Posts tagged ‘unintended consequences’

Voting Advice

I won't advise you on whether or not to vote.  Libertarians are split pretty evenly between "Don't vote, you are just giving authoritarianism your blessing", "Vote Libertarian because it is a useful protest and message", and "Vote for the major party candidate who has a hope of getting elected who is least bad."  I will leave parsing all that to you.

However, if you do vote, I have one bit of advice I always give on propositions:  Your default vote for any proposition (as it should be for legislators) should be "no".  If its purpose is unclear, if you are not sure of the full implications, if you don't know how it is funded, if you haven't thought about unintended consequences, if you haven't heard the pitch from both the 'yes' and 'no' camps -- then vote no.  Also beware that many Propositions that seem outwardly liberty-enhancing are actually Trojan Horses meant to be the opposite.   Vote yes only if you have thought through all this and you are comfortable the new law would have a net positive benefit.

Also, via Maggies Farm, I think this is a good image for election day:

bz-panel-10-10-14

 

George R. R. Martin: Why Good Intentions Don't Necessarily Make For Good Rulers

Via Alex Tabarrok

A major concern in A Song of Ice and Fire and Game of Thrones is power. Almost everybody – except maybe Daenerys, across the waters with her dragons – wields power badly.
Ruling is hard. This was maybe my answer to Tolkien, whom, as much as I admire him, I do quibble with. Lord of the Rings had a very medieval philosophy: that if the king was a good man, the land would prosper. We look at real history and it’s not that simple. Tolkien can say that Aragorn became king and reigned for a hundred years, and he was wise and good. But Tolkien doesn’t ask the question: What was Aragorn’s tax policy? Did he maintain a standing army? What did he do in times of flood and famine? And what about all these orcs? By the end of the war, Sauron is gone but all of the orcs aren’t gone – they’re in the mountains. Did Aragorn pursue a policy of systematic genocide and kill them? Even the little baby orcs, in their little orc cradles?

In real life, real-life kings had real-life problems to deal with. Just being a good guy was not the answer. You had to make hard, hard decisions. Sometimes what seemed to be a good decision turned around and bit you in the ass; it was the law of unintended consequences. I’ve tried to get at some of these in my books. My people who are trying to rule don’t have an easy time of it. Just having good intentions doesn’t make you a wise king.

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.

The Full Effects of Obamacare Just Starting to Make the News

This is a highly instructive story about Wal-Mart dropping health coverage for part-time workers (hat tip to a reader -- I always forget to ask if they are OK having their name used).  The writer is amazed at unintended consequences that were so hard to envision that complete non-experts like me predicted them days after the law's passage.

  • The writer is amazed that Wal-Mart would support Obamacare and then try to evade its provisions.  This is how the corporate state works.  Wal-Mart was an enthusiastic supporter of Obamacare NOT because it believed the law made any sense, and not because it had any intention of complying with its spirit, but because it knew that its size, political clout, and infrastructure would allow it to duck the new costs of Obamacare more easily than its competition.
  • We see unintended consequences run wild.  Wal-Mart was guilted into providing some health care coverage of part time workers because of tear-jerker news stories about these folks having no other alternative.  But under Obamacare, they do have an alternative (Uncle Sam) so the pressure on Wal-Mart to provide the care to avoid bad PR is removed.
  • I am amazed that we seem to naturally assume that providing health care is an employer's obligation.  This is just bizarre, and applies to none of our other needs.  Employers pay us money, we spend it according to our preferences to fulfill our needs and caprices  (a great phrase I stole from Agatha Christie via Hercule Poirot).   “Walmart is effectively shifting the costs of paying for its employees onto the federal government with this new plan".  I would have said that Wal-Mart is shifting the choice of how to spend their total compensation back on the employee.
  • The cat is almost out of the bag on the story I have promised to be the biggest economic story of 2013:  "Several employers in recent months, including Darden Restaurants, owner of Olive Garden and Red Lobster, and a New York-area Applebee’s franchise owner, said they are considering cutting employee hours to push more workers below the 30-hour threshold."  These guys are just being coy in public if they are saying "considering."  I know insiders in the restaurant industry and they have been working on definite plans to part-time their entire work force for well over a year.   By mid-2013, the service worker who works more than 30 hours a week will be a dinosaur
  • Some time in the past, we really screwed up the whole concept of health care "insurance."  One person complains in the article:  “The packages Walmart is providing for low-income people aren’t offering very much coverage except for catastrophes."  Gee, I could have sworn this is exactly what insurance is supposed to be.  Her statement is like saying "my home insurance isn't offering much coverage except in the case of major damage to my house."
  • Every extra dollar Wal-Mart pays for its employee's health care costs is another dollar added to the shopping bill of the lower income people who shop there.

Capital Controls

I am not sure I understand Kevin Drum's argument for capital controls.  He seems to be arguing that these controls are a sort of financial speed limit and making an awkward analogy to highway speed limits to justify them.

In a world where I as a taxpayer have to bail out banks, I don't have a huge problem with capital requirements for banks, though this seemingly simply topic is rife with unintended consequences -- I have seen it argued persuasively that the pre-2008 Basil capital requirements helped fuel the housing bubble by giving special preference to MBS in computing capital.  In fact, one might argue the same for the sovereign debt crisis, that by creating a huge demand for sovereign debt for bank balance sheets it fueled an unsustainable expansion in such debt.

Anyway, the point of this post was capital controls.  Drum quotes this from an IMF report:

19. Indeed, as the recent global financial crisis has shown, large and volatile capital flows can pose risks even for countries that have long been open and drawn benefits from capital flows and that have highly developed financial markets. For example, in several advanced economies, financial supervision and regulation failed to prevent unsustainable asset bubbles and booms in domestic demand from developing that were partly fueled by cheap external financing. Rather than favoring closed capital accounts, these experiences highlight the need for policymakers to remain vigilant to the risks. In particular, there is a constant need for sound prudential frameworks to manage the risks that capital inflows can give rise to, which may be exacerbated by financial innovation.

