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Practice political tolerance

Why do I hope that no one with my exact set of convictions ever gets elected to high office? First, because I change my mind pretty often, so that person would have to have the same exact changes of heart that I’m having. Second, any mistake or failure on the part of this person would immediately be ascribed to me as well, whether deservedly or not. Third, fellow-travelers often scare me. If it’s hard to find one person with a very close match of opinions, try an entire movement. Fourth, because power corrupts both materially and intellectually. Finally, and most importantly, because I believe that societies evolve from the bottom up, and never the other way around. Good administrators are like good surfers, they intuit the right wave and ride it for as long as possible. Bad politicians on the other hand tumble often and struggle to swim against the current. So from this point of view, I might not be a good surfer myself. What if I am having all the wrong intuitions? Emergent change is anybody’s guess, we don’t know until after the fact. For all these reasons, my attitude towards politics is one of tolerance. I try to let them be, the way I tolerate Hollywood celebrities, bad poets, and sports commentators. Annoying yes, but survivable.


There’s a raging debate going on.

The gun-control debate is not where my comparative advantage lies. I feel like I have very little to bring to the table. So let me stick to what I truly *don’t* understand: monetary theory. First of all, this is a really difficult subject with a good amount of graphs and equations such as PQ=MV etc…not for the light of heart. But from reading here and there, the debates over QEIII (that’s not a cruise-ship), and how the Fed and ECB are behaving etc…whether they’ve been tightening or loosening (nobody seems to agree), whether the Euro is a good thing or a bad thing etc…one thing seems to emerge from the fog: Central banks are great when they do the right thing. Somehow, a century or so of central banking has not been enough practice, the learning process is still in full swing, central bankers while arguably much more knowledgeable than before still have a long way to go, and they may in fact have *caused* the current mess.

It’s helpful to me to apply two opposite models to the situation. In one model, which I’ll call “cork in the ocean”, the Fed is just a bank trying to manipulate an oceanic market. Here ‘oceanic’ does not, again, have to do with cruise-ships, it’s just a term I once found in a game-theory book. In this model, every move the Fed makes, every breath Bernanke takes, is immediately voided and absorbed ┬áby some local change in the global economy. My bias lies here, I’m very attracted to this position, in fact I tend to subscribe to this theory even for the fiscal levers, independently of the zero bound, recessions and whatnot.

The other model, which I’ll call “thermostat tyrant”, is one where central bankers have great powers, they can pull certain levers, crank some knobs and stir the whole economy in the right direction, if they know what they’re doing, or down a completely disastrous road, if they’re tragically mistaken. Within this model it is easier to “explain” some historical events, point to hyperdeflations or hyperinflations and claim that they could have “easily” been avoided.

There are also intermediate models such as the “stirring the titanic with long bungee jump ropes from the dock”: you pull really hard in one direction and when you finally see movement you have to start pulling really hard in the opposite direction. In technical jargon, there’s a “lag”.

In any case, these are some ways of thinking that one can adopt when trying to make sense of what’s going on. Personally I see the thermostat tyrant as being an ideal theory to use as reference point, while the cork in the ocean as a more realistic assessment.



Last night we showed the movie *Gandhi* to our kids. I probably have seen it 3 or 4 times already (It’s 3 hours long but it doesn’t feel like it). The difference this time was that I was wearing the econ-inspired goggles that I’ve been acquiring in the last ten years or so. Here are some random thoughts.

1. The movie starts in South Africa. Gandhi feels the brunt of discrimination as an Indian immigrant, and decides to fight it (non-violently). Initially it backfires and there’s a crack-down, but then the new law runs into trouble and is likely to be repealed, so Gandhi goes free, and he supposedly “won”. However, the movie is good about this point, when General Smuts pulls him out of prison to tell him that the legislation will be repealed, he also says that, as a result, immigration from India will have to stop. Gandhi looks shocked. Thinks for a moment, and says, we were not fighting to keep the immigration flows going, we were fighting for something else (the principle of equality etc…). This, at least to me, beautifully describes how difficult it is to “speak for the people”, to achieve meaningful societal change. Gandhi cannot possibly know all the individual choices that Indian immigrants or would-be Indian immigrants would have made. Some would probably have preferred the right to move to South Africa to earn a living even though they would then be treated as second-class citizens.

