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Tuesday, December 30, 2003

On Hayek and Bush

In “The Fatal Conceit,” Freidrich Hayek provides an interesting account of cultural evolution with its array of customs, mores, and traditions that, in Hayek’s view, are inextricable from and essential to our civilization. Hayek goes further to state that centrally managed economies, particularly those that tinker with the capitalist system of private property (or as Hayek likes to call it, several property), corrupt our evolutionarily developed way of life, restrict freedom, and ruin the people who live in the society. (Hayek is very dramatic about this in his own elitist Austro-Germanic I’m-the-one-who’s-really-got-it-figured-out kind of way.) He also points out how everyone from Aristotle to Thomas Aquinas to Descartes to Rousseau to Mill, Welles, Orwell, Keynes, and Einstein (to name but a few) were lame-brains when it came to social science (a term that Hayek derides) and economics. The odd thing is, you wind up agreeing with most of what he says, and he lays it all out in such charming historical context.

The tribute Hayek pays to basic free capital market structures is worthy. But hasn’t the battle, at least in principle, already been won, even if it hadn’t quite yet been won in Hayek’s heyday? Deeply socialist systems, such as that of the former Soviet Union, are no longer of any consequence. The problem now in those former socialist places is corruption and insufficient administrative and judicial protocol and tradition. Amazingly, the Chinese have so far managed a transition from a socialist system to a capitalist one. The twin sister of capitalism, democracy, is still lagging behind, but the tension is generally kept under control. Occupied lands, such as Tibet and the land of the Uighurs no doubt are somewhat more tense. Still, one would expect that China gradually will become more capitalist, more just, and more politically free; it just may take a good long while, and might first be precipitated by some crisis, the scale of which I don’t wish to contemplate.

What Hayek should have argued, like my good friend Michael Rothschild did in “Bionomics,” was that resisting capitalism was not only detrimental to a society’s vigor, but that every society would eventually adopt capitalist principles. Capitalism is inevitable. And, so is democracy, if we should live so long. In this sense, we can be optimistic.

However, our shorter term pessimism should not be ignored. But, we’ll get to that in a minute. Let us first finish with Hayek.

Where Hayek goes too far, ironically, is in the field of social science. While his theories about the nature of economic systems are profound, he discredits the power of people to impact his beloved extended order. He often refers to the spontaneous, unpredictable, almost mystic, nature of the extended order that has developed. Perhaps, as Hayek writes, in ancient Greece, a cultural evolution was accelerated by the xenos, or guest-friends – go-betweens, if you will. Customs and traditions developed that were the basis for our customs and traditions of today. But, at the moment of their spontaneous creation so many thousand years ago, was not this new behavior, before it was ever considered a custom or tradition, simply the reasoned cooperation of one person with another. Yes, behind all our customs and traditions, reason. Even if we can’t explain them now, or undo them, they were the product of reason. With a good dash of superstition thrown in now and then.

So, Hayek is wrong in this respect. After instinct comes reason, then tradition. Though I’m sure Hayek enjoyed grouping us with rats as exemplars of adaptability, he neglected to dwell on the one attribute of our exceptionalism that makes us unlike any other creature - our enormous brains.

Have you heard of Jeff Hawkins? (You can read the entire article by registering with Tech Review online.) He’s the inventor of the Palm Pilot. But, his real interest is neuroscience. In an interview, he said he would not feel fulfilled if he died without having made a significant contribution to the field of neuroscience. Anyway, he has noted that only 10 percent of the brain’s circuitry is wired for output such as seeing, contracting muscles, and breathing. Ninety percent is routed back into our brains as input. In other words, one part of our brain is sending signals to another part of our brain while simultaneously processing the experience that the output part of our brain has been part of. Why? To get feedback, of course. To process the results from one’s actions, so one can develop predictive capabilities. As they grow, humans develop incredible predictive capabilities, and are able to accurately assess complicated probabilities from scant information. (This occasionally can lead to errors since some apparent patterns might change dramatically if more information is added to the picture. That’s the whole concept behind whodunits.) In fact, being able to predict outcomes is so crucial to human success that it may be considered the equivalent of intelligence. On college entrance exams, analytical and verbal predictability (i.e, memorizing and mastering certain intellectual operations) are relied on to separate the intellectual wheat from the chaff. Of course, as discussed by Howard Gardener, these tests take no account of other intelligences, such as musical, natural, interpersonal (which is the one most crucial for corporate and political success), physical, or spiritual.

Anyway, given these wonderfully evolved, predictive brains does allow us to apply reason to our further cultural evolution, even if we should leave our cotton-pickin’ mitts off the fundamentals of the capitalist system. Not that we’ll always make all the right decisions the first time. In this regard, I again give Hayek credit: he advocates an experimental approach in the social realm, which is odd for someone who goes to such great lengths to say how messed up the experiment with Socialism was. I also wonder, in light of his more general denigration of reason, on what basis he proposes these experiments be formed if not by reason – whether collectively through the polls, or by some trusted representatives. Surely he’s not recommending a combinatorial approach to social experimentation!

Yeah, baby. Instinct was first – it developed through all our predecessor species. With the advent of our species, the one with a gigantic brain, came reason: the ability to speculate about cause and effect in most profound ways. From the application of reason, dependable patterns of behavior, mores, customs, codes, and traditions arose, and did, in fact, form of themselves a transcendant system that we might describe as culture. A very useful thing, culture. And, yet, a jealous thing as well, resistant to uncomfortable change. Only new forms of empowerment, inspiration, or catastrophic circumstance will shape culture. The capitalist economy, which serves empowerment, is very active in shaping culture, though perhaps our individual gratifications do not quite reach the point of general satisfaction. Since we do not wish for catastrophe, we want inspiration. Are we asking too much?

We can direct our own cultural evolution. How? By creating new cultural dynamics. We can never predict outcomes within narrow confines, and they will always have unanticipated consequences, but it is possible to instill changes that stick because they appeal to people’s sense of empowerment. This is what marketing is all about. Not to say that it is easy. A new grocery store product hardly affects the status quo on its own. Good thing, too. The status quo has a high surface tension, and most potential changes of significance tend to bounce right off. And it is right there that great leaders distinguish themselves. They know how to integrate a significant change into a culture.

Take the most celebrated case of leader-inspired accomplishment of the past 50 years – the Apollo landing on the moon. Which president do you associate with it? Kennedy, right? But, in fact, Kennedy had been dead nearly six years when Neil Armstrong set foot on that alien surface. (Nixon was president.) But, Kennedy had fashioned the Soviet technological threat into a weapon of social change, and the Age of Aquarius was born. Think about it for a moment. In 1969, calculators hadn’t yet been invented. We went to the moon as a consequence of the applied brainpower of engineers and scientists using slide rules! In retrospect, based on the technology of the day, the event seems a displacement in time by at least a decade. Without leadership, perhaps we would have waited for quite a long time before attempting so audacious an experiment based purely on the confidence of our reason.

How about social objectives? Can they be achieved with applied reason? Yes, there are many examples. One is the transformation of Europe after WWII with much hard work. (As one of our esteemed colleagues has noted, articles in “Life” by reporters of the post-war years sounded as pessimistic as those from Iraq today. This does not, however, equate the morality of the current circumstance to that of post-war Europe, as, in this case, we were the aggressor nation.)

Other more or less successful social experiments crafted with reason, usually catalyzed by the need for expediency, include: the creation of a social safety net that includes bankruptcy provisions, disability insurance, unemployement insurance, and emergency care; significant laws setting commercial restrictions such as the Sherman Anti-Trust Act, the Robinson-Patman Act, and the Foreign Corrupt Practices Act; major environmental legislation such as the Clean Water Act and the Clean Air Act; and even such modest achievements as the Peace Corps, Head Start, and Clinton’s Welfare to Work program which were felt most significantly at individual levels, even as they have had generally beneficial repercussions for society as a whole.

There is no necessity that all such experiments be run at the federal level. In fact, for those things that logically can be governed by lower levels of government, experimentation could be much more greatly leveraged if tax revenues were passed through to the states for them to deliver services and conduct their own experiments.

There are other issues that I disagree with Hayek about, but probably the most important one is his confusion between morals and the customs, mores, and traditions of the capitalist system. Perhaps this is a confusion to be excused given that the Socialism against which Hayek argued was moralistic in that it presumed to be able to extend the power of economic productivity to achieve moral objectives. So, he felt the need to attack it on moral grounds. In reality, it is important to recognize that a free market system, which by definition freely serves the individual consumer’s desires to the extent the consumer has the means and the compulsion to be served, is the only system which will generate robust economic growth. Not to say that it cannot be improved, for it is being improved all the time both through transcendant processes (to use one of Hayek’s terms) and by design. Further, while the free market will maximize economic efficiency, it does so without regard for costs that are not factored into the price of goods. (Perhaps it isn’t so surprising that our own human impatience for gratification is also an attribute of our transcendant economic system. It is our true instinct showing through. Our market is inclined to optimize across a short horizon.) So, we choose to impose regulations, which clearly are meant to curb some naturally evolving tendencies. Does anyone regret that, due to regulations, the air is cleaner and healthier in big cities than it was 25 years ago? Perhaps the real purist, the ultracapitalists, will say, “Oh, but think what the productive capacity destoyed by regulation might have done for society!”