The logic, then, is that bubbles are exacerbated by inflows of foreign capital so capital controls can keep bubbles from getting worse.  I have very little knowledge of international finance, but let me test three thoughts I have on this:

  1. Doesn't this cut both ways?  If bubbles can be inflated by capital inflows, can't they also be deflated by capital outflows?  Presumably, if people domestically see the bubble, they would logically look for other places to invest their money.  International investments outside of the overheated domestic market are a logical alternative, and such capital flows would act a s a safety valve to reduce pressure on the bubble.  So wouldn't capital controls just as likely make bubbles worse, by confining capital within the bubble, as make them better by preventing new capital from outside the country flowing in?
  2. The implication here is that the controls would be dynamic.  In other words, some smart person in government would close the gates when a bubble starts to build and open them at other times.  But does that not presupposed the ability to see the bubble when one is in it?  Certainly there were a few who pointed out the housing bubble before 2008, but few in power did so.  And even if they had seen it, what is the likelihood that they would have pointed it out or taken action?  Who wants to be the politician who pops the bubble?  Remember the grief Greenspan got for pointing to an earlier bubble?
  3. Controls on capital inflows tend to be anti-consumer.  Yeah, I know, no one in government ever seems to care when they pass protectionist laws that protect 100 tire workers at the cost of higher tires for 100 million drivers.  But limiting capital inflows would reduce the value of the dollar, and make anything imported (or made from imported parts or materials) more expensive.

The Looming Failure of Obamacare. Part 1: Information

My new column is up at Forbes.com, and it is the first in a three-part series on Obamacare.

In order to protect the core of Obamacare, Congressional Democrats have recently begun to acquiesce to a few incremental changes to the legislation that fix some of the most egregious parts of the plan (e.g. the burdensome 1099 requirements).  The implicit message is that yes, the legislation was rushed and has some flaws, but these flaws can be fixed by targeted tweaks around the edges.

Today I will begin the first of a three-part series explaining several reasons why any health care law that relies on the fundamental assumptions of Obamacare is doomed to fail, even if crafted by the smartest people through the best process.  In this first installment, we will discuss information problems inherent in the law’s top-down approach.  In the second segment, we will cover incentives issues that will breed a myriad of unintended consequences.  In the final part, we will discuss the ever-powerful urge to rent-seeking among certain businesses that will likely turn Obamacare into the largest single corporate welfare program in the history of this country.

More on Coyote's Media Theorem

Back in January, I wrote about both ethanol and the stimulus bill, observing:

I have decided there is something that is very predictable about the media:  they usually are very sympathetic to legislation expanding government powers or spending when the legislation is being discussed in Congress.  Then, after the legislation is passed, and there is nothing that can be done to get rid of it, the media gets really insightful all of a sudden, running thoughtful pieces about the hidden problems and unintended consequences of the legislation

My emerging theorem about the media is that they want to be on the record as having predicted problems with legislation, but that for leftish legislation they personally support, they defer their most insightful analysis until after the law has passed.  That way, their favored legislation gets on the books, but they are also on the record as having spotted potential problems and can make the argument later that they were not rubes or useful idiots.

We are seeing this yet again, as the New York Times questions some obvious flaws with the Dartmouth health savings data (ht Insty)

Of course, the article misses the most obvious point -- while the Dartmouth data was certainly used to try to sell Obamacare, nothing in the actual legislation does anything to capture these supposed potential savings.  The $700 billion in waste number is more of a sort of happy thought that lets politicians sign the ridiculously expensive bill while pretending that some mythical savings are somehow available in the future through unidentified mechanisms to pay for the program.

Reminder

I still think all the political to and fro on the health care bill is so much smoke and mirrors.  I still believe this:

It is totally clear to me that Obama and Pelosi will spend any amount of money to pass their key legislative initiatives.  In the case of Waxman-Markey, the marginal price per vote turned out to be about $3.5 billion.  But they didn't even blink at paying this.  That is why I fear that some horrible form of health care "reform" may actually pass.  If it does, the marginal cost per vote may be higher, but I don't think our leaders care.

Too many politicians cojones are on the line now.   They are past caring about cost or unintended consequences or even if the bill achieves their own goals they originally set for it.  They are now driven to pass something, and since it is we taxpayers and not Congress that will individually bear the burden of their mistakes, something is very likely going to pass.

Regulating the Process, not Actual Safety

Kevin Drum says:

The Consumer Product Safety Improvement Act makes it illegal to sell toys that haven't been tested for lead content.  In general, I think that's a perfectly fine idea.

He can't understand, though, why its effects seem so perverse and Draconian when its core is such a "perfectly fine idea."  It is amazing to me that the law of unintended consequences is so hard even for seasoned political observers to grasp.

A sensible restriction might be that a child cannot by any reasonable use of the product ingest more than X concentration of lead.  But of course that is not what the government does.  The government requires that every toy undergo expensive testing and batch tracking (almost like that of an aircraft part).  This is not by any means the same as simply requiring products to limit lead exposure.  It is a one-size-fits-all regulation of process, rather than true safety.  It imposes huge testing and tracking expenses on products that can't possibly have any lead in them.

And, like many laws of this kind, it imposes a huge penalty on small competitors and new entrants and rewards larger toy makers who both have the scale to pay for the testing and the political clout to shape the law in their favor.  In fact, the big winner from the legislation has actually been Matel, the company whose recalls actually led to the law in the first place.

The Consumer Product Safety Improvement Act (CPSIA) requires third-party testing of nearly every object intended for a child's use, and was passed in response to several toy recalls in 2007 for lead and other chemicals. Six of those recalls were on toys made by Mattel, or its subsidiary Fisher Price.

