Posts tagged ‘influence’

Congratulations to Nature Magazine for Catching up to Bloggers

The journal Nature has finally caught up to the fact that ocean cycles may influence global surface temperature trends.  Climate alarmists refused to acknowledge this when temperatures were rising and the cycles were in their warm phase, but now are grasping at these cycles for an explanation of the 15+ year hiatus in warming as a way to avoid abandoning high climate sensitivity assumptions  (ie the sensitivity of global temperatures to CO2 concentrations, which IMO are exaggerated by implausible assumptions of positive feedback).

Here is the chart from Nature:

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I cannot find my first use of this chart, but here is a version I was using over 5 years ago.  I know I was using it long before that

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It will be interesting to see if they find a way to blame cycles for cooling in the last 10-15 years but not for the warming in the 80's and 90's.

Next step -- alarmists have the same epiphany about the sun, and blame non-warming on a low solar cycle without simultaneously giving previous high solar cycles any credit for warming.  For Nature's benefit, here is another chart they might use (from the same 2008 blog post).  The number 50 below is selected arbitrarily, but does a good job of highlighting solar activity in the second half of the 20th century vs. the first half.

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Don't Fire Sebelius

I am not sure why everyone thinks it would be a punishment to fire Sebelius at this point.  Three days after she is fired, she will have a handful of million dollar a year job offers from health care companies and lobbyists who want to tap her influence into this administration.  The Administration and Congress is actively picking winners and losers in 1/7 of the economy, so there are billions at stake.  Sebelius can name her price.

Instead I would love to see her stay in office three long years and answer every press question and Congressional inquiry about Obamacare, over and over and over.

Trying to Overcome My Ignorance on the Banking System

Over the last year, I have learned that those of us who took economics back in the 1980's with textbooks written in the 1960's and 1970's are not very well prepared to understand the modern banking system.  This was a pretty good article that whetted my appetite for understanding what has changed.  A couple of interesting bits from the piece:

One cannot think straight about the future impact of different exit strategies without understanding of the role of bank reserves in today’s financial markets.

  • Banking and money creation has not worked for at least two decades in the way that most people learned in school.

The old system was rather simple in the textbooks. The basic assumptions were (i) all credit was provided by banks; (ii) all bank credit (assets) were funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement; and (iii) central banks controlled credit/money/inflation by rationing bank reserves. A stable 'money multiplier' was hypothesised to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit.

The problem with the old theory of monetary operations is that none of the three assumptions has been true for at least a generation.
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements,3 and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.

  • Today, credit creation in general and money creation in particular are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).

This gets to the heart of the question of why over $2 trillion in excess bank deposits built up at the Fed over the last 4 years are not really moving the needle on bank lending  (of course, this is a supply AND demand problem, and part of the issue with flat bank lending is tie to lack of demand as many businesses deleverage).  But in terms of supply, I am increasingly coming to terms with the following statement which seems counter-intuitive to someone who studied banking 30 years ago

One of the unintended consequences of Fed LSAPs has been the withdrawal of high quality liquid collateral such as US Treasuries from the financial markets paid for by crediting commercial bank reserve accounts. As discussed above, the banking system as a whole cannot dispose of these assets (reserves). At the same time, banks are under massive pressure world-wide to deleverage. This can take place either by increasing capital (a bank liability), which is costly to shareholders, or by reducing assets. Thus banks’ massive holdings of reserves at the Fed are ‘deadwood’ as far as the banks and their credit-creation capacity are concerned. They may crowd out credit.

The deadwood problem will get worse if the US tightens regulatory leverage ratios – that is, reduces the maximum ratio permitted between a bank’s total assets and capital.6

There is a great irony in the journalistic history of monetary policy. What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures.  And all this is occurring while the spectre of uncontrolled credit expansion and monetary debasement are being decried countless times by those who have not recognized that yesteryear’s monetary paradigm is defunct.

Interesting.  I hear this from a lot of people in the know about the system.  The author suggests one solution is having the Fed begin to do reverse repos with non-banks, which would drain excess reserves while adding high quality collateral back to the banking system which would allow more lending.  Which appears to be exactly what the Fed is considering.

I am reading this article next to see if I can get a better handle on how all this works.  I will let you know if I find it useful.

Kudos for Teach for America

Via Reason on Teach for America (TFA)

The best evidence we had before today was a randomized evaluation conducted by Mathematica Policy Research between 2001 and 2003, which found that TFA teachers bested other teachers at teaching math — with gains for students equal to about a month of additional instruction —  and were not significantly different from them on teaching reading.

A follow-up using the same data showed that that result held for students across the math score distribution, not just the average student. “These results suggest that allowing highly qualified teachers, who in the absence of TFA would not have taught in these disadvantaged neighborhoods, should have a positive influence not just on students at the top of the achievement distribution but across the entire math test score distribution,” the authors concluded.

We sponsor a TFA teacher each year, and have fun doing a few little things for their classroom through the year (we collect school supplies at the beginning of the year, bring presents during the holidays).  Short of the school choice we really need, this is the best way we have found to help K-12 education.

Genetics, Race and IQ

Brink Lindsey has an great article discussing race, genetics and IQ.  It's hard to excerpt, but here is a bit of it:

A study of twins by psychologist Eric Turkheimer and colleagues that similarly tracked parents' education, occupation, and income yielded especially striking results. Specifically, they found that the "heritability" of IQ - the degree to which IQ variations can be explained by genes - varies dramatically by socioeconomic class. Heritability among high-SES (socioeconomic status) kids was 0.72; in other words, genetic factors accounted for 72 percent of the variations in IQ, while shared environment accounted for only 15 percent. For low-SES kids, on the other hand, the relative influence of genes and environment was inverted: Estimated heritability was only 0.10, while shared environment explained 58 percent of IQ variations.

Turkheimer's findings make perfect sense once you recognize that IQ scores reflect some varying combination of differences in native ability and differences in opportunities. Among rich kids, good opportunities for developing the relevant cognitive skills are plentiful, so IQ differences are driven primarily by genetic factors. For less advantaged kids, though, test scores say more about the environmental deficits they face than they do about native ability.