In addition to imposing regulations, we assess taxes on the transactions that take place in that pure capitalist system. The transfer of goods from one owner to another, the transfer of money to workers for services rendered, the transfer of wealth from one generation to the next, and the transfer of goods across borders – all these transactions are taxed, creating some unusual and unexpected perturbations. But, the great capitalist system, like a river, usually flows right around or through these regulations and taxes, serving the interests of humans more or less, relentlessly carrying the nutrients of growth to communities that prosper on its banks. Too much regulation or tax, or the wrong kind, can choke or pollute the river, but it is awfully hard to deter it from its destiny. Treated right, even subject to constraints and purposeful redirections, the river will deliver great bounty.

Despite everything, I take heart in Bush’s recent shift to emphasize the ideals of democracy taking hold in Iraq. But, I believe there were better ways than massive military power to undo the influence of Saddam. And, because of the way we’ve chosen to do so, while it was quick, the uncertainty of outcome over the next decade is still extremely high, and, yet, the current costs are so tangible in terms of human lives and money. Was there a better way? Bush didn’t give us much opportunity to discuss this question, even choosing to wildly exaggerate the threat Saddam posed so he, like Kennedy, would have a weapon forged of crisis to lead the American people. To war. Not to the moon. War is a very serious proposition. It seems to me that to precipitate it under false pretenses should be a crime.

And now the future of Iraq is highly uncertain. While it is imprudent of the left to compare it to Vietnam, it also would be imprudent of Bush supporters to say they have great confidence that Iraq will function as a successful democracy as a result of the imposition of our will. Huge amounts of money will help – the distribution of it can create incentives that establish behaviors, habits, and, potentially, customs and traditions if people are able to accept them as the best way to get things done. The situation is likely to be fragile for quite some time to come.

By the way, regarding the question, “Where’s the data” that supports the accusation of false premises for war propagated by Bush? One does not have to see a crash to reasonably discern that a crash has taken place when one hears the sound of squealing tires and metal smashing upon metal. Ninety-nine times out of 100, the seemingly obvious is what happened. That’s how it is with the Bush administration. Pattern recognition. I could be wrong, but I doubt it. Otherwise, why the constant back-pedalling from the earlier assertions? Why the aspersions and ultimate lack of accountability around false intelligence? Bush couldn’t validate those 16 words he used in the State of the Union address about Iraq buying plutonium from Nigeria, but I doubt that he even cared whether they were true or not. They served his purpose, this man of action. He had an objective in mind, and he (or, more accurately, his handlers) had calculated what it would take to create the national fervor necessary to justify action, and the American people became unwitting accomplices to war. With the actual evidence, he never would have succeeded in getting support. And, that’s why I think he should go to jail. Of course, he won’t. How does the crime I accuse him of compare to having oral sex with an intern? Well, for one thing, Clinton’s transgression was proven – it’s truthfulness is 100 percent certain. Bush’s will not be so proven. At least not during a timeframe that matters, i.e., his presidency, whether it be one term or two. It will be successfully covered up.

For the record, I stated that Clinton should resign at the time of his sordid humiliation. Interestingly, Gore probably would be president now if he had had a year to demonstrate his competence as Commander in Chief. It gives a whole new meaning to the term pussy-whipped, doesn’t it? (Ladies and gentleman, Al Gore, the great loser of the latter 20th century! To be placed in 20th century great-loser history books with Thomas Dewey and Konstantin Chernenko, who, ascending to the top Soviet post after 40 years of loyal service, immediately fell sick and died six months later.)

The current pessimism infecting so many of our thinking citizenry is a symptom of visionlessness. What is Bush’s vision for America? What is his vision of our relationship to the rest of the world? What part of his seat-of-the-pants plan is being devoted to achieving his unarticulated vision?

The fact that Bush has finally returned to the theme of a democratic Iraq as a primary purpose is such a tiny morsel of hope to those of us who want to see people rally around a vision of a better world. We take up the crumb with fervor, and it makes us light-headed when we consume it. Oh, yes, there are those of us who hunger for intelligent leadership.

As to sending young people to war in Iraq or to the current high-threat situation there, I have no sympathy, Bret, with your position. Nor would I try to sway you to mine. It is obviously something you’ve given a lot of thought to. Does Lory feel the same?

My father served for a year in Vietnam as a helicopter pilot doing reconnaisance and medivac operations. 1965-66. When he returned, he requested a discharge, after serving eleven years in the Army, including a year in Korea in 1960. There is not a sentiment inside me that makes me wish he had stayed in the Army and gone back to Vietnam for another tour.

As for Saddam and the degree of his threat, he was a run-of-the-mill tyrant with a strong instinct for survival, a mediocre intelligence, and a crippled military capability. Check out the political situation for a Uighur or a Tibetan, or a Chechen, or a Zimbabwean, or multitudes of other Africans born into the wrong tribe or situation. In early 2003, there were many people who felt more threatened than your average Kuwaiti, Kurd, or Iraqi Shi’ite. Why didn’t we free them from tyranny?

Don’t get me wrong, Saddam was a terrible human being. I just think it’s important for our citizenry to openly debate the apparent new standard of “because it serves our interests and we are highly likely to prevail” as sufficient conditions for war. Saddam’s threat to the U.S. was insignificant, and had he actually been implicated in a plot to kill innocent Americans, he was smart enough to know that the U.S. would come at him with all its might. He didn’t count on being implicated in an ersatz plot, however. We sure got him!

There may be some possible outcome such that a perspective could be crafted that makes George W. Bush seem to be visionary, inarticulate though he may be. Perhaps that is the future that will unfold. The range of possible results are rarely dwelled upon in accounts of history, and the actual results get all the attention, so he may yet be recognized as a great leader. Perhaps the truth is that most historical persons whom we now think of as great leaders were merely bold and fortunate, and, because of the great unpredictability of things, intelligence is of little importance. In which case, one can only hope that the people of Iraq will be able to build satisfactory lives under a governmental system which has not arisen out of their culture. I hope somewhere in Bremer’s organization there are people paying attention to culture and traditions, planning how to forge cultural connections to the grafted system.

If only every place could have a Lee Kwan Yew (of Singapore) to set its initial course as a country. Lee’s administration would score middling at best on a scale of democratic rights. But, clear standards of justice and economic process were established and implemented. Leaders such as this are not common, and perhaps Lee himself owes much of his success to the fact that Singapore is a nation of tiny land mass – easily controlled. Establishing new customs and systems of professional and judicial trustworthiness throughout Iraq will not be easy as there will be many factions interested only in staking out power positions. Their fervor will tend to corrupt the system from the get-go. In fact, they are likely to hijack the system to their advantage. Even in the more organically evolved structure that followed the Soviet dissolution, look at the recent outcome of change in Russia: Khodorkhovsky thrown in jail for corruption, but the terms of the imprisonment make it clear that the Putin government is even more corrupt. The new Russia has come out of the gate with endemic corruption throughout the government and business. Yet, the capitalist system is so powerful, over time it may help that country outgrow its corrupt qualities. One might even argue that this happened in the U.S. after several decades of the Industrial Revolution. But, will Iraq get that far? Or, will the outcome be one of the less favorable ones that any rational predictor of the future might anticipate if he or she were to consider the possibilities on the bottom side of this real-life Monte Carlo simulation?

All decisions in life are gambles – most of them small ones. The stakes seem rather high on this one. Did we do our homework? Did we understand the complexities and the stakes? Did we mitigate risks? Did we develop contingencies? Did we consider alternatives? Did we address the right issues with the stakeholders?

Bush takes pride in being a man of action. Boldness means a lot to him. One gets the impression that this is true to a fault: he would rather act than talk. He’s certainly been lucky to this point in his life. I hope his good fortune is a quality that will not desert him in this situation which will determine his historical legacy.

Wednesday, December 24, 2003

Well, That Didn't Work

Ever have a nightmare where you have a critically important demo in a faraway place and the equipment ends up damaged and unusable? Well, I've just lived it. Twice! In one week!

The 1st demo was supposed to be early last week in The Netherlands. We went to check the luggage, including the carefully packed robot in a custom crate, and the robot weighed in at 123 pounds. This was a surprise to us since when we received this, the packing slip said 100 pounds even. The airline wouldn't take it at any price. We even offered that one of us would stay back and put the robot in his seat. No dice. So we had to take apart the robot and put it in different suitcases. A wheel here, a power supply there, etc. We got the main crate down to around 100 pounds and they took it. Unfortunately, the removal of the wheels allowed it to slide around in its container and it arrived badly damaged.

We did, fortunately, have a video. The customer was dismayed and skeptical but decided to give us the benefit of the doubt and rescheduled for April.

So then we had our spare robot shipped to Cleveland for the second demo (and supposedly the making of a video). It arrived in good shape except that one of the hubs came loose on one of the axles. The Cleveland client had welding capabilities so we set up to weld the axles and hubs. Unfortunately, we accidentally dropped the robot on it's camera boards in the process and knocked them hopelessly out of alignment. Scratch that demo.

Man that sucked!

Well, I'm home now, and my blogging pace should pick up to the old level now. I'll also be pushing towards GG IV.

I hope you all have happy holidays! Happy belated birthday Benj!

Monday, December 08, 2003

Happy Birthday Benj!

Today, December 8th - a day that will live in infamy!

Why?

Because this was the day John Lennon was shot?

No! Because it was the day a Great Guy was born.

Happy Birthday Old Man.

Monday, December 01, 2003

Did He Really Say That?