Small toymakers were blindsided by the expensive requirement, which made no exception for small domestic companies working with materials that posed no threat.

So while most small toymakers had no idea this law was coming down the pike until it was too late, Mattel spent $1 million lobbying for a little provision to be included in the CPSIA permitting companies to test their own toys in "firewalled" labs that have won Consumer Product Safety Commission approval.

The million bucks was well spent, as Mattel gained approval late last week to test its own toys in the sites listed above"”just as the window for delayed enforcement closed.

Instead of winding up hurting, Mattel now has a cost advantage on mandatory testing, and a handy new government-sponsored barrier to entry for its competitors.

Update: Brad Warbiany has similar thoughts.

Really Missing the Point

We libertarians and critics of large government will often criticize this or that initiative as being misguided, or dumb, or counter-productive, or too costly, or whatever.   Too often we do so in the context of the particular personalities involved -- e.g. Bush is going to far, Obama made a mistake, Pelosi is trying to do something dumb.  This tends to give the impression that these are individual mistakes, with the corollary that if we could just get better people in government, these mistakes would not occur.

I see this reaction -- that its the quality of the people, not the system itself, at fault -- all the time.  Of course, it was a common one on the left for years during the Bush administration -- if only we had our guys, smarter guys, non-fundamentalist guys, scientific guys, whatever -- in there, things would work.  Republicans, though, did the same thing for years with Congress  -- if only we'd get those liberals out of the Congressional majority, we would run things intelligently  (anyone remember the Contract with America?).

Two examples bring this most recently to mind.  The first from Radley Balko:

This is sort of amusing. Salon writer Andrew Leonard concedes the unintended consequences of excessive regulation and bad lawmaking, walks right up to the edge of embracing libertarianism, then shrugs it off with, "And that might be one of the most distressing results of decades of being told that government is the problem "” we hear a story like Hayes', and think despondently, you know, they were right, rather than squaring our shoulders and reapplying ourselves to the wheel." Yeah. Keep reapplying yourself to that wheel. If we can just get the right people in charge"¦.

The second is perhaps the clearest statement of the fallacy I have ever seen, from the Washington Post's columnist Richard Cohen via Reason:

In Ronald Reagan's famous formulation, "government is not the solution to our problems; government is the problem." This statement, at the very heart of the so-called Reagan Revolution, denigrated government and the people in it. Reagan's statement withdrew John F. Kennedy's invitation to the intellectually gifted to come to Washington and see what they could do for their country. Reagan sent a different message. Government service is for the lame, the cautious. If you really want to do something for your country, shun Washington and make money. It was morning again in America -- whatever that meant.

It is to Barack Obama's immense credit that he has reversed Reagan's reversal. Washington crackles with people on a mission. Brains are once again in vogue, if only because Obama has them in abundance. Not for him the aw-shucks affectation of the previous eight years, when instinct was extolled and ideology trumped analysis. We are in a mess, and one of the reasons is that people who might have noticed or done something about it had been told to stay out of government.

In our scandal-soaked culture, it is de rigueur to denigrate public officials and to search for the inevitable conflict of interest. But here are people, such as [Lawrence] Summers, who have put aside wealth and lavish perks for government service. They have their reasons, sure, but whatever they are, we -- not they -- are the richer for it.

Seriously, gag me with a spoon.  Forgetting the fact that these guys are sacrificing nothing, and in fact get rich fast after office based on the power and contacts they have amassed, this just really misses the point.

The problem is not bad people.  In fact, I have said for years that with a very few exceptions, there are no bad people in government.  There are just 1) really bad incentives; 2) really bad information; and 3) problems that are not amenable to command and control.

People who believe as do Cohen simply will never accept #1 and #2, no matter how much evidence is brought to bear.  We ought, they say, to be able to find public service monks who are both brilliant and un-swayed by such incentives or information asymmetries.   Sure, the incentives are to deliver benefits to small, visible, powerful minorities even when those benefits dwarf the costs, as long as those costs are dispersed and less visible.  But their guy will be smarter and will avoid this trap.  Never mind how many free trade economists turn into protectionists once they enter the administration, succumbing to the pressure of the visible (e.g. GM jobs) over the logic of the invisible.

But lets look at #3, because this does not get nearly enough attention.  It seems incredible to me, particularly in current times, but how often do you hear someone make the case that the government simply cannot achieve a certain goal?  Almost never.  We argue about expense and constitutionality, as we should, but is it even possible for even the smartest people to make GM profitable this year?  Or to make toxic bank assets go away without economic pain?  Or stop a sufficiently motivated terrorist from killing people?  Could it be that we simply have to endure a recession, rather than firing off trillions of dollars to try to "do something" about it?

One of the things that I have learned as a systems-dynamics specialist in mechanical engineering is that there are systems out there so chaotic and so complex we cannot hope to even adequately describe them, much less effectively manage them.  The details of flow in a waterfall, of a smoke plume from a cigarette, of weather and climate ... and of the economy and individual action in a society are so complex as to defy human understanding.

Our interaction with the natural world is a great example.  We used to act with a certain hubris - like, "we can manage the deer population."   I think several decades of trying to "manage" animal populations have taught us a certain humility.   What if, for example, we wanted to increase the deer population in Yellowstone?   Well, we could put out feeders full of corn, but we might then find that by domesticating the deer, we have in fact doomed them long-term.  We could kill their natural predators, but we might find that these predators were also eating something else, possibly something that competed with the deer.  We could kill whatever competes with the deer for food, but again we might cause imbalances in other populations.  Or we could actually be successful, and increase the deer population, and then find it quickly devastated as they outgrow their food supply and habitat area.