I have been struggling to articulate my issues with IQ for a long time.  I have always been frustrated with the nature vs. nurture arguments on intelligence, because I have always thought the answer is both.  But Brink's article get's me thinking along the lines of this simple model:

iq

In this model, intelligence is not a product that works straight out of the box, so to speak.  It's an engine with some inherent potential that requires a lot of fine-tuning and a long break-in period to reach that potential. Let's say in the US suburbs our kids have a development percentage of 0.9 (we have to leave room for future Flynn Effect -- it would be awesome if it turned out we were only at 0.5).  I assume education is an exponential rise to a limit, where early gains are easy but incremental gains at the margin are harder and harder to achieve.

development

If this is the case, then US suburban kids are probably pretty tightly clustered around that 0.9 (say from 0.88 to 0.92).  This cluster seems tight but again remember in an exponential rise to a limit, the effort and expense to take a kid from 0.88 to 0.92 might be very very large**.  In this situation, measured IQ is going to be driven mainly by genetics, with a wide bell curve in native intelligence dwarfing the effect of a much tighter bell curve around development.  Small improvements in educational development in this model both come at a high price and have little effect on measured IQ.

In a different sort of society, say in rural Mexico, kids might be much lower on the development scale, say around 0.6, due to cultural factors, educational opportunities, even diet.  In this case, large changes can occur in measured intelligence even from small changes in education (the steep part of the curve) and difference in education and development might be at least as important as the genetic contribution.

** Postscript:  Some may object that differences in education seem to be much larger than these in US schools, but we have to make sure we are talking about the same output.   Here we are solely talking about the ability to improve IQ as measured by IQ tests.  There are many other things education does than just polish native intelligence and cognitive ability.  It teaches skills.  For example, it teaches one to write.   I would agree that there are huge differences in schools in their ability to produce kids that can write good 5-paragraph essays, or complete a calculus problem, or understand how to analyze a historical document.

My Problem With Benghazi...

... was not the crisis management but Obama's throwing free speech under the bus.

I can live with poor crisis management.  I have been a part of enough to understand that things are different in real time than they look when monday-morning quarterbacking the events.  In particular, it can be very hard to get reliable data.  Sure, the correct data is all likely there, and when folks look back on events, that data will be very visible and folks will argue that better choices should have been made.

A great example of this is when historians sort through data to say that FDR missed (or purposely ignored, if you are of that revisionist school) clear evidence of the Japaneses surprise attack on Pearl Harbor.  Sure, the correct clues stand out like flashing lights to the historian, but to the contemporary they were buried in 10,000 ostensibly promising false leads.

In real time, good data is mixed in with a lot of bad data, and it takes some time -- or a unique individual -- to cut through the fog.  Clearly neither Obama nor Clinton were this individual, but we should not be surprised as our selection process for politicians is not really configured to find such a person, except by accident.

No, the problem I have with Benghazi is that when push came to political shove, the President threw free expression under the bus to protect himself.  I am a sort of city on the hill isolationist, who prefers as much as possible for the US to have influence overseas by setting a positive example spread through open communications and free trade.  In this model, there is nothing more important for a US President to do than to support and explain the values of individual liberty, such as free expression, to the world.

Instead, it is increasingly clear he blamed some Youtube video, an exercise in free expression, for the tragedy.  And not just in the first confused days, but five days later when he put Susan Rice on TV to parrot this narrative.  And when the Feds sent a team to arrest and imprison the video maker.  And days after the Rice interviews when Hillary parroted the same message at the funeral, and days after that when Obama spoke to the UN, mentioning the video 6 or 7 times.    Obama took to his bully pulpit and railed against free speech in front of a group of authoritarians who love to hear that message, and whose efforts to stifle speech have historically only been slowed by America's example and pressure.

Cyprus and the Rule of Law

There was no particularly good way to resolve the banking mess in Cyprus.  But what worries me about how things played out is that there appears to be no rule of law that applies to bank failure in Europe.  There should be some clear principle that guides a bank resolution - e.g. equity holders and bondholders get wiped out first, then uninsured depositors, then insured depositors.  Or perhaps there is some ratio of pain between insured and uninsured depositors.

It is clear that no such rule exists across Europe (or if it does, it does not enjoy any particular force such that folks feel free to ignore it in real time).  That is the real danger here.  Results, however bad, should be transparent and predictable in advance, which is far from what happened in Cyprus.  Without a rule of law, one gets a rule of men -- in other words, rules are set by individual whim, often based on which government or corporate interests wield the most influence.

Think I am being too cynical?  Here is a detail that was new to me about the depositor haircuts in Cyprus:

A few weeks ago, the Central Bank of Cyprus published a curious set of "clarifications for the better understanding of the resolution measures." The principle of a bail-in—that uninsured creditors should suffer losses before taxpayers are on the hook—turns out to contain a few lacunae. "Financial institutions, the government, municipalities, municipal councils and other public entities, insurance companies, charities, schools, and educational institutions" will be excused from contributing to the depositor haircuts, though insurers later were removed from the exempt list.

Apparently, individual parties are lining up for special exemptions as well (much like connected corporations did with the Obama Administration to get exemptions from early provisions of the PPACA).  Essentially, all bank losses will be assigned to depositors who don't have access to powerful friends in the government.

Bitcoin, Short Sales, and Volatility

I am fascinated by Bitcoin and would love to see it be a success.  But Tyler Cowen has a quote that reflects some of my concerns about it:

…bitcoins are an uncomfortable combination of commodity and currency. The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.

Bitcoin is in the midst of an enormous price bubble, with increases in value of as much as 50% over just a few days.  This is astounding volatility for even a commodity, much less a currency.

Cowen said something at the end of the post, almost as a throw-away, that got my attention:  "There is, by the way, no current way to short Bitcoin."  The reason this caught my eye is that I have argued a long time that short selling is an important mechanism to reduce market volatility.

Every time we get to a market bubble or problem, insiders always start arguing against short selling saying it makes volatility worse and undermines markets.  But what they are really saying is that they like volatility so long as it is up. They had no problem with the bubble that propelled their securities up, they just don't want them to come back down to Earth.

In certain bubbles, when interest in a certain asset class gets really frothy, anyone who is skeptical of the asset and its new high values will sell and get out.  This means that as the bubble grows, all the skeptics are long gone from the market.  No longer owning the asset, these skeptics have no further "vote" or influence on the price.  Short selling is a way for skeptics to continue to influence the price and asset values.  To this extent, I think it tends to limit the peak of bubbles, just as bottom-fishers limit the debt of troughs.