Maybe I shouldn't be surprised by the following exchange in a NY Times Magazine interview of Noam Chomsky, but I am:
NY Times: "Have you considered leaving the United States permanently?"

Noam Chomsky: "No. This is the best country in the world."
Given his unrelenting, harsh criticism of the United States for the last forty years, I had assumed that he thought that much or all of the rest of the world was better. I stand corrected. But I have to believe that many (on the Left) who quote Chomsky routinely are choking on that statement.


Consumption Taxation

According to the Nation Center for Policy Analysis, our fearless leader (that'd be Bush), supports a move towards Consumption Taxation, as proposed by Jim in this blog entry. It's good to see Jim and George so closely aligned on this particular issue!!!

Here are some excerpts
The Bush Administration supports a fundamental tax reform that would move the federal tax system away from taxing income toward taxing consumption. This is a highly desirable goal, because it will raise growth and living standards for most Americans...

Consumption taxes are less burdensome than income taxes because of the way they treat saving. Under an income tax, all returns to saving and investment - interest, dividends, rent and capital gains - are fully taxed. Under a consumption tax, they would be exempt. Consequently, saving and investment are much higher with a consumption tax than an income tax...
Additionally, according to this article, "supported by President Bush", "[w]ithout much public debate or even awareness, the United States is heading toward an almost flat tax.", which would give us a mix of consumption and flat income taxes just like Jim proposed.

Saturday, November 22, 2003

Is the Deficit too Small?

No. Really. I'm not joking (well, maybe a little). From an article in the Washington Times:
The conventional wisdom is our federal government deficit is too large. However, the empirical evidence suggests the deficit might be too small. [...]

The total federal government debt held by the public (which is the relevant number to be concerned about) dropped from 42 percent of gross domestic product (GDP) in 1962 to a low of 25 percent in 1975, then rose to a high of 50 percent in 1993, and then dropped back to 33 percent in 2001. Currently, debt as a percent of GDP stands at about 35 percent.

Since 1963, we have had 14 years when debt has been below 33 percent of GDP and 26 years when it has been higher. Conventional wisdom is that economic performance should have been better in the years when we had less relative debt, but the facts are the opposite. Real economic growth averaged 3.47 percent in the high debt years, which was almost 1 percent higher than the 2.59 percent average growth of the low debt years.

Unemployment was also lower in the high debt years averaging 5.65 percent as opposed to 6.43 percent in the low debt years. Inflation averaged a whopping 7.6 percent in the low debt years, almost 3 times as high as the average 2.95 percent of the high debt years.

The Congressional Budget Office (CBO) estimates federal debt could grow to as much as 40 percent of GDP by 2005 and then begin declining again. From 1986 to 1999, it was above 40 percent, and we did quite well during most of those years. Recent data showing both much higher economic growth and higher inflation (meaning much higher nominal GDP) than the CBO forecasted means the debt GDP ratio in fact is likely to remain almost constant. [...]

Finally, the analysis of the historical data clearly indicates that if we had properly structured tax cuts (like the first Reagan and the most recent Bush tax cuts) in 1969, 1973, 1979, 1989 and 2000 we may have avoided the recessions, with all their human misery and unemployment, that occurred the year following each of the above dates. Unfortunately, policymakers in all of those years were more preoccupied with reducing the deficits rather than keeping the economy growing.

The lesson is clear, economic prosperity can continue, even if the federal government never balances its budget, provided it keeps government spending from growing as a percentage of GDP, and has an ongoing program of removing tax and regulatory impediments to growth.
Obviously, the debt itself isn't what causes superior economic performance. It's probably reduced inflows to the government (i.e., reduced taxation) which then causes both the increased economic performance and also the debt. Nonetheless, DOD (debt obsession disorder) is at this point,more of a problem than the debt itself (in my opinion).

This article also reminds us that as more and more worldwide economic data becomes available, it is critically important to learn from, and rely on that data, as opposed to relying on economic theory or "common sense". There will continue to be situations where there is no comparable historical data, but these situations are becoming fewer and farther between. In every case where taxes above 20% of GDP are cut, growth accelerates (with a slight lag). In every case growth eventually benefits the poor (though never as much as the rich). Therefore, if you want to help the poor, cut taxes.

Thursday, November 20, 2003

National Direct Democracy: One Approach

I've been thinking about direct democracy at the national level and its potential benefits and problems. One of the first questions that comes to mind is "how would the government need to be restructured in order to support direct democracy?" Unfortunately, it's a bit of a chicken and egg problem. Without identifying the potential benefits and impacts of direct democracy, it's difficult to design an optimum system. However, with out knowing what the system might be, it's difficult to identify the potential problems and determine how beneficial a directly democratic system might be. But we have to start somewhere, and I think starting with a rough outline of one way direct democracy could work is as good a place as any.

The simplest version of Direct Democracy that I can think of, and the one that requires the least change to the structure of the government and leaves most of the checks and balances which seem to work so well in place, is to leave the Executive and Judicial branches and the Senate as they are now, and to make two minor changes to the House of Representatives. The first change is that the populace can introduce legislation to the House of Representatives. The second change is that the vote of the House of Representatives is advisory only and requires a subsequent national vote to pass the legislation.

There are many ways that a system could be designed for the voters to introduce legislation to the House of Representatives. Most methods have some person or entity write proposed legislation and collect some number of millions of signatures, and if enough signatures are collected, the legislation is added to the House or Representative's agenda (in time order). We'll need to assume that those signatures can be collected electronically and that the electronic collection is verifiable and incorruptible. This may be an enormous or even insurmountable assumption and the required technology will be the topic of future essays, but for now, let's assume it can be done inexpensively and effectively. I'm also going to ignore numerous other interesting details for now.

With this approach, the House of Representatives would have an agenda of pending legislation, part of which was added to the agenda by the Representatives themselves just as it's done now, and part of which was added to the agenda by the above procedure. The Representatives debate and vote on the legislation just like they do now. However, the vote doesn't have any direct effect on whether or not the legislation passes. For each piece of legislation there is a national vote and the whether or not the legislation passes is solely dependent on the national vote.

I would suggest that the national votes be based on something similar to a typical proxy based corporate vote. At voter registration, each voter would specify their default proxy directive as having his or her vote be the same as the advisory vote of the House of Representatives, the same as the advisory vote of a given party or subparty within the House, the same as the advisory vote of one of the representatives, or an abstention. Just like a corporate proxy, the voters can rescind their proxies for a particular piece of legislation and vote directly on that legislation. Legislation that passes would continue on to the Senate just as it does now.

Clearly, if the voters never bothered to introduce legislation and everybody set their proxy default to follow the advisory vote of the entire House of Representatives, the legislative process would proceed exactly as it does now. If voters want to be more specific about their allegiance, they can pick a particular group or subgroup within the House to be their "voting advisors". And if they care about a particular issue, they can cause legislation to be produced and vote directly on that legislation.

I'm proposing this approach because it gives the voters tremendous flexibility with minimal burden and requires little change to the existing government structure. There are numerous other approaches, but I think this one is good enough to begin discussing the benefits and impacts of a national direct democracy.

Wednesday, November 19, 2003

Don't Forget...

...it's National Buy Ammo Day! I just knew you didn't want to miss knowing that.

And He Had a Good Shot at My Vote

Howard Dean just lost any chance at getting my vote in 2004.
After years of government deregulation of energy markets, telecommunications, the airlines and other major industries, Democratic presidential candidate Howard Dean is proposing a significant reversal: a comprehensive "re-regulation" of U.S. businesses.

The former Vermont governor said he would reverse the trend toward deregulation pursued by recent presidents -- including, in some respects, Bill Clinton -- to help restore faith in scandal-plagued U.S. corporations and better protect U.S. workers.

In an interview around midnight Monday on his campaign plane with a small group of reporters, Dean listed likely targets for what he dubbed as his "re-regulation" campaign: utilities, large media companies and any business that offers stock options. Dean did not rule out "re-regulating" the telecommunications industry, too.
This excerpt from a Washington Post article. My company, like most high tech companies, offers stock options. Does he want to kill the entire high-tech sector? Is his goal to bring back the stagnation of the 1970s? What is he thinking?

Tuesday, November 18, 2003

Hitler and Germany Versus Bush and America

This is a first draft, I'll probably hack it up and republish it over time...

A common theme across much of the world is that Bush and America has many similarities to Hitler and Hitler's Germany. I think most of the evidence being presented to backup of this theme is extremely weak. A somewhat typical example is an essay at the Common Dreams website. It's an amusing and clever radical reweighting of historical factors and finds a couple of events from before WWII that seem similar to the present time. Anti-war folk point to essays like this to "prove" that Bush is a fascist in the making. Pro-war folk roll their eyes and wonder how anybody could be so ignorant of history to believe that there is any similarity between Nazi Germany and America. I just chuckle to myself.

In my opinion, the similarities of the details between Hitler and Bush and their respective nations are few and far between. However, from the perspective of the projection of ideas, I think Hitler's Germany was quite similar to Bush's America. And both of those have a great deal of similarity to the Romans, the imperial British, and other major powers.

Allow me to explain myself.

Memetics is the study of cultural evolution. A Meme is "a unit of cultural information, such as a cultural practice or idea, that is transmitted verbally or by repeated action from one mind to another." Genes are to DNA like memes are to culture. Both genes and memes mutate and combine to form novel combinations.