We describe these problems by saying that these actions in complex systems carry "unintended consequences".  The problem is that when I use this term in a political world the reaction is "well, that's just an artifact of poor design - my guy will be smart enough to avoid them."  But here is another way to put it:  "Unintended consequences" is a simple way of saying that in a nearly infinitely multi-variate, hugely complex system (like the economy), it is impossible to narrowly target changes to a single variable without all the other variables in the system being effected, often in ways impossible for us to predict in advance.  In this context, "unintended consequences" are not avoidable design defects -- they are absolutely required.  They are unavoidable.  They are an absolute fact that politicians cannot wish away (but if they are clever, they can hide, at least until after reelection).

Sometimes, I wonder how my education had such a different impact on me than on others.  I could easily be called part of the over-educated elite -- magna cum laude at Princeton, first in my class at Harvard Business School.  Folks with similar backgrounds in this administration seemed to have walked away from similar educations with a deep confidence that they can run or fix anything -- Take over GM, run it successfully where decades of industry experts have failed, manage its turnaround better than a coterie of experienced bankruptcy guys -- No problem!  I just can't even imagine thinking this way.  If anything, I walked away from my mechanical engineering degree with a deep sense that most complex systems would always be out of my analytical reach, and I walked away from Harvard Business School with an understanding of just how hard it is, even as the top boss, to move and drive change in large organizations.

Some older thoughts on this topic, in relation to technocrats, here.

Unintended Consequences

This story in the Nation was a pretty classic example of intended consequences at work:  (via the Anti-Planner)

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

As I understand it, the paper companies had a process that has for decades been 100% biofuel powered, but if they now mix in some diesel fuel, they can get a tax credit under a provision that gives such credits for using a 50/50 diesel/biofuel mix.   Obviously, the indended consequence were to get 100% diesel fuel users to mix in some biofuel, but the law was not written in a way to preclude the opposite.

I found nothing particularly new or unique about this example, but I did find the author's reaction depressing.  Apparently, for Christopher Hayes, this is a failure of private enterprise, not of government:

I've come to expect that even nobly conceived laws will be manipulated and distorted for private ends. But once in a while I hear a story that gives me the queasy feeling that I'm nowhere near cynical enough...

the episode is a useful reminder of the persistently ingenious ways the private sector can exploit even well-intentioned legislation

First, the notion that the whole bio-diesel law was "nobly conceived" is a total hoot.  Basically this law was originally a politically-motivated subsidy of a powerful political lobby (farmers and agribusiness) that most science has demonstrated to have zero impact on its nominal target (CO2 production).  So all that is happening here is that one narrow business interest has hijacked the subsidy intended for a different narrow business interest.   Seriously, I probably should know who this author is, but can anyone who has covered Washington for, say, a week or more really attach  "noble" and "well-intentioned" as modifiers to "legislation" with a straight face?

Second, as a back-check on all the "well-intentioned" stuff, note that there has been no movement to change the original law now that this exploit is understood.  Why?  Because, Mr. Hayes says, the paper industry has a powerful political lobby.  I am having a hard time reconciling the picture of a group of folks in Congress failing to fix an expensive exploit in a law due to political pressure from 8-10 corporations with the view that these same guys passed the original law nobly and with the best of intentions.

Finally, there seems to be a general reaction, particularly on the left, that if Congress were just smarter then this would never happen.  But it HAS to happen.  It is a mathematic certainty.  No one, no matter how smart, can make changes to a single variable in a nearly infinitely large, chaotic, and multi-variate system like the economy and understand fully what the consequences will be.  It's absurd hubris to think otherwise.

Repairing Years of Protectionism

Often, government interventionism is like a wack-a-mole game, with one set of regulations that create unintended consequences that are the justification for more regulation, and so on.

On the bad-worse scale of government interventionism, this is probably one of the better ideas, the State of Florida's buyout of US Sugars cane growing operations around the Everglades  (via bird dog).

Not mentioned anywhere in the article is the fact that sugar-cane production in the US likely would not even exist at all were it not for the substantial import quotas and tariffs placed on foreign sugar.  The US government has had a policy of propping up US Sugar via enforced higher prices.  So after years of the government in effect paying US Sugar to grow cane around the Everglades, the Florida government is now paying it not to.

Congress: We Can't Stop Ourselves From Doing Harm

From the Washington Post, via Tom Nelson, comes a nice summary of the consequences of Congress's addiction to ethanol mandates and subsidies.  The last sentence in particular is one I have warned about for a while on this issue.

To be sure, some farmers in these countries benefit from higher prices.
But many poor countries -- including most in sub-Saharan Africa -- are
net grain importers, says the International Food Policy Research
Institute, a Washington-based think tank. In some of these countries, the poorest of the poor spend 70 percent or more of their budgets on food.
About a third of the population of sub-Saharan Africa is
undernourished, according to the Food and Agriculture Organization of
the United Nations. That proportion has barely changed since the early
1990s. High food prices make gains harder.
...
It's
the extra demand for grains to make biofuels, spurred heavily in the
United States by government tax subsidies and fuel mandates, that has
pushed prices dramatically higher
. The Economist rightly calls
these U.S. government subsidies "reckless." Since 2000, the share of
the U.S. corn crop devoted to ethanol production has increased from
about 6 percent to about 25 percent -- and is still headed up.
...
This
is not a case of unintended consequences. A new generation of
"cellulosic" fuels (made from grasses, crop residue or wood chips)
might deliver benefits, but the adverse effects of corn-based ethanol
were widely anticipated. Government subsidies reflect the careless and
cynical manipulation of worthy public goals for selfish ends. That the
new farm bill may expand the ethanol mandates confirms an old lesson:
Having embraced a giveaway, politicians cannot stop it, no matter how
dubious.

Biofuel Stupidity

From the department of absolutely predictable unintended consequences, "Eco-friendly" fuels are destroying the rain forest.  TJIC has a great post that I can't improve on, so I will send you there.