Bitcoin would likely benefit from skeptics having some sort of influence on bitcoin values.  But without a way to short, Bitcoin values are driven solely by wacky anarcho-capitalists (e.g. people like me) and people fearful of Cyprus style depositor losses.  Essentially all the true believers are bidding against themselves.

Why Europe Won't Let Banks Fail

Dan Mitchell describes three possible government responses to an impending bank failure:

  1. In a free market, it’s easy to understand what happens when a financial institution becomes insolvent. It goes into bankruptcy, wiping out shareholders. The institution is then liquidated and the recovered money is used to partially pay of depositors, bondholders, and other creditors based on the underlying contracts and laws.
  2. In a system with government-imposed deposit insurance, taxpayers are on the hook to compensate depositors when the liquidation occurs. This is what is called the “FDIC resolution” approach in the United States.
  3. And in a system of cronyism, the government gives taxpayer money directly to the banks, which protects depositors but also bails out the shareholders and bondholders and allows the institutions to continue operating.

I would argue that in fact Cyprus has gone off the board and chosen a fourth option:  In addition to bailing out shareholder and bondholders with taxpayer money, it will protect them  by giving depositors a haircut as well.

The Cyprus solution is so disturbing because, hearkening back to Obama's auto bailout, it completely upends seniority and distribution of risk on a company balance sheet.  Whereas depositors should be the most senior creditors and equity holders the least (so that equity holders take the first loss and depositors take the last), Cyprus has completely reversed this.

One reason that should never be discounted for such behavior is cronyism.  In the US auto industry, for example, Steven Rattner and President Obama engineered a screwing of secured creditors in favor of the UAW, which directly supported Obama's election. In Cyprus, I have no doubt that the large banks have deep tendrils into the ruling government.

But it is doubtful that the Cyprus banks have strong influence over, say, Germany, and that is where the bailout and its terms originate.  So why is Germany bailing out Cyprus bank owners?  Well, there are two reasons, at least.

First, they are worried about a chain reaction that might hurt Germany's banks, which most definitely do have influence over German and EU policy.  There is cronyism here, but perhaps once removed.

But even if you were to entirely remove cronyism, Germany and the EU have a second problem:  They absolutely rely on the banks to consume their new government debt and continue to finance their deficit spending.  Far more than in the US, the EU countries rely on their major banks continuing to leverage up their balance sheets to buy more government debt.  The implicit deal here is:  You banks expand your balance sheets and buy our debt, and we will shelter you and prevent external shocks from toppling you in your increasingly precarious, over-leveraged position.

Update:  Apparently, there is very little equity and bondholder debt on the balance sheets -- its depositor money or nothing.  My thoughts:  First, the equity and bondholders better be wiped out.  If not, this is a travesty.  Two, the bank management should be gone -- it is as bad or worse to bail out to protect salaried manager jobs as to protect equity holders.  And three, if depositor losses have to be taken, its insane to take insured depositor money ahead of or even in parallel with uninsured deposits.

Behind the Curtain in the Corporate State

How the recent "fairness" tax bill became a vehicle for subsidizing connected corporations.

Baucus' Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama's insistence, the Baucus bill was cut and pasted word for word into the cliff legislation. Set aside for a moment how this contradicts Obama's talk about "fair shares" and the need to diminish the influence of lobbyists, and look at what this raft of tax favors shows us about the Baucus Machine.

Pick any one of the special-interest tax breaks extended by the cliff deal, and you're likely to find a former Baucus aide who lobbied for it on behalf of a large corporation or industry organization.

General Electric may have been the biggest winner from the cliff deal. GE makes more wind turbines than any other U.S. company, and it lobbied hard for extension of the wind production tax credit. But more important for the multinational conglomerate was an arcane-sounding provision that became Section 222 of Baucus' bill and then Section 322 of the cliff bill: "Extension of subpart F exception for active financing income."

In short, this provision allows multinationals to move profits to offshore financial subsidiaries and thus avoid paying U.S. corporate income taxes. This is a windfall for GE: The exception played a central role in GE paying $0 in U.S. corporate income tax in 2011 when it made $5.1 billion in U.S. profits.

Peter Prowitt, formerly Baucus' chief of staff, is now an in-house lobbyist and VP at GE. GE filings show Prowitt on the lobbying teams that won wind-tax credits, electric-vehicle tax credits, and "Extension of Subpart F Deferral for Financial Services."

The examples in the article go on and on.  The best way to get rich in America is not to have a great idea or work hard but to hire an ex-staffer from Senator Baucus's office.

Romney and Republican Messaging Fail

I got a lot of email that Republicans aren't libertarians and to stop complaining that they are not.  OK.  But let's look at their campaign messaging in the context of their own values.

Republicans had a golden opportunity to use the results of a natural experiment over the last four years between red and blue states.  Obama constantly harped on the fact that 3.5 million new jobs had been created on his watch.  Rather than play dueling statistics or end points in this analysis, the Republicans should have taken advantage of existing red/blue data:

Yes.  And the vast majority of these jobs were created in states like Texas which have been successful precisely because they have labor and tax policies which you, Mr. Obama, oppose.  And they have been created in industries like Oil and Gas production that you, Mr. Obama, have done your best to hinder.  All the jobs you claim to have helped to create were actually facilitated by a philosophy of government you oppose, by regulatory policy you would overturn if you could, and in industries you would prefer did not exist.   States like Texas -- with organic growth driven by private capital -- stand in stark contrast to your investments of our taxpayer money in bankrupt companies like Solyndra.   If you had had your way, Mr. Obama, few of these jobs would have been created.  Yes, this country saw some job creation, but it occurred despite your efforts, not because of them.