A Meme Complex (MC) is a group of memes that form an organized belief system, such as a religion or ideology (sort of like a chromosome). A culture is then a set of MCs. MCs exist across individuals. In aggregate, the individuals host the MCs. While a MC can exist in only one individual, it's not particularly interesting. It becomes interesting when MCs exists across a population. In this view, MCs utilize their human hosts to cause behaviors and actions across that population. In other words, the MCs are the primary actor, not the individual human thinkers.

Like genes, memes only survive if they are able to propagate to new hosts at a rate faster than existing hosts die or stop hosting them. Like a set of chromosomes in a biological entity, only memes that are part of MCs that are good at propagating survive. MCs that might be potentially good for humanity are immaterial if they are not also good at propagating. Like genes, memes have no consciousness of their own and don't care how much suffering they cause. They only "care" about propagating.

When Homo Sapiens first appeared, MC propagation was closely linked with the population growth of those hosting the MC. If the MC helped a tribe do well in reproduction and survival, the number of people hosting that particular MC increased. While there was some communication between tribes, the effect on MC propagation was probably dwarfed by the effect of population growth and migration of successful tribes.

The invention of trade about 40,000 years ago was the first major change to MC propagation. Not only were goods traded. Ideas were traded as well. The invention of trade is itself a MC which was self propagating. Inventions and cultural adaptations were able to propagate much faster because they were facilitated by inter-tribal interactions whose primary purpose was trade. Inventions like agriculture spread to much of the globe in only a few thousand years. Prior to the invention and adoption of trade, it would have taken much, much longer.

With the inventions and propagation of trade and agriculture, a much higher population and density of that population could be attained. Probably as a result, MCs involving aggressive conquest and empire building became very successful. Examples include Alexander the Great, the Greeks, the Roman Empire, and 1,500 years of European religious and secular wars and empires. Not only did the conquering MC acquire resources to support more rapid reproduction, but the conquered often adopted some or all of the conqueror's MCs. This adoption is easily seen by tracking the propagation of language and dialects throughout the world, since language itself is a significant MC.

The printing press coupled with increasing literacy enabled far more complicated MCs to be supported. The more complicated MCs supported far more complex societies, far high population densities, far more potent cultures, far more effective economies, rapid technological advance, and far more lethal weaponry and military strategies and tactics. At the end of the 20th century, a given MC could have hosts numbering in the billions, with potentially tens of millions being directed to fight and possibly die to support the propagation of the MCs. The individuals would die, but the MCs would live on and even increase their total number of hosts. In some cases, MCs lead to negative population growth (in most of the 1st world), but the total number of hosts increases since the MCs infect new hosts from the 3rd world.

Truth has never been an inherent part of MCs. If lies help a MC to propagate, then there is strong selective pressure for a MC to evolve to incorporate those lies. The printing press and big media prior to the last decade were expensive and therefore centrally controlled by only a relatively few elite people. These elites were able to set and control the debate and thus had huge influence on the propagation of memes. Because of this concentration of power controlling a primary channel of meme propagation, truth increasingly became a victim in order to further the power of the elite's control of their society's MCs.

In the last ten years, with the rapid growth of the Internet and cheap telecommunications, and increasing access to those technological developments, big media is losing its monopoly on controlling MC propagation. At the same time, a rich economy (rich because of effective MCs and luck) is able to use these technologies to project their MCs across the globe.

The American MCs are tremendously aggressive in global propagation. They are in your face, seductive, and subversive. Because they help those who adopt them produce wealth and power, they leave those who don't adopt them relatively worse off. As a result the American MCs are obliterating the rest of the MCs in the world. America has a powerful military and isn't afraid to use it, but the military's influence is inconsequential compared to the rest of America's projection of its MCs. Thus, the American MCs are currently heading rapidly toward global domination.

The WWII German MCs also evolved to attempt global domination. Because communication and media technology were less advanced, the primary channel for MC propagation was military conquest.

In this sense Hitler's Germany and Bush's America are identical. Both have evolved extremely aggressive cultural MCs that tried or are trying to propagate themselves globally, to be hosted by every person on the planet. The German MCs failed and were destroyed (parts still exist, but not the whole mix).

Islamism (as opposed to Islam, the religion) is another group of MCs that has correctly identified the American MCs as an explicit threat. For the Islamism's MCs to survive, those MCs will have to evolve so that they are able to resist the seductive nature of the American MCs. If it's not possible to resist, the Islamism's MCs will have to evolve so that they attempt to destroy the American MCs (perhaps they already have). Unfortunately, it may be that the only realistic way for Islamism's MCs to survive is to destroy the American MCs. That may require the slaughter of tens of millions of Americans and destruction of the West on a vast scale.

The West, in standing up to Hitler 60 years ago, understood that it would require devastating Germany to survive. Islamism's MCs may understand that it requires devastating America to survive. Hitler lost. We may too.

Saturday, November 15, 2003

Mom Finds Out About Blog

A hysterically funny article from the Onion.

Here's "what to do when your mom discovers your blog" by Blogger Support.

More on Iraq - al Qaeda Linkage

I wrote below that I didn't "have any clue one way or the other" regarding Bush and his administration alleged "lies" regarding links between Iraq and al Qaeda. There are two reasons for that. First, as I've pointed out several times, I seriously distrust all media. That's why I find the pair of NY Times quotes via Sullivan both amusing (to me) and tragic (for that once venerable old paper).

The second reason is that there is plenty of public information that corroborates those quotes in Jim's entry. For example, here are some excerpts from a recent article from The Weekly Standard:
OSAMA BIN LADEN and Saddam Hussein had an operational relationship from the early 1990s to 2003 that involved training in explosives and weapons of mass destruction, logistical support for terrorist attacks, al Qaeda training camps and safe haven in Iraq, and Iraqi financial support for al Qaeda--perhaps even for Mohamed Atta--according to a top secret U.S. government memorandum obtained by THE WEEKLY STANDARD.

The memo, dated October 27, 2003, was sent from Undersecretary of Defense for Policy Douglas J. Feith to Senators Pat Roberts and Jay Rockefeller, the chairman and vice chairman of the Senate Intelligence Committee. It was written in response to a request from the committee as part of its investigation into prewar intelligence claims made by the administration. Intelligence reporting included in the 16-page memo comes from a variety of domestic and foreign agencies, including the FBI, the Defense Intelligence Agency, the Central Intelligence Agency, and the National Security Agency. Much of the evidence is detailed, conclusive, and corroborated by multiple sources. Some of it is new information obtained in custodial interviews with high-level al Qaeda terrorists and Iraqi officials, and some of it is more than a decade old. The picture that emerges is one of a history of collaboration between two of America's most determined and dangerous enemies.

According to the memo--which lays out the intelligence in 50 numbered points--Iraq-al Qaeda contacts began in 1990 and continued through mid-March 2003, days before the Iraq War began. Most of the numbered passages contain straight, fact-based intelligence reporting, which in
some cases includes an evaluation of the credibility of the source. This reporting is often followed by commentary and analysis.

The relationship began shortly before the first Gulf War. According to reporting in the memo, bin Laden sent "emissaries to Jordan in 1990 to meet with Iraqi government officials." At some unspecified point in 1991, according to a CIA analysis, "Iraq sought Sudan's assistance to establish links to al Qaeda." The outreach went in both directions. According to 1993 CIA reporting cited in the memo, "bin Laden wanted to expand his organization's capabilities through ties with Iraq..."

The Weekly Standard is a right wing publication and supportive of Bush. I don't trust them either. They could easily made up the leaked "top secret" memo. I'm always particularly suspicious when only one journalist (or at least journal) gets to see some inside information and nobody else has access to it. Who leaked it? Why can't we see the memo itself? What evidence is there that it's real?

But the same goes for those providing "evidence" that Bush lied. It always seems to be some unnamed intelligence official providing that information. Again, who is said intelligence official? Why should we consider what they say authoritative? How do we know they had access to all pertinent information (intelligence is usually distributed on a "needs-to-know" basis so few people have access to all information)? How do we know they just weren't anti-Bush and made it up?

That's why, in my mind, the case is not yet closed whether or not Bush lied about links between Iraq and al Qaeda. The same is true regarding weapons of mass destruction, including the African enriched uranium story. If someone believes the media, the evidence is conflicting. If someone doesn't believe the media, there's virtually no evidence. If someone only believes the portion of the media that conveniently aligns with that person's views, then that person is biased.

Thursday, November 13, 2003

Where's the Data?

Jim, regarding three quotes from Bush and senior administration officials, you write that "it's pretty clear these are outright lies or at least great leaps beyond the facts." Unless you have access to all classified intelligence data worldwide, or at least what Bush and his Administration have access to, I'm baffled as to how you could possibly know that with such confidence. Especially to the confidence level that Bush should be "put in jail" for those statements. I'm not saying I'm sure he didn't lie (or even that I have any clue one way or the other). I'm just saying the evidence that he did lie is totally lacking, primarily because it's extremely difficult to prove a negative (i.e., prove that Bush and his Administration did not see intelligence that supports his statement).

You also asked, "would you want one of your kids to serve in Iraq?" I would be honored if one or both of my daughters served in the United States Armed Forces one day in a situation such as Iraq if they so choose (they're a little young at the moment).

You state "Hitler overran other nations. Saddam not only didn't overrun another nation, he didn't even have the means to do so." Ummm, doesn't Kuwait count as a nation? He tried to overrun Iran. Does that not count because he didn't succeed?