One could argue that symbolism is important, but at least in this case, it’s only symbolic to us now. South African society did not change for another hundred years. Gandhi’s victory was certainly important to build Gandhi’s fame, but the cost was borne by some very poor Indians.

2. Back in India, Gandhi continues his symbolic campaigns. He travels the country, learns to spin his own clothes, etc…This kind of “nationalism” (“love of country”) is understandable in the face of British oppression, but in hindsight can also be distasteful. Take for instance one of his campaigns whereby he incites the crowd to make a bonfire of all their pieces of garments produced in England. Again, the movie doesn’t shun the problem. Gandhi ponders about the workers in Manchester, but his British friend assures him that “they understand it’s for a good cause”. Blah. Pushing a return to home-production and traditional methods is a sure-fire way to impoverish Indian society even further. The energies that Indians save because they don’t have to spin their own clothes can be used in other more productive endeaviors. The workers in Manchester are actually not the point. The point are the workers in India. Again, the move is a symbolic one, for political purposes, but the costs fall on poor Indian people.

3. At times one feels Gandhi is pushing the limits of free-speech. At what point do his non-violent provocations become incitement to violence? Can he really claim that he didn’t know, or that he warned people to stay united across religions etc…or is he partially responsible for casualties resulting from the riots?

4. One symbolic campaign that warmed my heart, and likely blinded me to possible unintended consequnces, was the march to the ocean. Gandhi walks a few hundred miles to the shore and then “makes salt”. He does this to protest the British monopoly on salt production. This type of civil-disobedience is great and where, I think, Gandhi is at his best.

Throughout his life Gandhi faces legislation he does not agree with. Instead of direct political involvement he tries to learn “what people actually do”. He then tries to point to other laws, other principles that are already in place, and that are in direct contradiction with the ones he doesn’t like. With discrimination in South Africa he also appeals to Christianity, but ultimately confides in “British law” as being on his side.

In the end, by the taking the bottom-up approach he learns that there’s a difference between law and legislation (a Hayekian theme). By learning about how people actually live, he becomes ever more aware of how much manufactured legislation can be at odds with the actual “laws” of the land, the mores, the customs, the unspoken understandings, etc…As a result he is afraid of what “success” can bring (maybe a lesson that he learned earlier in South Africa?). He worries about what kind of politicians will take over after the Brits leave. He understand the problems that can arise from centralised legislation. More than anything he tries to preach pan-religious unity because he realizes these differences can easily be manipulated.

It’s a wonderful movie. Show it to your kids.

The Fundamental Theorem of Politics

Theorem: When asked about why electoral promises weren’t fulfilled, a politician will accuse the opposition of obstructionism.

Proof: Most ideal policies that voters favor will have disastrous effects if implemented (in fact, more is true: most implemented policies are disastrous. But we don’t need so strong a claim for the purposes of this proof). However, politicians want to be elected so they have to cater to these figments of the imagination. The trick is to stall and distract once in power. Accusing the opposition of uncooperative behavior has two advantages. It taps into the natural hatred and distaste that one’s supporters already have towards the other side and for the opposition it allows them to rile their troops by saying “See, we were able to stop them!”. QED.

My contra-rian take on contra-ceptives

Economic theory should predict that employers have an incentive to force contraceptives on their employees. That’s because it reduces the risk that workers will be unavailable for maternity or paternity reasons. “Forcing” being illegal, bosses might instead partly compensate employees with contraceptives in place of cash. Unfortunately it’s not legal to resell those “free” pills or “free” condoms etc…, so the employees are stuck with them whether they want them or not.

An extreme example might illustrate the situation. Suppose that you run a business in a very competitive environment, say a WNBA team. You just won a spot in the play-offs and your leading scorer tells you that she’s pregnant. Well that’s a bummer from the point of view of the team. So one could very well imagine that players at such high level be encouraged to always be on the pill or some other contraceptive method. In fact, one could argue that NBA players would also benefit in performance were they to be on the “male” pill.

So in fact, were it not for the fact that I don’t like bans, I would be in favor of a law forbidding employers to compensate employees with anything other than cash. Wages would be higher and then responsible individuals would go about purchasing what they prefer. That would guarantee that everybody’s right were protected and if for some reason some people had a hard time or ran into some bad luck then we could provide a generous safety net, again mainly consisting of extra cash.