Instead of this clear kind of message, we get a bunch of wonky stuff about tax deductions vs. tax rate changes.  Heck, even if you told me I had to run my campaign on the single plank of eliminating tax deductions, I could have done a better job.  I saw this part of the debate that Romney supposedly won.  His explanation was lame.  What about this instead:

This country over the past several decades has increasingly become plagued by cronyism.  Whether it be Wall Street bankers or public employees unions or casket sellers in Louisiana, everyone wants to try to convert influence with the government into taxpayer money for themselves.  We have to end this.  And a good place to start is with the tax code.  Every special deduction and tax credit in the tax code is a giveaway to some special interest.  At best it is a misguided attempt, like the money we wasted in Solyndra, of politicians to try to pick winners and losers, to say that one kind of spending is somehow better than another.  At worst, these deductions are a crony giveaway.  Sure, it's  eliminating these deductions will help reduce the deficit.  But even more importantly, eliminating them would be an opening shot in the war to take cronyism and corporatism out of Washington.

Attention Lawyers, We need a Hand, Not a Brain: A Licensing Parable

Several sites have reposted this Craigslist ad, gasping in shock at it as evidence of massive foreclosure fraud

We are a collection agency/debt buyer. What we are looking for is a part time attorney to work for us as our corporate counsel, on our payroll, about 5 to 6 hours a week. This is a short term employment arrangement, no longer than 90 to 120 days.

Your job will be to sign pleadings, praecipe for entry of appearances, praecipe for writ of execution, and garnishment orders. Our paralegal will prepare all paperwork for your signature. This is very standard stuff for us.

If you are an attorney looking for challenging legal work, this is not for you. WE DO NOT NEED F LEE BAILEY- we are fee shopping. If you passed your boards with a D+, and you can sign your name, you possess all the credentials required for this job. If this opportunity interests you, please feel free to reply to this email with a brief description of who you are, when you got your law license, and what you will be needing from us in the way of compensation.

I would instead offer it as a lesson in the stupidity of state-enforced professional licensing arrangements.  Let me rewrite it:

We have all the legal knowlege we need.  We know exactly what the forms look like and mean.  We have written all the documents and tested them over time during our long presence in this business and we know them to meet our legal needs.   We have no need, in other words, for legal help.

However, attorneys have gotten together and created an attorneys guild, and, what's more, have convinced the government to pass laws that require membership in the guild to perform certain gate-keeping functions.  In our case, we need a member of the guild to sign some forms to make them legal, both because the guild has strong influence and because certain folks have convinced everyone that all mortgage pain in this country came from having a machine perform this signature function rather than a flesh and blood hand.  So we need a flesh and blood hand rather than a machine to sign foreclosure documents.  Unfortunately, that hand has to be attached to a brain that has passed the bar exam, and because the guild is pretty good at limiting its membership, we expect to have to pay an absurd amount of money for this trivial function that could be duplicated by a six-year-old (and used to be performed by a simple $100 machine).

Don't get us wrong -- if we were on trial for our lives or facing a nasty, complicated lawsuit or wanted to draft a custom contract to protect our interests, we would be very happy to consider the opinion of third party licensing groups as to the merit of a particular attorney.  Ironically, though, even then current licensing would be absurd, for in this case it would not greatly exceed our quality requirements (as it does for signing our foreclosure paperwork) but it would vastly undershoot our need due diligence needs.   Perhaps there is some legal function for which attending an ABA-accredited school and passing the bar exam is the perfect level of quality assurance, but we have not found it yet.

Damned if You Do, Damned if You Don't

I am increasingly convinced that contradictory regulations that make it impossible even for people of goodwill to be in compliance are a feature, not a bug of the current system.

…Common sense dictates that any medication that carries with it a warning that it “may cause drowsiness” or that the patient should “use caution” if operating machinery may pose a risk in the workplace. It is for this reason that many employers adopt a policy requiring employees to self report the use of prescription pain killers. This is especially important in potentially dangerous workplaces such as manufacturing and construction.

In a recent action that defies common sense, the Equal Employment Opportunity Commission has taken the position that such policies are unlawful under the Americans With Disabilities Act. The ADA prohibits an employer from conducting “medical inquiries” without a business reason to do so. In EEOC v. Product Fabricators, Inc., an action in federal court in Minnesota, the EEOC required a manufacturing employer to abandon its policy of encouraging employees to inform supervisors if they are under the influence of narcotic pain killers such as Vicodin. The EEOC took the position that an employer cannot ask about prescription pain killer usage unless it has “objective” evidence that an employee is impaired on the job.

This places employers in a very difficult position….

Walter Olson also has comments at the link.

Just When You Thought China Might Be Joining the Modern World

from the HuffPo via Q&O

In one of history's more absurd acts of totalitarianism, China has banned Buddhist monks in Tibet from reincarnating without government permission. According to a statement issued by the State Administration for Religious Affairs, the law, which goes into effect next month and strictly stipulates the procedures by which one is to reincarnate, is "an important move to institutionalize management of reincarnation." But beyond the irony lies China's true motive: to cut off the influence of the Dalai Lama, Tibet's exiled spiritual and political leader, and to quell the region's Buddhist religious establishment more than 50 years after China invaded the small Himalayan country. By barring any Buddhist monk living outside China from seeking reincarnation, the law effectively gives Chinese authorities the power to choose the next Dalai Lama, whose soul, by tradition, is reborn as a new human to continue the work of relieving suffering.

Update:  Maybe he will be reincarnated in Avignon:

At 72, the Dalai Lama, who  has lived in India since 1959, is beginning to plan his succession, saying that he refuses to be reborn in Tibet so long as it’s under Chinese control. Assuming he’s able to master the feat of controlling his rebirth, as Dalai Lamas supposedly have for the last 600 years, the situation is shaping up in which there could be two Dalai Lamas: one picked by the Chinese government, the other by Buddhist monks.

The Only Winning Move is Not to Play

The 5-year old transcripts of Federal Reserve Board meetings make for interesting reading.  Bernanke & Geithner basically yawn at concerns raised about housing prices and mortgages.

Let's be clear.  Unlike most of those who are likely commenting on this, I do NOT blame these folks for being wrong about the direction of the incredibly complex economy, and how one or two factors might influence the whole.   My sense has always been that it is impossible to be consistently right.

What I do criticize is the hubris of making major top-down Federal policy decisions that require that these folks be consistently right.  It's simply madness, and I am exhausted with the continuing reaction of both the media and most politicians that if we only had the right folks making these decisions, all would be well.  The reality is that these decisions are impossible to make, and will virtually always lead to gross mis-allocations of capital and resources in the economy that lead to recessions.