My Approach on Ballot Initiatives

Arizona has pages of ballot initiatives (or propositions) up for vote on the ballot tomorrow.  Here is my approach to voting on these initiatives:

  • My default is a no vote on everything.  After all, most of these initiatives are regulations and tax increases that even the legislature, not shy about passing either, has not wanted to take on.   Having a default vote is very helpful - if I am unsure, if there is doubt, if I don't fully understand the issue, then it gets a "no".  Like "not guilty" in a criminal trial, its my default answer.
  • I then look for tax cuts and regulation relief.  There tends to be little of this.  We have one ballot initiative that looks like it will help keep property taxes under control, and one that does a nice job circumscribing eminent domain takings as well as regulating "soft" takings (changes to zoning or land use that make a property less valuable without compensation).  On these I will switch my vote to "yes".
  • I then look at bond issues.  A growing city like Phoenix needs facility expansions, and bond issues are a reasonable way to do so.  However, a lot of crap gets loaded in these.  Typically they will say the bond issue is "for schools" to get everyone to vote for it and then load a lot of garbage in it.  I believe California has some of this going on.  We have no bond issues up for vote in my district but we do have a proposition to increase the size limit of future bond issuances.  I am still thinking about this one, but if I can't get excited about it, it gets the default vote - "no".
  • I will then consider procedural changes in government, but with a heavy bias towards "no" due to the laws of unintended consequences.  I don't understand the procedural changes being suggested in two initiatives on public land use so I will vote no on both.  I will definitely vote no on the proposal to pay people to vote with a lotter ticket.  The proposal to effectively switch Arizona to all absentee balloting with virtually no polls is intriguing, but seems fraught with possibilities for unintended consequences (or secretly intended consequences I don't understand) so I will vote no there too.

Thoughts on Net Neutrality

I have had several readers email me asking my opinion on net neutrality, at least as embodied in the regulations passing through Congress.  I really haven't gotten worked up about it one way or the other, but here is where I am on it:

  1. It seems to be solving a "problem" that doesn't exist, but is mostly hypothetical.  So the current benefit of the law is zero.  Which makes the law at best currently useless, and at worst a negative given inevitable unintended consequences.  It seems crafted out of general distrust of phone and cable companies than for any other reason.  Couldn't we at least have waited not just until some company was giving preferential access to certain sites, but until there was some demonstrable harm from the practice?
  2. I dislike the precedent of the government increasing its regulation of the Internet.  I know folks want to argue to me that this law is just to "keep the Internet like it has always been" but that is the justification of half the regulations on the books -- locking the the status quo against new business models, technologies, and competitors
  3. I can imagine situations where net neutrality might be bad.  I think in particular with fledgling wireless networks, that might want to put certain limits on high-bandwidth sites to try to reduce the load on their key nodes.
  4. I know it is not a direct analog, but net neutrality smacks a bit of the awful "must carry" rules applied to cable and satellite.  These must-carry rules were crafted to force people like cable to carry every local TV station, worthy or not, on their cable and to force satellite providers to only bring the network feed to a city via its city's local affiliate.  Another government incumbent protection act, it basically said that incumbent terrestrial broadcasters got first call on cable bandwidth ahead of new entrants.   The sattelite rule has always irritated me - it means that to provide NBC to 60 cities, DirecTV has to carry 60 nearly identical feeds in its limited satellite bandwidth instead of just one, all to protect technologically dated but politically influential local TV businesses. 
  5. Ironically, the same "progressives" pushing net neutrality also pushed, just 6 months ago, legislation to require cable TV to provide content a la carte rather than just one price for everything bundled.  Aren't these two initiatives effectively opposite of one another?  And why is either the government's business?

Your Cable Bill Is Going Up (and Your Choice is Going Down)

The FCC has reversed course and decided that cable companies bundling channels into packages rather than selling them a la carte is bad and requires coercive action from the government to fix.  This issue was originally pushed by religious groups, who I guess did not want signals from naughty content even accessible from their house (the "just don't watch that channel" solution presumably determined to be too difficult).  However, "progressives" on the left have latched onto this issue as well.  I remember a Kevin Drum post, which unfortunately I can find right now, advocating cable unbundling as an example of an agenda progressives should be jumping on.  Beyond the basic rationale that progressives hate cable companies almost as much as Exxon and Wal-mart so anything cable companies oppose they are for, the ostensible logic is that if I pay $50 now for 165 channels, I should only pay $10 if I choose to watch only 33 of those.  Here is their "logic":

The main obstacle for a la carte: programming contracts.
Programmers routinely bar cable operators from selling channels a la carte.

Why? Advertising rates. Cable programmers base ad rates on
the number of viewers they reach. The more they reach, the more they can charge.
If they allowed a la carte, viewership for many channels would likely
plummet.

Gene Kimmelman of Consumers Union says:"This is the essence
of how they squeeze extra revenues out of consumers."

The problem could worsen, he warns, as cable operators "” as
well as broadcasters and satellite TV "” pack on more channels.

"The bundles get bigger, and prices go up," Kimmelman says.
"A la carte would blow this scam out of the water."

This presumes that the number of channels has anything to do with cable cost or pricing.  Which it really doesn't, since the marginal 100 channels or so at the tail end of the viewership curve all just want to be carried for free, in hopes they can get some ad revenue from corporate America for being on the dial.   From a cost standpoint, beyond a few core channels, it costs cable companies about nothing extra, given the infrastructure of high-bandwidth delivery systems is already in place, to send you 20 channels or 150. 

Pricing, though, is not just set based on costs, but on value.  And the government is about to change the value equation, and maybe not in the consumer's failure.  Up to now, cable's value proposition has been "wide selection", a value proposition supported by the multi-channel bundle for one price.  After making this traditional value proposition illegal, there is no guarantee at all that the value proposition that replaces it will be a better, or even equivalent one.