The situation in Iraq in 2002 was much more similar to the situation in Germany in 1938. Who, from that era, if they knew what the future had in store, wouldn't have supported pre-emptively attacking Hitler before he got his war machine in full swing? Yet there was less evidence at that time to support taking action against Hitler than there was supporting taking action against Saddam. At that point Hitler hadn't actually invaded any countries. Saddam had.

As Howie will vouch from our conversations one to two years ago, I wasn't particularly keen on invading Iraq at that time. But then I had a long political conversation with my Dad, who clearly remembered the late thirties. He described to me the peace protests, Neville Chamberlain's "Peace in our Time" speech, the antiwar media, the French wringing their hands and imploring and threatening Hitler not to continue violating the Treaty of Versailles (but doing nothing). He was stunned by the similarity of that time with 2002. He asked me, "when is the world going to learn that you shouldn't ever appease power hungry dictators?" I couldn't come up with a good answer to his question and since then I've supported the invasion and occupation of Iraq.

Are there other power hungry dictators? Of course. Should we remove them from power? If they have the resources to actually achieve the power they crave, I think we should. Saddam, with his hunger for power and oil fields, was, in my opinion, the most obvious target at the time. The other power hungry dictators simply don't have the resources to wreak as much havoc as someone like Saddam.

I need clarification on one thing. Do you think that Ends can never justify Means (that are not just in and of themselves), or that in the case of the Iraq war in particular the Ends didn't justify the Means, if the Means were that Bush lied?

In defense of the NY Times

This example from Andrew Sullivan holds little meaning for me. I don't even see the excerpts as contradictory. The vast majority of what has come out of the Bush administration on Iraq has been about imminent threats, WMD's, etc. The fact that Bush once talked about a free and peaceful Iraq doesn't suggest that was ever the main message. If Bush is now returning to the "free and peaceful Iraq" message, it's only because the main messages have been uncovered as duplicitous. You want some quotes to chew on? Try these:

"This is a man that we know has had connections with al Qaeda. This is a man who, in my judgment, would like to use al Qaeda as a forward army." -- President Bush, Oct. 14, 2002

"Yes, there is a linkage between al Qaeda and Iraq." -- Defense Secretary Donald Rumsfeld, Sept. 26, 2002

"There have been contacts between senior Iraqi officials and members of al Qaeda going back for actually quite a long time." -- National Security Advisor Condoleeza Rice, Sept. 25, 2002

It's pretty clear these are outright lies or at least great leaps beyond the facts. Why? To justify pre-emptive attack.

Here's how I see it: Saddam was an awful leader (as are a bunch of other world leaders), we attacked a sovereign nation that was not directly threatening us (though our leaders pretended otherwise) to get this awful leader, we killed a bunch of innocent Iraqis (nobody knows how many, but it's at least hundreds and probably thousands) as well as thousands of Iraqi soldiers, Saddam is still ungotten, our soldiers are dying at an increasing rate (would you want one of your kids to serve in Iraq?), and now we must spend tens of billions of dollars trying to create some semblance of stability (what would Hayek say about trying to "manage" the outcome in that situation - another "Fatal Conceit"?).

The galling thing is that Bush made the American people accomplices in a pre-emptive attack in a situation in which there was no discernable threat to the U.S. Am I happy that Saddam is not in power? Of course (though he may yet regain power if we stop spending money under this "plan" that we're now making up day-to-day). Am I happy with the way he was removed? Hell no. Am I happy that there was no national (much less international) debate about how to get rid of him other than immediate military intervention? No, again. And why was there no debate? Because Bush lied. He lied because it was the only way he could get the authority to attack. He lied to kill Saddam, and Bush should be put in jail.

And here's the clincher question that I'm not afraid to ask or answer: if Bush's means were the only way to get rid of Saddam, was it worth it? Absolutely, unequivocably no! The end does not justify the means.

Meanwhile, Saddam and most of his army, are blending into the sand, waiting.

Yes, Iraq now may be like Germany after WWII. Maybe it will become a model of democracy. I hope so. But, the situation in Iraq in early 2003 cannnot be compared to the situation in Europe in 1940. Hitler overran other nations. Saddam not only didn't overrun another nation, he didn't even have the means to do so. Bush overran Iraq, not the other way around.

Is pre-emptive attack ever justified? Yes. It's worth debating the boundaries of such action. But, Iraq wasn't even close.

So, no, I don't put much stock in nit-picking bullshit from Andrew Sullivan.

Where Have All the Editors Gone?

Did the NY Times lay off all of it's Editors?
"President Bush sketched an expansive vision last night [at his American Enterprise Institute speech] of what he expects to accomplish by a war in Iraq. Instead of focusing on eliminating weapons of mass destruction, or reducing the threat of terror to the United States, Mr. Bush talked about establishing a 'free and peaceful Iraq' that would serve as a 'dramatic and inspiring example' to the entire Arab and Muslim world, provide a stabilizing influence in the Middle East and even help end the Arab-Israeli conflict. The idea of turning Iraq into a model democracy in the Arab world is one some members of the administration have been discussing for a long time." -- New York Times editorial, February 27, 2003.

"The White House recently began shifting its case for the Iraq war from the embarrassing unconventional weapons issue to the lofty vision of creating an exemplary democracy in Iraq." -- New York Times editorial, November 13, 2003.
Is it incompetence or bias? (Hat tip Andrew Sullivan)

Wednesday, November 12, 2003

Ham 'n Cheese Please

That's as in ham 'n cheese for an omelet because an egg won't be enough. In this post Jim presents an article from The Economist to express his concerns about the economy and the contention that people are living beyond their means. Below in bold type is the admission of egg on the face.

EVER since America's stockmarket bubble burst in 2000, The Economist has argued that America faced several years of sluggish growth, if not a deep recession, as the economy worked off the excesses that built up in the late 1990s. Yet the economy has come roaring back, with GDP rising by 7.2% at an annual rate in the third quarter—its fastest sprint for 19 years. Do we look a bit silly? Indeed. But there are still big risks ahead.

The risks that concern me are geopolitical (i.e. a revolution in Saudi Arabia with damage to the oil fields) or a domestic policy shift towards austerity and away from growth (i.e. tax hikes, trade wars...). Absent those types of events, I see some key factors pointing to a broad and strong expansion taking hold. The modest improvement in credit spreads last fall followed by the big improvement last spring along with the huge positive divergence between the household and establishment employment surveys are very positive signs. Low inflation and a 15% tax rate on capital gains and dividends means that the taxation on capital formation is the lowest in over 40 years. This will be a huge positive undergirding the expansion. You will not learn the significance of this from Al Franken and the supply-side Jesus parody in his latest book.

Business investment is picking up, but ample spare capacity will continue to discourage new spending. In September, manufacturing output was running at only 73% of capacity, well below the average of 81% over the past half century. In any case, business investment is too small a share of the economy to keep it aloft in the absence of robust consumer spending.

Business spending is already picking up for the first time in 3 years. Capacity utilization has only upticked slightly from the lows. Capital expenditures usually accelerate early in a cap.ute. ramp, well before average or high levels are reached. It has happened this way before. It would surprise you to know how cap.ute. rates are produced and why the behavior I'm referring to occurs.

Debt levels are high but not unmanageable. As growth takes hold, this concern will fade.

Early last century, economists such as Ludwig von Mises and Friedrich Hayek argued that, if interest rates were held below their “natural rate� (at which the supply of saving from households equals the demand for investment funds by firms), credit and investment will rise too rapidly and consumers will not save enough.

Yes, in theory this is true. In reality, the natural rate of interest is unknowable. I wouldn't be surprised if some economist somewhere is sure that they know how to calculate it. If you want a better understanding of the monetary distortions that rippled through the economy over the last few years, have a look at this Jude Wanniski article titled The Deflation Monster. I might have sent this to Bret and HoneyBee several years ago. The Fed could still snatch defeat from the jaws of victory if they don't start paying more attention to price based indicators and modify their ad hoc approach to monetary policy.

ps all of the essays at the bottom of the page at wanniski.com are worthwhile.

Tuesday, November 11, 2003

Pode was never dead!

No, I wasn't dead. It's just that those of us who are working stiffs can't find the time for these deep, philosophical political discussions. However, when the topic is GG IV, I will make the time. At present, I don't see any problem with the March dates proposed by Bret - that should leave us plenty of time to work things out with the wives.

Pode Lives! (and How to Use the Comments Section)

Jim mentioned that he isn't "seeing the Comments capability." That's too bad because Pode's first access is in the comments to Jim's Post!

Jim, at the bottom of your post I see:
# posted by Jim @ 9:43 PM Comment (1)
If I click on the word "Comment", it brings up a new window which shows all the comments and allows me to enter a new one. I think you have to have Javascript enabled for it to work though.

Anyway, Pode proposes March. That works for me. I'll go out on a limb here and propose a specific date. How about Friday March 5th through Monday March 8th, 2003?

How I Stopped Worrying And Learned To Love The Deficit (with apologies to Stanley Kubrick)

Obviously running large deficits indefinitely can cause problems, but some people can't get beyond DOD, deficit obsession disorder. This Holman Jenkins article has a good treatment of the political issue. Here are some excerpts:

Politically, voters care about budget deficits only when they feel insecure about their own jobs. The deficit then becomes an emblem of economic mismanagement (never mind the Keynesian wisdom that a growing deficit is desirable when the economy is slack, providing countercyclical demand).