Helping the unfortunate this way would be a lot less problematic. It’s pretty clear for instance that going the other way: namely passing a law that forces employers to pay their employees in contraceptives rather than cash, is quite a welcomed “reform” for the producers of pills. Some might even refer to it as a “boondoggle”. Also the science is not completely settled and people might actually object to taking pills on a daily basis. Focusing on cash helps to get away from the culture war. Unfortunately both Republicans and Democrats love to impose their views on the general population and one of their main tools is to mess with the way workers get compensated.

Inflation is overstated in the long run going backward and yet understated in the short run going forward

How can I possibly hold two such apparently contradictory views simultaneously? Simply put I don’t believe in inflation as it is commonly understood. Of course nobody really ever defines the word ‘inflation’ before starting to talk about it, but the intuitive idea is that stuff gets more expensive than it used to be.

If that’s the definition, then I believe “stuff” is getting cheaper all the time. That’s because our economy is really good at producing substitutes. New stuff is cheaper by definition. Take your favorite all-purpose electronic tablet. Just ten years ago it did not exist and its price was therefore infinite. One might object that straightforward Econ theory predicts the price of a good to rise as it becomes more and more scarce. But in fact we never run out: at the first inkling of a price increase we find a substitute and toss the old for the new. There are of course notable exceptions, such as healthcare and education, but those are services and there too the innovations and “new ways” of doing things could be underestimated.

What this discussion points to, however, is that prices are moving in every which way direction. Some are going up, some down, and what really matters is their relative trends. Trying to aggregate such immensely vast array of inter-relationships into a single percentage number is patently absurd. Not only that: our tastes and desires change over time, so it’s only correct that the distribution of prices continually change.

But what about the activities of the central bank? Can’t they create hyperinflation by printing money like crazy? Can’t they create hyperdeflation by crazily not printing enough money? Possibly. The central bank is just a bank, it mainly gives money to other banks that then juggle it among themselves, so what? Actually whatever new money trickles out probably only contributes to disrupt the monetary signals that have already emerged and in any case such leakage would be highly concentrated in space. The analogy is with the BP oil spill of a few years ago. There’s no doubt that it polluted a lot of water, but the ocean is a truly vast entity and the overall impact was diluted. The modern US economy is likewise enormous, especially with it’s ability to create “new” ways to extend credit, new leverage strategies, etc…It’s questionable whether the central bank is actually having an impact at all.

Still pollution is pollution, even if localized, it can still be pretty bad and at the margin make things overall worse. Because of its impossible task most of the central bank activity can be equated with pollution. In the short run going forward this amount of smoke and disruption can matter and can be understated.

Letter to the Collegian

I couldn’t help but respond to this piece in our daily collegian:

Here is my response:

Dear Editor,

Milton Friedman used to say that economic change precedes political
change. The opening up of world trade has done more to change China than
any political reform might have accomplished. Unfortunately our foreign
policy is replete with embargoes that punish innocent people on the ground
and do nothing but reinforce local tyrants. Trade is a force for peace,
maybe our only hope. In the words of another great liberal thinker,
Frederic Bastiat, “When goods don’t cross borders, soldiers will”.

Therefore, I must say that Mr. Frye has it exactly backward in his piece
“Public universities…” of 02-24-2012. Delivering educational services,
especially higher education, to foreign nationals is part of the peace
effort. It’s the reason why these foreigners would want to sell their work
and their goods to us, so they can earn dollars that they can then spend
to come and get educated in our great university system. As long as these
channels of exchange stay open we can expect to keep war at bay, so it is
exactly to the countries we have most problems with that we should extend
an open invitation to come spend their dollars over here.

Once the benefits of open trade are understood, the distinctions that Mr.
Frye makes about public versus private universities become irrelevant. In
fact “public” universities only get a minor percentage of their funding
from tax-payer money, and private universities also might very well
receive federal grants etc….If Mr. Frye wants to make a general case
against tax-payer money going to subsidize education, that’s fine but
unfortunately he picked the wrong example. If it’s a good thing that
people from all over the world strive to come here to get their
education, then it’s a good thing full-stop, independently of a person
country of origin and independently of the institution providing said