Most consumer advocates tend to assume that bundles are hosing the customer, because they are being forced to pay for stuff they don't want.  But bundles can more often than not be the opposite - including items of value that the customer is not paying full price for.  The the evolution of cable service tends to confirm this.  Cable on a real basis does not cost that much more than it did 20 years ago when you only got 20 or so channels.  My suspicion, which I can't prove, is that you are paying for those 20-25 core channels, and everything else is a freebie.  In this model, bundling is delivering extra value over a la carte, because you really aren't paying much or anything at all for those incremental 130 channels.

In fact, in my years as a consultant looking at pricing, one of the first things we looked at in a company to increase total pricing and profits was unbundling services.  The issue of concern was that more often than not, bundling provided customers with hidden pools of value that they were not really paying for, and unbundling helped make consumers pay full price for things they were previously getting for free.  Airlines, banks, and numerous others make more money by unbundling today.  My suspicion is that this will be the case with cable.

By the way, look under the hood of any business regulation proposed as "consumer protection" and you will usually find the fingerprints of corporations trying to use the government to sit on their competition.  And yes, we have that here.  New entrants AT&T and Verizon want the government to ban the current cable companies' business model, thereby putting them on equal footing in entering the market.  By the way, speaking of these phone companies, does anyone out there really think they are getting a better deal when they pay for call waiting and answering service and long distance and local separately rather than in one of the advertised bundles?

So here are my predictions:

  • Assume an average cable bill today is $50 a month for 150 channels.  If the average person watches and really is willing to pay for 15 of those a la carte, then the new pricing is going to result in a $50 bill for those 15 channels.  Count on it.  People will be paying the same amount as before, but for fewer channels.  Or, if they want the same number of channels as before, they will be paying more
  • In one year, leftish backers of the bill will realize the above, and will publicly criticize the cable companies for their rational reaction to the coercive government program.  They will propose new pricing regulations to "fix" the problem they say stems from private enterprise, but in fact came from unintended consequences of the original regulation.  This use of negative consequences of regulation to justify further regulation is one of the most important tools in the statist's bag.
  • A number of smaller cable channels will go bust.  Even those wanting and willing to pay a la carte for the full 150 channels they got before will not be able to, because many will not exist any more.
  • Fewer niche or idiosyncratic channels will exist.  Today, cable companies want to sell the package of 150 channels.  At the margin, adding a channel that caters to a niche not reached by the other channels is better for them than adding yet another channel that caters to the median viewer, because it makes the package as a whole attractive to more viewers.  However, if every channel is sold a la carte, cable programmers will add channels and content aimed at the mass market to maximize sales of each channel.  Each channel must stand on its own. Oddball niches need not apply.  Interestingly, many of these will be things like the Gay Vegan Channel
    that tend to be particularly popular among "progressives".
  • Innovation in terms of new cable channel offerings will die, because a la carte pricing will substantially increase the cost for a new entrant to get going.  In the past, they just had to sell 2-3 cable company programming buyers that they should try the new channel in their lineup, and they were off and running.  Now, they not only have to convince cable companies to be on the menu, but have to sell consumers one by one to get into homes.  This is orders of magnitude more expensive.  The stock of current cable companies will go up, because competition will be harder.  In another ironic unintended consequence for "progressives", only large corporations will be able to start new cable channels in the future, increasing media consolidation that progressives decry.
  • In one year, religious backers of the bill will be upset that so many people still opt for naughty content, and will propose legislation to increase the difficulty in signing up for certain channels (e.g. physical presentation of proof of age) and to regulate advertisement and promotion of these channels.

Reason's Hit and Run has more along the same lines.

Postscript:  In the past, FCC and Congressional rules have actually mandated bundling.  For example, still on the books are must-carry laws that say that cable companies have to carry every local broadcast channel.  It will be interesting to see if I can opt out of ABC.  I bet I won't be able to - legislation pre-empts FCC rule-making.  Which will create an interesting discriminatory aspect to the regulation, which is that the cable companies must bundle in companies that also broadcast their content over airwaves but must unbundle non-broadcast content.  Which also leads to the irony that cable will have to include content that consumers have an alternative source for (e.g. ABC via an antenna) but have to be ready to exclude content that consumers have no alternative source for (e.g. the History Channel).

Final Thought: What's next from the FCC?  If I only listen to FM 93.3 on my radio, are radio makers going to be required to unbundle the capability to receive all those other stations to give me a radio that only gets 93.3?  And does anyone think that radio would be cheaper?

Press Getting Upgraded to Elite-level Citizenship

Congress is again on the verge of conferring new Constitutional rights to a narrow subset of American citizenry.  Already the recipient of speech rights that the rest of us don't enjoy, the major media organizations are also about to receive a special pass from cooperating with law enforcement and criminal investigations.  The reason for granting these new rights is in part because the media, with their business model in tatters, has learned a lesson from the steel and airline industry about running to Congress for help.

First there were special speech rights for the Press:  McCain-Feingold

This special treatment began with the McCain-Feingold Campaign Finance Act, which gave journalists unique speech rights during elections by taking away the speech rights of every other non-media-credentialed American in the 30-90 days prior to an election.  Of course, those of us who don't work for the NY Times or CBS were kind of confused about how we had somehow lost our constitutional right to political speech.  Reasonably, many of us in the blogosphere wanted our speech rights back, and campaigned to be called journalists (i.e. to get the media exemption from campaign speech restrictions).  As I wrote back in June:

These past few weeks, we have been debating whether this media
exemption from speech restrictions should be extended to bloggers.  At
first, I was in favorThen I was torn.
Now, I am pissed.  The more I think of it, it is insane that we are
creating a 2-tiered system of first amendment rights at all, and I
really don't care any more who is in which tier.  Given the wording of
the Constitution, how do I decide who gets speech and who doesn't - it
sounds like everyone is supposed to...