Update:  Here is one example

JUNE 28-29: In summarizing Fed officials’ views, Bernanke notes how it’s getting more and more difficult to make forecasts, describing the economic situation as “exceptionally complicated.” Since housing is particularly hard to project, Bernanke calls it “an important risk and one that should lead us to be cautious in our policy decisions.”

So, this seems like an admirable statement of humility.  Given these remarks, the group did nothing, right?  Of course not ... they raised interest rates a quarter of a point.

 

Crony Capitalism? Blame the Progressives

That is the purposely inflammatory title of my article this week at Forbes.com, finding the roots of crony capitalism not in capitalism itself, but in progressive legislation.  An excerpt:

The core of capitalism has nothing to do with, and is in fact inherently corrupted by, the exercise of state power.  At its heart, capitalism is one simple proposition -- free exchange between individuals based on mutual self-interest.  There is no room in this definition for subsidies or special government preferences or bailouts.  The meat and potatoes activities of crony capitalism are corruptions rather than features of free markets.  Where state power to intervene in economic activity does not exist, neither does cronyism.

Believe it or not, the Occupy movement reminds me of nothing so much as 1832.  Flash back to that year, and you will find Federal officials with almost no power to help or hinder commerce... with one exception: the Second Bank of the United States, a powerful quasi-public institution that used its monopoly on government deposits as a source of funds for private lending.  The bank was accused of using its immense reserves of government cash to influence elections, enrich the favored, and lend based on political rather than economic formulae (any of this sound familiar?).  Andrew Jackson and his supporters, the raucous occupiers of their day, came into office campaigning against the fraud and cronyism at the Bank.

Jackson, much like the current OWS folks, was a strange blend of sometimes frontier anarchist and sometimes tyrannical authoritarian.  But in the case of the Second Bank, the OWS movement could well learn from Jackson.  He didn't propose new and greater powers for government officials to help check abuses of the existing powers -- he proposed to kill the Bank entirely.  Eliminate the source of power, and men can no longer tap it for their own enrichment.

Unfortunately, the progressive Left which makes up most of the OWS movement has taken exactly the opposite approach over the last century or so, expanding government powers and economic institutions (such that today the scope of the second bank seems quaintly limited) and thus the opportunity for cronyism.   In fact, most of the interventions that make crony capitalism possible are facilitated and enabled by the very progressive legislation that the progressive Left and the OWS protesters tend to favor.  Consider some examples...

Assemble Freely, and Lose All Your Rights

My new column is up at Forbes, and discusses the proposal by a number of Congressmen for a Constitutional Amendment to strip corporations of speech and other rights.  The post is hard to excerpt but here is just a bit:

This is why this proposed Amendment is so absurd.  In effect, it would mean that we all enjoy the full range of Constitutional rights, except when we agree to assemble and cooperate -- then we lose them all.   If I as an individual bake bread in my kitchen for resale, I could still petition the state to modify regulations relevant to my activity.  If I then join together with my neighbor in a cooperative venture to bake and resell bread, does it really make sense that I would then lose my right to petition the government?

Worse, the proposed Amendment does not limit its scope to just the First Amendment.  It means that individuals, when on corporate property, might have no protection from unreasonable searches and seizures;  corporations would have no guarantee of due process or of a jury trial in civil suits;  corporate assets would no longer be protected from eminent domain seizure without compensation.  Under this provision, the Federal government could seize Apple Computer if it so desired (or even quarter troops in the Apple offices!).  This all sounds like a stalking horse for Socialism, which might seem overwrought until one realizes that Bernie Sanders is the sponsor of a similar proposal in the Senate....

Of all the possible approaches to reducing the ability of private citizens to manipulate government policy to their personal benefit, this is in fact likely the worst.  As mentioned above, there are many different avenues to exercising influence and power, of which election spending and advertising is just one.  But election spending is the most transparent of all of these approaches.  This proposed amendment would in effect substitute highly visible advertising and electioneering with backroom deals and political patronage that is far more hidden from the public eye.  A cynical person might argue that this is exactly the goal.

Crony Capitalism

Perhaps I do not give Sarah Palin enough credit, because this is a really good passage, from one of her recent speeches (emphasis added by Mickey Kaus)

We sent a new class of leaders to D.C., but immediately the permanent political class tried to co-opt them – because the reality is we are governed by a permanent political class, until we change that. They talk endlessly about cutting government spending, and yet they keep spending more. They talk about massive unsustainable debt, and yet they keep incurring more. They spend, they print, they borrow, they spend more, and then they stick us with the bill. Then they pat their own backs, and they claim that they faced and “solved” the debt crisis that they got us in, but when we were humiliated in front of the world with our country’s first credit downgrade, they promptly went on vacation.

No, they don’t feel the same urgency that we do. But why should they? For them business is good; business is very good.  Seven of the ten wealthiest counties are suburbs of Washington, D.C. Polls there actually – and usually I say polls, eh, they’re for strippers and cross country skiers – but polls in those parts show that some people there believe that the economy has actually improved. See, there may not be a recession in Georgetown, but there is in the rest of America.

Yeah, the permanent political class – they’re doing just fine. Ever notice how so many of them arrive in Washington, D.C. of modest means and then miraculously throughout the years they end up becoming very, very wealthy? Well, it’s because they derive power and their wealth from their access to our money – to taxpayer dollars.  They use it to bail out their friends on Wall Street and their corporate cronies, and to reward campaign contributors, and to buy votes via earmarks. There is so much waste. And there is a name for this: It’s called corporate crony capitalism. This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk. No, this is the capitalism of connections and government bailouts and handouts, of waste and influence peddling and corporate welfare. This is the crony capitalism that destroyed Europe’s economies. It’s the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys. It’s a slap in the face to our small business owners – the true entrepreneurs, the job creators accounting for 70% of the jobs in America, it’s you who own these small businesses, you’re the economic engine, but you don’t grease the wheels of government power.

So, do you want to know why the permanent political class doesn’t really want to cut any spending? Do you want to know why nothing ever really gets done? It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed – a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.

Information and Incentives

I tell folks all the time that  99% of the time the problem with bad governance is not bad people in the government (or at least not bad before they entered government) but bad incentives and information.