What Republicans have understood, instead, is that the only effective long-term form of fiscal discipline is tax cuts.

Republicans have become the Party of Tax Cuts: that is, the party that lets you keep your own money, the party that protects the private sector from being smothered by big government. In a more sophisticated audience's eyes, it means a second thing: the party that restrains the growth of government by keeping it on the only fiscal leash that works--a k a the deficit, which maintains a constant tension between forgoing new spending or borrowing to pay for it.

Admittedly, this involves Republicans in a certain amount of self-duplicity (We don't mean this in a bad way; every party has to keep its big tent together.) Not only do Republicans take as given that Congress will spend every dime it can tax and then every dime it can borrow, until it runs up against its effective credit limit. Republicans also accept that they will behave exactly like Democrats in this matter.

Gary Becker, the Nobel economist, has made the same argument much more elegantly, showing that the strongest correlate to fiscal restraint is a rising share of the federal budget devoted to interest payments on the national debt. The picture here is not pretty if you imagine your federal government being run by farseeing grownups who plan the future meticulously and have compendious knowledge of all things.

The picture is quite pretty if you have limited confidence in managerial competence but appreciate the exquisite wisdom of the Founding Fathers, who devised a government responsive to the public mood yet constrained by checks and balances.

Humor

This from a Todd Buchholz book, New Ideas From Dead Economists

In a joke from the Soviet Union, a man asks, "Was communism invented by biologists or politicians?" "Politicians, of course. Biologists would have tried it out on rats first."

Sunday, November 09, 2003

I'm in for GG4

Bret, I'm not seeing the Comments capability. Can you give me a hint about doing it? The San Diego plan sounds great. Feb, Mar, Apr would be good months.

Great Guys IV

Yes, we should start thinking about Great Guys IV. While using my house as a base isn't a possibility (the wife won't tolerate it), San Diego is a good place to have the party for several reasons: reasonably good winter weather, lots of stuff to do, and, since I live here, I can optimize the experience.

Here is a possible itinerary:

Friday Afternoon and Evening: Great Guys begin arriving
Saturday: hiking and partying in the anza-borrego desert. I'm intimately familiar with this particular desert and know many really interesting and fun places.
Sunday morning: mission bay beach and boardwalk activities - rollerblading, surfing (rent boards and wetsuits)
Sunday afternoon: Black's beach (one of the most beautiful nude beaches in the U.S.) - swimming, hackey-sack, frisbee
Sunday night and Monday: Great Guys begin leaving

Other possibilities: Mexico, Hang-gliding (for beginners on Dunes down in Mexico),.

What do you think? When are you available? Use the comments section to let me know...

Yet One More Article from The Economist

Bret, a few weeks ago you challenged my statement about people living beyond their means. This article from this week's Economist is my response. It makes an interesting reference to Hayek and von Mises.

America's economy

Another hangover in the making?

Nov 6th 2003
From The Economist print edition

America's spurt in growth is being fuelled by a dangerous cocktail

EVER since America's stockmarket bubble burst in 2000, The Economist has argued that America faced several years of sluggish growth, if not a deep recession, as the economy worked off the excesses that built up in the late 1990s. Yet the economy has come roaring back, with GDP rising by 7.2% at an annual rate in the third quarter—its fastest sprint for 19 years. Do we look a bit silly? Indeed. But there are still big risks ahead.

Certainly, the recent recovery has been startling. Over the past year, America's GDP grew by 3.3%. Growth is becoming more balanced. In the third quarter, consumer spending rose by 6.6% at an annual rate, but business investment was also up by an impressive 11%, housing investment grew by 20%, and even exports jumped by 9%. Corporate profits are rebounding and figures due on November 6th were widely tipped to show that business productivity grew at an astonishing 8% or thereabouts in the third quarter.

The Federal Reserve

Many pundits have argued that America's brisk rebound, despite all that it has suffered—the bursting of the bubble, September 11th, corporate scandals and the Iraq war—proves just how wonderfully flexible and resilient its economy is. Flexibility played a part, but a smaller one than many believe. The main reason why the economy has held up better than expected is that it has enjoyed the biggest fiscal and monetary stimulus in decades.

No other country has experienced such a huge increase in its structural-budget balance (ie, excluding the automatic effect of the economic cycle). Thanks partly to tax cuts, it has swung from a structural surplus of 1% of GDP in 2000 to a deficit of 5% this year. Meanwhile, historically low interest rates sparked a boom in mortgage refinancing, giving households lots more extra cash to spend. And spend they have.

But the government cannot carry on handing out such largesse for ever. America's deteriorating fiscal finances rule out further big net tax cuts (see article). Long-term interest rates have also risen, and as a result mortgage refinancing has fallen by around 80% from its peak. In September real consumer spending dipped by 0.6%. If job lay-offs continue, consumers may also tighten their belts.

Business investment is picking up, but ample spare capacity will continue to discourage new spending. In September, manufacturing output was running at only 73% of capacity, well below the average of 81% over the past half century. In any case, business investment is too small a share of the economy to keep it aloft in the absence of robust consumer spending.

But the main reason for doubting that America is back on a path of strong, sustainable growth is that it has failed to purge the excesses of its previous boom. It is, to say the least, odd that at the beginning of an economic recovery many indicators—low saving, rampant household borrowing, record house-building and uncomfortably high stockmarket p/e ratios to name but a few—have more the look of a cycle that is drawing to a close.

Debt provides the best example. In the year to the second quarter (the latest figures available), borrowing by households rose by 11%, its fastest pace in real terms since 1985. Economists wearing rose-tinted spectacles point out that interest rates today are low, so households can afford to borrow more. The main snag with this argument (but by no means the only one) is that, despite low interest rates, households' debt-service payments are alarmingly high as a percentage of their income. The Federal Reserve has recently revised its measure of household debt-service. In contrast to the old figures, this now shows that the debt-service ratio is higher than at its previous peak in the 1980s.

When interest rates inevitably rise to normal levels, debt-service ratios will rise higher still. But even while interest rates remain low, debt service will eat up a rising share of income if households keep borrowing more. Sooner or later, consumers will need to save more and spend less.

This week, both the Reserve Bank of Australia and the Bank of England raised interest rates largely because of concerns about soaring household debt. The Fed has instead signalled that it intends to keep interest rates low for some time in order to support the recovery. Given America's greater economic slack and hence the risk of deflation, that is understandable.

Alpine reflections
Why has this situation arisen? Austrians are in vogue in America, at least in California, so perhaps it is a good time to dust down Austrian business-cycle theory. This helps to explain why this economic cycle is different to previous post-war cycles, and why a full recovery could be delayed.

Early last century, economists such as Ludwig von Mises and Friedrich Hayek argued that, if interest rates were held below their “natural rate” (at which the supply of saving from households equals the demand for investment funds by firms), credit and investment will rise too rapidly and consumers will not save enough.

Sound familiar? America displayed many of those features in the late 1990s. Faster productivity growth raised the natural rate of interest, but because inflation was low (and because Austrian economics had long been out of fashion) the Fed failed to lift interest rates by enough. Investment and borrowing boomed.

Strict Austrian-school disciples would argue that, because America's recent downturn was due to overinvestment and overborrowing, slashing interest rates to encourage yet more borrowing was wrong because it delayed the need for households to save more. Central banks can postpone a downturn only by injecting more and more credit. The inevitable downturn is then deeper or longer.

But having made the mistake of allowing a bubble to inflate and then burst, the Fed now faces a difficult balancing act: trying to prevent deflation, while at the same time avoiding a credit bubble which may burst even more painfully.

Joachim Fels, an economist at Morgan Stanley, accuses the Fed of being a serial bubble blower. Slashing interest rates and pumping out liquidity every time a bubble bursts—from the Asian and Russian crises to the stockmarket bubble—creates yet another. America's latest bubble is in house prices and mortgage financing. By rescuing investors from their folly each time, central banks encourage increased risk-taking. On this view, the Fed will eventually run out of soap and the last bubble will burst.

Copyright The Economist November 6, 2003

Saturday, November 08, 2003

Another Bit of Interesting Data from The Economist

From The Economist

The most striking common factor among war-prone countries is their poverty. Rich countries almost never suffer civil war, and middle-income countries rarely. But the poorest one-sixth of humanity endures four-fifths of the world's civil wars.

The best predictors of conflict are low average incomes, low growth, and a high dependence on exports of primary products such as oil or diamonds. The World Bank found that when income per person doubles, the risk of civil war halves, and that for each percentage point by which the growth rate rises, the risk of conflict falls by a point. An otherwise typical country whose exports of primary commodities account for 10% of GDP has an 11% chance of being at war. At 30% of GDP, the risk peaks at about one in three.

....Spending on health and education, by contrast, seems to provide an immediate boost to the economy of a newly peaceful nation. This is surprising. The benefits of social spending usually take years to show up in the growth figures. But in countries emerging from war, a new school or clinic shows that the government is serious about peace, which buoys confidence and may encourage private investment.

Copyright The Economist, May 22, 2003

The above paragraphs were taken from a longer article on civil wars in the world. It's a great argument for economic growth and development. Why isn't our foreign policy focused on that?

Quasi-Markets

In case you didn't catch this article in The Economist last week, I thought you'd be interested. The article doesn't go very deep, but the ideas are interesting enough to make me want to pick up the referenced book. The basic concept is what I've long contended, i.e., that the power of markets can be used for provision of public goods.