I
have come to the conclusion that arguing over who gets the media
exemption is like arguing about whether a Native American in 1960's
Alabama should use the white or the colored-only bathroom:  It is an
obscene discussion and is missing the whole point, that the facilities
shouldn't be segregated in the first place.

Now, Congress is Considering Enhanced "Shield" Laws

Now Congress is ready to take another step in the same direction of giving the media special enhanced platinum-level Constitutional rights with the proposed Federal Shield Law.  No doubt inspired by the whole Valerie Plame / Judith Miller mess, this is yet another example of Congress feeling like it has to "do something" with a half-assed solution to a non-problem that no one at this point, except perhaps Ms. Miller, even really understands.  The Federal Shield Law, named in typical Orwellian fashion the "Free Flow of Information Act", would make reporters the only citizens of the United States who can evade subpoenas and legally stand in contempt of court, a right we have determined that not even presidents have.

These shield laws, which I have criticized before, are often justified as necessary supports for the First Amendment.  Beyond the fact that the press in this country has functioned for centuries quite nicely without such shield laws, and have toppled President's without these extra rights, they are somehow now "necessary to help the United States regain its status as an 'exemplar' of press freedom", according to bill sponsor Richard Luger  (a statement made without explaining either why this was true or even how or when the US stopped being an 'exemplar' of press freedom).

Luger is not even shy about admitting that this law effectively creates two classes of citizen in the United States:

Lugar acknowledged that the legislation could amount to a "privilege" for reporters over other Americans.

"I think, very frankly, you can make a case that this is a special
boon for reporters, and certainly for their role in freedom of the
press," he said. "At the end of the day what we will come out with says
there is something privileged about being a reporter, and being able to
report on something without being thrown into jail."

Um, reporters can already report things without being thrown in jail.  Judith Miller, the explicit reason for the bill's existence, according to Luger, was thrown in jail not for her reporting, but her refusing to participate in an investigation.  An investigation that her employer the NY Times cheer-led the government into starting.  She was put in jail for refusing to testify about a source who had in fact already given her verbal permission before she went to jail to reveal his name.

Glenn Reynolds has a nice quote about the proposal:

ONE CHARACTERISTIC OF THE TITLED NOBILITY was its immunity from some
legal rules laid on the commoners; that's why such titles were an
important boon that the King could bestow on favorites. Reading this statement by Richard Lugar on the proposed journalists' shield law, which probably won't cover bloggers, I wonder if we're getting into the same territory

The Licensing Issue:  Who is a Journalist?

This new special privilege afforded to journalists, when combined with the special speech rights conferred in McCain-Feingold, increases the importance of the question "So who is a journalist and who qualifies for these unique privileges?" I predicted way back in February that I thought some type of official licensing program was going to be proposed for journalists.  Well, here it is in black and white in the aforementioned article on the new shield law:

A key reason some journalists oppose the popular federal shield
proposal is fear that giving Congress the power to define who is and
isn't a journalist could lead effectively to the licensing of
journalists.

Back in February, I predicted that the effort at licensing would fail, but now I have changed my mind.  After all, you can't have all of us unwashed folks who actually got good grades in math so we didn't have to default back to a journalism degree in college getting hold of these special privileges.  Only elite people who have proved themselves worth of being beyond legal accountability, folks like Dan Rather or the Katrina reporters, can be trusted with these extra rights and privileges.

Whenever the government by legislation gives a group of people special powers, it always leads to licensing.  It HAS to, else the courts would forever be bogged down with fights over who is in and who is out.  It is much easier to say "the only people who have the right to evade subpoenas are people with this piece of paper."  Using medicine as a parallel example, once you decide the average person can't be trusted to educate themselves enough to make their own medication decisions, you end up with a process where only licensed MD's can issue prescriptions.  The same will be true in journalism.

What is Really Going On Here

To understand what is really going on here, think "steel industry" or "airline industry".  When technology or markets or customers or competition changed in industries like steel, the last desperate defense of the US steel industry was to run to the government begging for import restrictions and price supports and subsidies and pension bailouts and god-knows what else.  Boy-oh-boy wouldn't the steel industry in the US love to have a law that says only licensed steel makers can sell steel in the US, and by the way, the current steel industry participants will control the licensing board.

Think that is a ridiculous exaggeration?  It can't be any more stupid than this form of licensing (or this one;  or this one).  Here are the various trade-specific licenses
you need here in Scottsdale - I would hate to see the list for some
place like Santa Monica.  My favorite is the one that says "An
additional license is required for those firms which are going out of
business."  Or for an exact parallel to my steel industry hypothetical, try this law from Ohio to liscence new auctioneers:

Besides costing $200 and posting a $50,000 bond,
the license requires a one-year apprenticeship to a licensed auctioneer, acting
as a bid-caller in 12 auctions, attending an approved auction school, passing a
written and oral exam. Failure to get a license could result in the seller being
fined up to $1,000 and jailed for a maximum of 90 days.

And my commentary on it:

Note that under this system, auctioneers
have an automatic veto over new competition, since all potential
competitors must find an existing auctioneer to take them on as an
apprentice.  Imagine the consumer electronics business - "I'm sorry,
you can't make or sell any DVD players until Sony or Toshiba have
agreed to take you on as an intern for a year".  Yeah, I bet we'd see a
lot of new electronics firms in that system - not.

This is exactly what is going on with the media.  The world, at least for the US media, is changing.  Subscriptions and ad revenues have been falling year after year after year.  People either giving up this media all-together or switching to new competitors, such as online media, in large numbers and there is no indication that this trend will stop.  As a result, the traditional media finds itself with its back against the wall.