Take the recent public reaction against the new TSA search procedures.  Its not that everyone in the TSA aspired for a job where they could grope stranger's nads.  Its that the incentives in government make risk management impossible.

Let's look first at the cost side.  How much do internal TSA evaluation and incentive systems value

  • protection of individual rights and privacy
  • stewardship of taxpayers money

Can we safely say close to zero?  I don't think anyone at the TSA is being denied promotion because they were insufficiently concerned with the fourth amendment.

So what is it that does matter in their incentive system?  I would argue that they have one single, overriding concern -- to avoid an incident for which they can be retroactively blamed as being insufficiently diligent.   If you are confused about how this incentive might arise, Conservatives need only look at themselves.  How many of you have pounded Janey Napolitano for being insufficiently diligent, for example in her "the system worked as it was supposed to" comments.

I spent a lot of time at HBS, in consulting at McKinsey, and in corporate life worrying about incentive systems.  And the absolute first rule, in my mind, is to ignore the official incentive system and explore what really drives behavior.  For example, a company might have a finely balanced set of published performance measures, but if the last three promotions all went to the person who sucked up the most to the boss, the latter will likely influence behavior much more than the published system.

The same is true at the TSA.  I have no idea what their official performance metrics are.  But to a large extent these metrics are irrelevant anyway in an environment where it's impossible to be fired and salaries and promotions have more to do with seniority than performance.   In this environment, unofficial incentives are going to be very powerful, and I am virtually positive the overriding such incentive is avoiding blame due to lack of diligence.

So we should not be surprised if the TSA runs out of control with its diligence in a way that is unchecked by any considerations of cost, privacy, or risk management.  This incentive is so powerful that the only way to override it is either through executive leadership or legislative action.  We'll see if we get either, but trashing privacy and the fourth amendment tend to be bipartisan hobbies so I am not wildly confident much will change.

Sheriff Arpaio Meets Al Gore

Not since the Reese's Peanut Butter Cups have there been two great populist tastes that go so great together.  In an amazing bit of fact-free scare mongering gauged to panic everyone across the political spectrum, Michael Oppenheimer (embarrassingly a professor at my alma mater) manages to combine demagoguing against Mexican immigration with climate alarmism

Climbing temperatures are expected to raise sea levels and increase droughts, floods, heat waves and wildfires.

Now, scientists are predicting another consequence of climate change: mass migration to the United States.

Between 1.4 million and 6.7 million Mexicans could migrate to the U.S. by 2080 as climate change reduces crop yields and agricultural production in Mexico, according to a study published online this week in the Proceedings of the National Academy of Sciences. The number could amount to 10% of the current population of Mexicans ages 15 to 65.

The proceedings of the NAS has become a joke of late.  Roger Pielke Jr responded:

To be blunt, the paper is guesswork piled on top of "what ifs" built on a foundation of tenuous assumptions. The authors seem to want to have things both ways -- they readily acknowledge the many and important limitations of their study, but then go on to assert that "it is nevertheless instructive to predict future migrant flows for Mexico using the estimates at hand to assess the possible magnitude of climate change"“related emigration." It can't be both -- if the paper has many important limitations, then this means that that it is not particularly instructive. With respect to predicting immigration in 2080 (!), admitting limitations is no serious flaw.

To use this paper as a prediction of anything would be a mistake. It is a tentative sensitivity study of the effects of one variable on another, where the relationship between the two is itself questionable but more importantly, dependent upon many other far more important factors. The authors admit this when they write, "It is important to note that our projections should be interpreted in a ceteris paribus manner, as many other factors besides climate could potentially influence migration from Mexico to the United States." but then right after they assert, "Our projections are informative,nevertheless, in quantifying the potential magnitude of impacts of climate change on out-migration." It is almost as if the paper is written to be misinterpreted

I thought this response was instructive

Philip Martin, an expert in agricultural economics at UC Davis, said that he hadn't read the study but that making estimates based solely on climate change was virtually impossible.

"It is just awfully hard to separate climate change from the many, many other factors that affect people's decisions whether to stay in agriculture or move," he said.

The same exact statement, by the way, could be made as to the relationship of climate change to the single variable manmade CO2 without reference to the myriad of other factors that affect the complex climate system.

Homesteaders Beware

I already wrote on the egregious FTC proposals to begin the government takeover of journalism.  But I missed this part, via South Bend Seven, which caught my eye in their post:

Tax on broadcast spectrum. They argue "commercial radio and television broadcasters are given monopoly rights to extremely lucrative spectrum at no charge," and this is a massive public subsidy. They therefore suggest the revenues generated by that spectrum be taxed at a rate of 7 percent, which should result in a fund of between $3 and $6 billion. In exchange, commercial broadcasters would be relieved of any obligations to engage in "public-interest programming," which the broadcasters claim costs them $10 billion annually.

Much of the TV and radio spectrum was indeed "given away," in exactly the same process that the Homestead Act (and I believe the Northwest Ordinance before that) "gave away" land to Americans who were willing to develop it.  These acts gave land away to pioneers who were willing to take the risk and effort to develop what was essentially value-less land into a productive asset  (the land had potential value, but until someone tilled it and put up structures and built rail and road to it, it was worthless).  When TV and Radio broadcasters first started using the spectrum, it was worthless -- and we were even less confident in its potential value than we were of the land in the Homestead Act.  The spectrum did not have value until private broadcasters demonstrated it had value through their investment, development, and experimentation.

So is Congress next going to tell everyone who lives on homesteaded land that they received a massive public subsidy and that their land is now going to be taxed?  The current landowner would likely argue that they didn't get the land for free - they bought it for a substantial price from the previous owners, who bought if from someone else, who bought it from the original homesteader.  But the situation is no different in the broadcast spectrum.  Clear Channel did not get the spectrum for free -- it did not even exist for decades after the spectrum was homesteaded -- it paid a full market price for the spectrum it controls.

Postscript: However, I am happy to see even the leftish Obama Administration admit that public-interest programming is a questionable requirement.  Because broadcasters only make money if they broadcast things people want to see or hear, everything they do is "public-interest."  What is meant in practice by the term "public-interest" should actually be called "political-interest" programming, because this programming tends to be uninteresting to the great majority of the public (have you ever listened to the garbage at 5am on Sunday morning on radio?) but is supported by small niche groups that have disproportionate political influence.  Let's remove these requirements as stupid without holding up broadcasters for more taxes in exchange.