Economics focus

Power to the pawns

Oct 30th 2003
From The Economist print edition

For excellence in public services, should societies rely on altruism or self-interest?

EGALITARIANS are instinctively suspicious of market forces. Markets breed inequality, they believe. In ordinary markets, that may well be true. But this fact should not blind egalitarians to opportunities for using “quasi-markets”, which combine market forces and public money, in ways designed to promote equality. So argues Julian Le Grand of the London School of Economics in a fascinating new book.

“Motivation, Agency and Public Policy: Of Knights and Knaves, Pawns and Queens”* examines the theory and practice of “quasi-markets” for public services. The book is short, accessible and profound. Drawing on theory, case studies and surveys of the literature, Mr Le Grand argues that the left is missing a trick. Market forces, he says, can often serve its goals better than the methods socialists and social democrats generally favour.

The left's distaste for mixing markets and public services springs partly from two deep-rooted ideas. One is that governments and their officials, when acting as providers, do what they think is good for society, not what they think is good for themselves: as Mr Le Grand puts it, the left assumes that providers are “knights” not “knaves”. Second, the left sees recipients of public services as having no scope for action on their own initiative. Citizens act as they do because of the economic environment into which society has put them. As consumers of public services, they are passive beneficiaries: “pawns” not “queens”.

Mr Le Grand argues that these beliefs are not only wrong but also anti-egalitarian. He shares the left's concern about the inequalities that arise in ordinary markets, but this issue is not to the fore in the quasi-markets he concentrates on. Governments often pay for universal access to public services such as schools. The question in such cases is whether those public services—which may well matter more to the poor, who lack alternatives, than to the rich—are any good. The point is that properly designed quasi-markets improve quality and value for money.

Mr Le Grand does not arrive at this conclusion by agreeing with those economists and right-wingers who see public-service providers and recipients alike as one-dimensional self-interested “maximisers”. Policy needs to recognise, he argues, that public-service providers may be motivated simultaneously by altruism and by self-interest. And though some recipients may regard themselves as helpless, policy should try to increase their power over providers—to turn pawns into queens—both because that would promote efficiency and because, from an egalitarian point of view, it is desirable in itself.

The idea that altruism and self-interest are both at work in the supply of public services has interesting theoretical implications, which Mr Le Grand teases out. For instance, how does supply react to price? An altruist will supply some services even if the payment received is zero. A small payment, if it were seen as recognition of the provider's sacrifice, might then encourage additional supply. But increase the payment further and you could discourage supply, by tainting the event as a market transaction and reducing the altruist's intrinsic reward. If the payment were then increased further still, the supply of the service might start to rise again, in the standard economic way, as the positive power of self-interest overwhelmed the diminishing power of altruism. In short, a mixture of the two motives can produce a wobbly supply curve.

Mr Le Grand draws lessons for policy from this and from other theoretical explorations. One rule of thumb is that incentives in quasi-markets need to be framed, as far as possible, so that they appeal to both knightly and knavish instincts, rather than concentrating on one or the other.

The book's discussion of competition among schools shows what this might mean. The key supply-side decision-maker is the head teacher. Heads may have both a knightly and a knavish interest in the financial well-being of their schools: the first because financial strength allows them to do a good job for their pupils, the second because financial incompetence may mean the sack. It need not matter which interest is uppermost. In either case, heads have reason to respond to market pressures that affect their finances. Parents armed with choice and information—better still, with vouchers too—can supply the market pressure, appropriately tuned to educational performance. In practice, as Mr Le Grand's review of the evidence shows, it seems to work.

So, he argues, might a range of other policies, likewise framed with quasi-markets in mind: greater use of tax hypothecation (earmarking), for instance, or “demogrants” (publicly financed grants of capital to young people) of the kind that Britain's Labour government has announced.

Moral uplift
Sceptics will nonetheless feel that there is something morally diminishing about self-interest—that such a motive erodes trust and the public-service ethos. It follows from Mr Le Grand's arguments that this can sometimes be true, but also that it need not be. With care, policies that recognise self-interest can reinforce the power of altruism (as when a small payment calls forth an increase in supply); and it is desirable in itself to attack that part of the public-service ethos that treats recipients as mere pawns.

The book ends by drawing attention to the classical-liberal tradition that makes an even larger claim. Markets can be not only empowering, efficient and equitable; not only moral in the sense that they can reinforce altruism; but they may also civilise people's behaviour towards one another. As Montesquieu put it: “commerce...polishes and softens barbarian ways.” Unlikely, you say? Read Mr Le Grand's splendid book, which adduces some intriguing modern evidence in support of this idea too.

*Published by Oxford University Press

Copyright The Economist, October 30, 2003

Friday, November 07, 2003

Jobs, Jobs, Jobs

Where do they come from? The jobs fairy, of course! Actually they are created and destroyed all of the time in a healthy economy. The relative rate of creation and destruction changes depending on many factors. This article from today's New York Times is so good, I'm posting the whole thing.



--------------------------------------------------------------------------------

November 7, 2003
OP-ED CONTRIBUTOR
The Great Job Machine
By W. MICHAEL COX and RICHARD ALM

ALLAS

Apparently unconvinced by last week's eye-popping growth figures, economic pessimists remain fixated on the labor market. Today's release of the Labor Department's latest employment figures, we are told, will give a true picture of the pace of economic recovery.

But the monthly statistics, while relevant within the larger context of all economic indicators, don't tell the whole story of what is happening with Americans' jobs. Focusing on net employment gains or losses misses the real show, the long-running drama that drives the economy forward.

While it may seem that little progress is being made on the jobs front, beneath the surface the economy is doing what it's done for decades: orchestrating a relentless and enormous recycling of jobs and workers.

Large-scale upheaval in jobs is part of the economy; the impetus for it comes from technology, changing trading patterns and shifting consumer demand. History tells us that the result will be even more jobs, greater productivity and higher incomes for American workers in general.

New Bureau of Labor Statistics data covering the past decade show that job losses seem as common as sport utility vehicles on the highways. Annual job loss ranged from a low of 27 million in 1993 to a high of 35.4 million in 2001. Even in 2000, when the unemployment rate hit its lowest point of the 1990's expansion, 33 million jobs were eliminated.

The flip side is that, according to the labor bureau's figures, annual job gains ranged from 29.6 million in 1993 to 35.6 million in 1999. Day in and day out, workers quit their jobs or get fired, then move on to new positions. Companies start up, fail, downsize, upsize and fill the vacancies of those who left. It is workers' migration to new and existing jobs that keeps the country from sinking into some Depression-like swamp.

Yes, this disruption can be very hard on some workers who lose their employment and have trouble adapting. But in the larger sense, the turmoil in the labor market is vital to economic progress. A good part of the turnover takes place in a handful of industries, like restaurants and retailing, but to greater or lesser extent the churning grinds on across the board, in bad times and good. Tallies of net jobs lost or gained capture only a fraction of the flux in the job market. As this plays out, most workers end up better off.

Societies grow richer when new products emerge that better meet consumers' needs, and when producers adopt new technologies that reduce costs by making workers more productive. In a dynamic, innovative economy, these forces unleash waves upon waves of change. Some industries and companies prosper while others wither. Some companies find themselves with too many workers while others struggle with too few. A free-enterprise system responds by moving resources — in this case workers — to where they're more valuable.

For example, e-mail, word processors, answering machines and other modern office technologies are cutting jobs for secretaries but increasing the ranks of programmers. The Internet opened jobs for hundreds of thousands of Webmasters, an occupation that didn't exist as recently as 1990. Digital cameras translate to fewer photo clerks.

A century ago, 40 of every 100 Americans worked on farms to feed a nation of 90 million. Today, after one of history's most brutal downsizings, it takes just two agricultural workers out of 100 workers to supply an abundance of food to a nation more than three times as large. Suppose we'd kept 40 percent of our labor on the farm. Absurd, yes, but if we had, we wouldn't have had enough workers to produce the new homes, computers, movies, medicines and the myriad other goods and services of our modern economy.

Likewise, the telecommunications industry employed 421,000 switchboard operators in 1970, when Americans made 9.8 billion long-distance calls. Thanks to advances in switching technology, telecommunications companies have reduced the number of operators to 78,000, but consumers ring up 98 billion calls. Let's face it: Americans are better off with more efficient long-distance service. To handle today's volume of calls with 1970's technology, telephone companies would need 4.2 million operators, or 3 percent of the labor force. Without the productivity gains, a long-distance call would probably cost 40 times what it now does.

Microeconomic failure is not macroeconomic failure. Quite the opposite, "failure" is the way the macro economy transfers resources to where they belong. It is the paradox of progress: a society can't reap the rewards of economic progress without accepting the constant change in work that comes with it. Efforts to soften the blows, by devising policies or laws to preserve jobs or protect industries, will lead to stagnation and decline, the biggest threat to American workers.

Job losses for farm hands and telephone operators came so long ago that they don't sting anymore. Today we see the benefits clearly and forget the costs. That's harder to do in the short term — it rightly distresses us to see newspaper photographs of laid-off industrial workers. But these are the economic forces that raise living standards.

Since 1980, Americans have filed 106 million initial claims for unemployment benefits, each representing a lost job. Facing unemployment and rebuilding a life can be hard on families, but the United States today is better off for allowing it to happen. Even with the net decline in jobs over the past three years, during the past decade total United States employment has risen to 130 million from 91 million since 1980, a net gain of nearly 40 million jobs. Productivity, measured by output per worker, increased a staggering 56.2 percent.