What to do?  What every other industry has done - run to Congress!  Major media groups were extraordinarily strong supporters of McCain-Feingold, knowing that by limiting speech of everyone else, it added to its own influence and power come election time.  Over time, Congress will continue to add new privileges for the media, like the shield law, in part because it knows that it needs to stay in good with the only group of people who have full speech rights come election time.

The one thing I disagree with in the quote above about licensing is the notion that many in the press oppose it.  They are right to see the prospect as scary (see unintended consequences below) but once a licensing system is in place, I GUARANTEE that the licensed press will be huge supporters of licensing.  Just like lawyers and doctors, the press will find a way to take control of their own licensing and use it to keep out competitors they don't like.  Those pajama-clad bloggers irritating you - well, just make sure that they don't get licensed.  Come election time, they will all have to shut up, because only licensed journalists will have the media exemption in McC-F.  Milton Freedman described this process years ago:

The justification offered [for licensing] is always the same: to protect the consumer. However, the reason
is demonstrated by observing who lobbies at the state legislature for
the imposition or strengthening of licensure. The lobbyists are
invariably representatives of the occupation in question rather than of
the customers. True enough, plumbers presumably know better than anyone
else what their customers need to be protected against. However, it is
hard to regard altruistic concern for their customers as the primary
motive behind their determined efforts to get legal power to decide who
may be a plumber.

And as I said here:

Such credentialing can provide a powerful comeback for industry insiders under attack.  Teachers, for example, use it every chance they get to attack home schooling and private schools,
despite the fact that uncertified teachers in both these latter
environments do better than the average certified teacher (for example,
kids home schooled by moms who dropped out of high school performed at
the 83rd percentile).  So, next time the MSM is under attack from the blogosphere, rather than address the issues, they can say that that guy in Tennessee is just a college professor and isn't even a licensed journalist.

Hit and Run described how doctors use the licensing process, and even hazing of interns, to keep their numbers down and therefore their salaries (and their fees to us) up:

When Kevin Drum commented on the New England Journal
article, he said that the system's defenders "sound like nothing so
much as a bunch of 50s frat boys defending hazing after some freshman
has been found dead in an arroyo somewhere."

Hazing is the right metaphor. The system serves the same
purpose: It's a brutal initiation to a privileged club. Medical hazing
is part of the set of barriers that limit entry to the profession;
whatever other reasons there are for it, it's ultimately a byproduct of
occupational licensing.
Those long shifts don't just undermine public health. They drive away
qualified men and women, reducing the supply of doctors and allowing
those who survive the trial to charge more for their services.

Unintended consequences

Of course, all this has unintended consequences, as does any government meddling in individual decisions, limitations of rights, or attempts to pick industry winners. 

The first unintended consequence, or more accurately I guess I should call it the first irony because I am not sure that it is unintended, is that laws meant to keep the elite from having undue influence vs. the little guy in politics (via spending limits) have done just the opposite - concentrated political speech in a few elites in the media and squashed the one medium, blogging and the Internet, that hold the promise of giving individuals like myself new, inexpensive ways of influencing politics.

The second unintended and really scary consequence is that in attempting to remove a lever of government control over media - the subpoena power - Congress is potentially creating a larger one - that of licensing.  Of all the news-oriented media in the world, which is the most bland?  I would answer local TV and radio (by this I mean their local programming, not the syndicated stuff they air).  Why?  Because they are already subject to government licensing that to this point other media, such as newspapers, have not.  Local broadcast outlets are VERY self-conscious about protecting their license, and tend to keep their programming bland to avoid irritating some government bureaucrat.  Just look at how many rolled over immediately and dropped Howard Stern when the government started looking cross-eyed at Stern's raunchiness.  Do we really want all the media subject to this kind of pressure?

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Conservation Easments

Currently, Congress is considering scaling back on tax breaks for conservation easements.  As habitat protection and open space have become larger environmental issues, conservation easements have gone way up in use.  As with most government programs, the laws of unintended consequences have taken over, and many have found ways to get tax breaks some feel are undeserved.  Nature Noted has a long series of posts on the debate. 

I have mixed feelings on the change.  To understand this, lets take a step back and look at government environmental policy.  As I have written in the past, I think of government environmental legislation in 2 parts:

  1. Regulation of pollution and emissions that affect other people's property.  These regulations are essential to the maintenance of a system of strong private property rights.  Without them, we would all be in court every day suing each other for damage to our property or water or air on our land from neighboring lands. Of course, we can all argue about whether set limits are reasonable, and we do.
  2. Regulations of land use that effects only your own land.  This is a relatively new area of environmental law, ushered in by the Endangered Species act and various wetlands regulations.  These regulations say that even if your proposed land use doesn't create any emisions that affect anyone else, the government may still ban your land use for some other environmentally related goal (habitat, watershed, anti-sprawl, the list is endless). 

These land-use laws constitute by far the most distressing area to me in environmental law.  In the worst cases, these laws can result in what are effectively 100% takings of a person's land without any compensation. (Example:  you buy a lot on the ocean for $500,000 to build a beach house.  Before you can build it, new regulations are passed making it illegal for you to build a house on that land.  Yes, you still own the land, but it is now worthless to you since you cannot use or develop it).  Good article on this here (pdf) and a listing of Cato Institute articles on this topic here.

I have for a long time been a supporter of the Nature Conservancy and other land trusts (see Nature Noted site linked above for lots of links and info).  These trusts works to reach the goals in #2 above but with private money instead of government regulation and takings. 

Back to the issue of conservation easements.  It is becoming clear to me that while deals made by the Nature Conservancy rely on private money, they also rely on government subsidy through conservation easement tax breaks.  Their actions are not as private as I thought the were.  And therefore my mixed feelings.  I still think that their activities, even with the tax breaks, is more fair and probably much more efficient than the government takings approach.