The Immigration Non-Crime Wave

Proponents of tougher immigration enforcement often use crime as their big scare factor in trying to influence people to their point.  Only tougher laws and Joe Arpaio, they caution, stand athwart the coming immigrant rape of Phoenix.

But when the case is built on one or two high-profile crime where the perpetrator has not even been identified, rather than statistics, we can be suspicious of how strong the case is.  I have cited historical figures here, but the WSJ has the new figures for 2009:

Violent crime fell significantly last year in cities across the U.S., according to preliminary federal statistics, challenging the widely held belief that recessions drive up crime rates.

The incidence of violent crimes such as murder, rape and aggravated assault was down 5.5% from 2008, and 6.9% in big cities. It fell 2.4% in long-troubled Detroit and plunged 16.6% in Phoenix, despite a perception of rising crime that has fueled an immigration backlash....

In Phoenix, police spokesman Trent Crump said, "Despite all the hype, in every single reportable crime category, we're significantly down." Mr. Crump said Phoenix's most recent data for 2010 indicated still lower crime. For the first quarter of 2010, violent crime was down 17% overall in the city, while homicides were down 38% and robberies 27%, compared with the same period in 2009.

Arizona's major cities all registered declines. A perceived rise in crime is one reason often cited by proponents of a new law intended to crack down on illegal immigration. The number of kidnappings reported in Phoenix, which hit 368 in 2008, was also down, though police officials didn't have exact figures.

And just to head off the obvious straw man, 2008 was not somehow a peak year, it was actually well below historical levels.

The Corporate State

Life is too short to spend much time on the Democratic Underground, but this article by Ernest Partridge popped up in one of my Google watch lists.  I highlight only because it contains this straw man:

The dogmatism of free market absolutism resides in the belief that the unregulated market never fails to be beneficial to all; the belief, in other words, that there are no malevolent effects of unconstrained market activity, no "back of the invisible hand." From this belief follows the insistence that the free market is self-correcting, and that there is thus no need for regulation � that, in Ronald Reagan�s enduring words, "government is not the solution to our problems, government is the problem."

I can't think of any thoughtful defender of capitalism and free markets that ever would have said that the market "never fails" or that it is "beneficial to all" or that there are never bad outcomes or that the market is perfectly self-correcting.

Bad, stupid shit happens all the time in free markets.  For example, BP idiotically dumps a few zillion barrels of oil into the Gulf of Mexico.  In a free society, BP will be out billions of dollars in cleanup costs and damage settlements -- it might even bankrupt itself if governments allow that to happen, and thus will never again be able to do something so careless.  Markets can't prevent a first dumb action, like huge leveraged bets on ever-increasing housing prices, but markets can make sure the folks involved don't have the resources to do it again -- that is, except if governments bail them out from their mistakes.

The point is not that markets are perfect -- the point is that they are superior in both function and the retention of personal liberty to the alternative of giving governments coercive power to use force against individuals to change market outcomes.  The point is not that individuals don't do destructive things within the context of free markets.  The point is that they have a lot less power to do harmful things over long periods of time than if one gave that person coercive power in a government job backed by police forces and armies.   There is only a limited amount of damage anyone can do when they depend on the uncoerced cooperation and agreement of their counter-party.   A tobacco company CEO doesn't have a hundredth the power to ruin peoples lives as does one member of Congress. Fifty years of slimy cigarette advertising doesn't have the power of one Congressional mandate.  Go to Chicago, Detroit, Baltimore -- which has been worse for these cities -- the private campaign to sell cigarettes or the government led war on drugs?

Its clear from later in the article that the author is yet another person with a list of pet peeves who wants to use force on the American citizenry to get his way.  The author doesn't like cigarettes, so intervention with tobacco companies is a valid role for government.  OK, well I can't stand reality TV shows, so much so that I would rather be in a room of smokers than a room with "the biggest loser" on TV, but you don't see me wanting to give government power to do something about it.

But what is amazing to me is how much his examples actually make the libertarian point for limitation of government.  Try his first one:

Private Prisons. Good for the corporations: more prisoners, "three strikes" laws, mandatory sentencing. The cost to society: less rehabilitation and early release, increased government expenditures and taxes. It is noteworthy that the United States has the largest prisoner to population ratio in the industrialized world.

You have to really re-read history to come to the conclusion that American incarceration rates are mainly driven by privatization of prisons.   My sense is the causality is the other direction - we have passed crazy drug laws and mandatory sentencing for sometimes petty crimes and have had to turn to private actors with private capital to keep up with the demand to construct new prisons.

Like the author, I hate this incarceration trend, but its really a stretch to blame this on privatization.  And, I am the first to deride the symbiotic relationship between powerful corporations and the government.  I have written on any number of occasions that both political parties in this country seem to be trying to build a European-style corporate state.  So, even if I don't think he has history quite right here, I am willing to concede the point.  Because, in fact, this seems to me an indictment of exactly what he is trying to defend -- the government interventionist state.

The only reason corporations lobby the government is that the government has the unique power to coercively intervene in markets.  Corporations try to engage this power for their own benefit and to step on competitors, both current and future.  The root cause failure here is not the fact that private companies try to engage this power, but that this power exists at all.

Amazingly, he makes the same argument about war:

War, Inc. Good for the corporations (i.e., the military-industrial complex and "private contractors" such as Halliburton and Blackwater): more wars, expenditure of rockets, bombs and ammunition (requiring restocking of inventories). Cost to society: avoidance of diplomatic solutions, increased military budget and battlefield casualties, disobedience to international law (e.g., the Geneva and Nuremberg protocols).

I am staggered to see that someone who is defending giving more power to the government is simultaneously highlighting examples where this power is misused so horribly  (and what could be a more despicable crime by legislators than incarcerating more people or starting wars just to help a favored corporate interests).  I don't think wars are started primarily to help armaments manufacturers, but if they are, then this kind of failure by politicians is FAR worse than any he could point out in unregulated markets, only making my point for me.  Markets are not perfect, but the cure of government use of force is worse than the disease.

