indication that armed guardsmen in airports do anything to innocent people. I saw more armed soldiers in the Zurich airport in the late 1980s than I saw in U.S. airports, and I’m fairly sure they didn’t erode Swiss freedom.
This is sufficiently bizarre as to suggest he can’t keep track of which ideology he believes today.
Not to mention this older report where he seems to specifically say Reagan National should have armed guardsmen.