Some people tend to forget this. The almost daily drumbeat of reports and "expert commentary" about a so-called jobless recovery prompts the question, "What's gone wrong with the labor market?"

The surprising answer: nothing.

Job growth will come, as it always has in the past. The economy, meanwhile, is as busy as ever in shifting labor from one use to another to make the country richer and more productive.


W. Michael Cox, chief economist of the Federal Reserve Bank of Dallas, and Richard Alm are co-authors of "Myths of Rich and Poor."



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Wednesday, November 05, 2003

On Youth Suffrage

Great idea! Parental proxy may be fine, but I'd turn it over to the kids no later than age 16. If you can drive and work, you should be able to vote.

A Good Evening with Benj

Benj is here for business at Agile's HQ in San Jose. He came by the house for dinner and a pleasant evening of delicious pot roast and veggies, excellent hacky, and good conversations.

So, Bret old pal, have you made any plans for the next GG Convention? Any ideas you want to bounce off of us?

A Moment of Appreciation

Bret and Howie (and Honey Bee, just a little bit), thanks for so many great thoughts, comments, and ideas these past several weeks. Bret, I like the observation about journalistic pessimism after World War II, and, Howie, whether or not I ultimately agree with the final argument laid out by Hayek in "The Fatal Conceit," I'm enjoying the historical context and logical thread immensely. Obviously, the blog has filled some need that I didn't even know was there.

Direct and Universal Democracy?

From the Straits Times (Asia):
The one-man-one-vote system could be modified in Germany to give parents an additional vote for their children if some leading German MPs have their way.

The proposal to give parents a proxy vote for their children to counter the rising power of the elderly lobby is similar to an idea mooted by Singapore's Senior Minister Lee Kuan Yew in the early 1990s, but which was never taken up.

Concerned that politicians would be increasingly beholden to the demands of the rapidly swelling ranks of the retired, some Germans have taken the idea of universal suffrage to its logical conclusion.

They want children to have the right to vote to counter-balance the fast ageing electorate that is resisting cuts to generous benefits.

Forty-seven MPs are supporting a cross-party motion that calls for the right to vote from birth.

The motion asks the government to amend the Constitution so that parents get a proxy vote for each child under 18.
Clearly my thinking is nowhere near radical enough on the subject of direct democracy. I wasn't thinking that children should vote too.

Tuesday, November 04, 2003

American Are Losing the Victory in Europe (Part II)

Apparently, the Life Magazine articles from 1946 were for real. In addition, I've discovered a couple of others.

From the Saturday Evening Post, January 26, 1946, "How We Botched the German Occupation". The article states "No wonder so many Americans are asking, 'What are we doing in Germany?'"

The 1947 issue of Foreign Affairs, "Alternatives for Germany" states "The defeat of Nazism has removed one of the obstacles to the democratization of Germany; but it has not created a democratic Germany. Nor is there much basis for the belief that democracy will develop in Germany under present conditions of defeat, hunger, idleness and despair."

It's striking how familiar these articles seem. It's almost as if today's journalists just looked up these articles and rewrote them for the Iraq occupation. Perhaps things really are going badly in Iraq, but, as with Germany, I don't think we'll really know for quite a few years or even decades.

Sunday, November 02, 2003

New Science Discovery

A major research institution has recently announced the discovery of the heaviest chemical element yet known to science. The new element has been tentatively named "Governmentium". Governmentium has one neutron, 12 assistant neutrons, 75 deputy neutrons, and 11 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected as it impedes every reaction with which it comes into contact. A minute amount of Governmentium causes one reaction to take over four days to complete when it would normally take less than a second. Governmentium has a normal half-life of three years; it does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes. This characteristic of moron-promotion leads some scientists to speculate that Governmentium is formed whenever morons reach a certain quantity in concentration. This hypothetical quantity is referred to as "Critical Morass". You will know it when you see it.

(from Andrew Sullivan).

Saturday, November 01, 2003

Protecting the Commons

One thing that keeps me from even claiming to be a libertarian is that I'm very skeptical that certain types of commons can be protected without government regulation. One example of such a common resource is air. Therefore, at least for the time being, I accept government regulation of the air, and I accept the loss of freedom, the growth of bureaucracy (the EPA), and the cost in taxes and lost productivity associated with it. It's unfortunate that we have to endure so many costs to have clean air, but having clean air is still worth it to me.

However, I think commons should be privatized wherever feasible, and regulation of the remaining commons should be pushed down to as localized level as possible.

Slavery Versus Freedom

During the period immediately preceding the civil war, southern slaves were better off than their northern free counterparts by every physical measure. For example, the slaves were taller, heavier, had more daily calories to eat, had a longer life-expectancy, and had higher birth rates. This makes sense in a perverse sort of way, since slaves where "property" and their owners invested in their property to maximize utility. The northern, free blacks had nobody investing in them.

Of course, even though the southern slaves were physically better off and more comfortable, none of the northern blacks sold themselves into southern slavery to achieve that comfort. Freedom was worth far more to them than comfort. In fact, according to this:
"What slaves hated most about slavery was not the hard work to which they were subjected (most people in the rural United States expected to engage in hard physical labor), but the lack of control over their lives - their lack of freedom."
While you might think that statement is blisteringly obvious, it's amazing to me how quickly people nowadays are willing to trade their freedom for a little security, whether it be support for the Patriot Act or the FDA, ignoring the evisceration of the Rule of Law, tolerance for bureaucratic meddling and high taxes, or support for soon to be bankrupt programs like Social Security or Medicare.

Apparently, freedom doesn't seem like it's all that important until you don't have it anymore.

Thursday, October 30, 2003

North Korea and the 2nd Amendment

Oh man! Excuse me while I go blow chow after reading this story regarding North Korea:
"Family members of traitors don't even get food rations. They are starved to death, "said the wife of Soon Yong Bum, a fishing boat captain.... Lee, who asked that her given name not be used, was a clerk in a government office who notarized the deaths in her town. She is a pretty young woman, 29, with tumbling hair curling to her shoulders and smooth, flawless skin that belies the hardships she has faced and struggles to explain. "We started seeing cannibalism," she recalled, pausing. "You probably won't understand."

She went on: "When one is very hungry, one can go crazy. One woman in my town killed her 7-month-old baby, and ate the baby with another woman. That woman's son reported them both to the authorities.

"I can't condemn cannibalism. Not that I wanted to eat human meat, but we were so hungry. It was common that people went to a fresh grave and dug up a body to eat meat. I witnessed a woman being questioned for cannibalism. She said it tasted good."

When I read stories such as these, I wish the citizens of North Korea had been armed to the hilt like Americans. Perhaps the horrors there would have happened anyway, but at least it would have been a deterrent

I'm a hypocrite when it comes to guns. I've never owned and can't see ever owning a gun. Yet I think it's very important that citizens be armed in order to avoid genocide/politocide. In my opinion, it's worth the thousands of potential extra gun deaths per year we endure.

Many people say it can't happen here. Contemplate this:
Consider a thought experiment suggested by Professor Robert Cottrol. Let us travel by some means back in time to the year 1900, and there convene a committee of the most exalted thinkers from all over the world. We inform them that within fifty years a great and cultured nation will try to exterminate, with near success, one of its most important ethnic, racial, or religious minorities. We now ask them to forecast who the victim group and the perpetrator nation will be. Would any predict the Holocaust?

It is hard to see why anyone would. Jews as a likely victim group might have been foreseen, though other candidates would surely have ranked higher. As for potential perpetrators, surely the United States would have been high on the list, what with that proverbial culture of guns and violence that Europeans find so quaint, to say nothing of our many minorities--immigrant, indigenous and racial. Germany, the homeland of music, philosophy, mathematics, public sanitation, environmentalism, physical culture, social security, and the rule of law could hardly have figured at all."
In other words, don't think it couldn't happen here. Sure it won't happen tomorrow, but from now to eternity is a long time for things to change for the worse. It could have happened already when we interned Japanese Americans during WWII. If the war had gone particularly badly, and Japan had invaded the mainland, are we sure it wouldn't have happened?

As the article points out, when the Nazis came to power, "first, they forbade Jews from owning guns or any other weapon." In other words, the confiscated the Jews' firearms. And then they slaughtered them. When the authorities come to collect your guns, it's time to go buy your gravestone (though it won't do you much good in a mass grave).

At Least the Debate Will End Eventually

From a Washington Post article about the sun:
"... the sun will be around for billions of years yet. But it'll change. Eventually it will cool, expand and turn into a "red giant" that completely consumes the Earth -- which may finally end the global warming debate." [italics added]

Wednesday, October 29, 2003

Don't Hold Your Breath...

...'cause you might turn blue - regarding seeing my logic on my direct referendum approach. It's turning out to be a lot more work than I originally envisioned to work through all the details and to read up on what's already been done. It's easily 200 hours of work and at the 1 or 2 hours a week rate that I'm contemplating it - well, you do the math.

Nonetheless, I'll post some stuff I encounter on the subject. For example, this article describes some issues and mechanisms for a national referendum. The approach is interesting, though, being an experimentalist I wouldn't even vaguely consider doing anything like this at a national level until far, far more experimentation is done at local and state levels.

Also, as I get a little farther along I can post some outlines of my logic for discussion. But I'm not there yet.