Since the author dwells on cigarettes, just look at the so-called tobacco settlement.  Supposedly, this was the great government hammer wielded against cigarette companies to punish them for years of selling a dangerous product.  But in fact, all the settlement did was cement the market position of largest tobacco companies.  The settlement effectively made government a financial partner with tobacco companies, and since it was implemented, the government has wielded its power to protect the companies who were involved in the settlement against competition (particularly from low-price upstarts) so as to protect its own cash flow.  The position of the major tobacco companies has never been as secure and profitable.

I think the author's response would be that if we ban corporate election spending, then all would be well.  This does not pass any kind of smell test.  First, corporate giving has been effectively banned (or at least severely limited) for 20 years, and we see the staggering influence corporations have none-the-less.  We only have to look at Europe, where the troika of politicians, large corporations, and large unions run those states to their own benefit, to the detriment of all others (e.g. smaller businesses, business without political contacts, workers outside of favored fields like autos, young workers, etc.)  This symbiotic relationship occurs without campaign cash being a major element.

If you want to understand how this works, just look at recent legislation like cap-and-trad and health care.  Legislators propose some populist interventions in a market to help themselves get re-elected.  Corporations who might naturally oppose such interventions agree to support legislation in exchange for a number of subsidies and special protections. Trades occur that have little to do with campaign contributions.  Just look at the influence GE wields in getting special deals for itself.

The GM bankruptcy was a classic example.   GM is given a big taxpayer bailout and some cuts in labor costs.  In exchange for labor cost cuts, unions get the government to squash secured creditors of GM in their favor in dividing up ownership and also get some special considerations in pending health care legislation.  Secured creditors allow this to occur because they got TARP funds from the government.   Politicians get active support from GM and the UAW in getting out the vote, positive PR, etc.  The only people who lose are taxpayers, all the other automobile competitors, and workers in every other industry who must pay taxes to support auto workers special deal.

By the way, don't tell me that this is not what you want, that if only we have the right people (e.g. yourself) in power this will never happen.  Wrong.  It always happens.  Every dang time.  The incentives are overwhelming.  Given politicians the power to do that one good intervention you want, and you have also given them the power to do a thousand that you don't want.

Postscript: By the way, please do not ever take a "progressive" seriously when they say they care about the poor.  Take this for example:

Outsourcing of jobs. Good for the corporation: increased profits and return on investment of stockholders. Cost to society: poverty, loss of educational opportunities, redistribution of wealth "upward," shrinkage of customer base, economic depression.

Another way of stating outsourcing is say that it is "transferring a job from a rich American to a poor person in a developing nation."  As a country becomes richer and more educated, low-skilled jobs are not going to continue to get done by college grads.  PhD's, in general, are not going to stitch underwear.  Low skilled jobs in a wealthy society do get outsourced, and these new low-skilled jobs in developing nations become the seed or the catalyst for future wealth-creation and development.

This is one ironic problem that progressives in this country have -- even the poorest Americans would be middle class in many of the countries of the world.  If progressives really want to transfer wealth from the rich to the poor, everyone in the US would pay and no one would receive a dime, it would all flow to other countries.

Please Don't Tell Us the Facts

Remember all that BS about the Obama administration only being ruled by facts and science?  This is a mythology at the core of the progressive movement, that it is possible to have a wise dictator who uses the heavy hand of government coercion only for the best interests of the country, driven only by science and not by political influence.

This is of course a crock.  It was a popular point of view in the early 20th century, and at the heart of efforts like Mussolini's fascism, which in turn was much admired by FDR and emulated in US efforts like the NRA (the blue eagle, not the gun organization).  Over time, history has demonstrated folks like Hayek right on the knowlege problem (no one can possibly be smart enough to make optimum decisions for everyone, particularly when everyone has different preferences) while we have plenty of evidence to demonstrate the incentives for politicians are skewed so badly as to make good decisions almost impossible.

But the myth persists, even in the face of obvious counter-examples, like this (emphasis added):

The economic report released last week by Health and Human Services, which indicated that President Barack Obama's health care "reform" law would actually increase the cost of health care and impose higher costs on consumers, had been submitted to the office of HHS Secretary Kathleen Sebelius more than a week before the Congressional votes on the bill, according to career HHS sources, who added that Sebelius's staff refused to review the document before the vote was taken."The reason we were given was that they did not want to influence the vote," says an HHS source. "Which is actually the point of having a review like this, you would think."

The analysis, performed by Medicare's Office of the Actuary, which in the past has been identified as a "nonpolitical" office, set off alarm bells when submitted. "We know a copy was sent to the White House via their legislative affairs staff," says the HHS staffer, "and there were a number of meetings here almost right after the analysis was submitted to the secretary's office. Everyone went into lockdown, and people here were too scared to go public with the report."

In the end, the report was released several weeks after the vote -- the review by the secretary's office reportedly took less than three days -- and bore a note that the analysis was not the official position of the Obama administration.

Wouldn't want to influence a vote with actual facts.

Exhibit A For School Choice

For years I have argued that the killer app that may someday actually lead to school choice will not be individual liberty (because no one in government gives a rip about that any more) and not education quality (because again, its clear no one really cares) but speech and religion.  If the right messes up schools enough, the left might finally be willing to shed their alliance with the teachers unions and consider school choice.  From a live-blog of a Texas Board of Education meeting (via Radley Balko)

9:27 - The board is taking up remaining amendments on the high school world history course.9:30 - Board member Cynthia Dunbar wants to change a standard having students study the impact of Enlightenment ideas on political revolutions from 1750 to the present. She wants to drop the reference to Enlightenment ideas (replacing with "the writings of") and to Thomas Jefferson. She adds Thomas Aquinas and others. Jefferson's ideas, she argues, were based on other political philosophers listed in the standards. We don't buy her argument at all. Board member Bob Craig of Lubbock points out that the curriculum writers clearly wanted to students to study Enlightenment ideas and Jefferson. Could Dunbar's problem be that Jefferson was a Deist? The board approves the amendment, taking Thomas Jefferson OUT of the world history standards.

9:40 - We're just picking ourselves up off the floor. The board's far-right faction has spent months now proclaiming the importance of emphasizing America's exceptionalism in social studies classrooms. But today they voted to remove one of the greatest of America's Founders, Thomas Jefferson, from a standard about the influence of great political philosophers on political revolutions from 1750 to today.