Happy Thanksgiving!

Spontaneous order plus for this day.

Another economic lesson.

Revisiting this version.

Everyday Economics - The Children's Laundry

This story is one of incremental policy change and evolutionary optimization of the extended order. This is the story of unintended and unforeseen consequences. This is the story of capitalism versus socialism. This is the story of incentives, both conscious and unconscious.

This is the story of my children's laundry.

We have two daughters who, in the past, generated a truly impressive amount of dirty laundry. As an example, on a not untypical day, the younger daughter would change from pajamas to an outfit after waking up and getting out of bed, then change into soccer clothes for soccer practice. After soccer, she would come home, take a shower and then lounge about in another pair of pajamas for a while, and then change into yet another outfit to go out to dinner in. Finally, she would change back to another fresh pair of pajamas for bed. Our daughters would manage to sneak all of these clothes into the dirty laundry hamper, usually after being worn just once.

Oh, and did I mention towels? It sure is nice to have a fresh towel for every bath, isn't it? Especially if the towels magically appear clean, dry, and folded whenever they're needed. After all, there was no cost of generating dirty clothes or towels for the children.

Up until about six months ago, my wife did the vast majority of the laundry, including washing, drying, folding, and putting away. My wife implored the children to generate less dirty laundry, trying to appeal to their noble natures that they should help her, even trying to get them to be good world citizens by not wasting energy and water for cleaning more dirty clothes than necessary. However, the amount of laundry kept increasing. The washer and dryer were operating several hours per day. It was driving my wife crazy and I was beginning to fear for her mental health.

You may wonder, in this age of gender equality, why was my wife was doing the laundry instead of me? That's because my wife has a plethora of incredibly complex and non-obvious (to me) rules about how laundry ought to be done that I can never seem to remember and/or get right. Certain clothes aren't supposed to be washed with other clothes. Certain clothes are to be pulled out of the dryer after certain numbers of hours (or was that minutes?). All clothes are to be removed from the dryer as soon as the dryer cycle is finished. Things like that.

I, on the other hand, just stuff any old pile of dirty clothes into the washer and then the dryer, wait until they are all completely done drying, and then, usually within a day or two, remove the clothes from the dryer and work towards getting them folded. Granted, the clothes are a little more wrinkly than when my wife does the laundry and my shirts and underwear that used to be white now have a pinkish, bluish, greenish, brownish, grayish tinge, but it doesn't bother me and I don't understand why it bothers my wife. But it did bother her so she wouldn't let me touch the laundry. Heck, she wouldn't even let the maids touch the laundry!

However, I insisted on taking over the laundry. I decided to exert my authority and I said, "I'm the man of the house and I'm going to do the laundry!" Or something like that.

So I started doing laundry.

Last century saw socialism versus capitalism experiments on a massive scale and at least the extreme versions of socialism did quite poorly. However, there are typically gazillions of tiny socialism versus capitalism experiments happening across the world each and every moment. These experiments take shape in the realm of family dynamics.

My wife's approach to laundry was basically socialism. From each according to her abilities, to each according to their needs. My wife was, according to her, the only person with the ability to wash the clothes and my children feigned incompetence for all aspects of the laundry process - especially the folding and putting away part of the process. So therefore, under the rules of socialism, my wife ended up doing it all.

Just as my wife's approach was basically socialism, my approach to the whole problem is more like capitalism. I wash and dry my children's clothes, but I don't fold them. Instead, I leave them in the basket and tell the children to fold and put away their own clothes. They were a little slow at first to get to it, but once they realized that their clothes were going to just sit there forever, and as they started to consistently run out of stuff to wear, they started folding their clothes when asked.

And lo and behold - the number of loads of dirty laundry per week plummeted! Amazingly, the children, of their own volition, started avoiding changing clothes multiple times per day, started re-using outfits and pajamas, and kept clothes off of the floor so they'd stay clean longer. Just because they don't like folding clothes!

Incentives are an amazing thing!

I doubt the change in behavior was conscious on their part. I'm confident that they never really thought it through. I think that over time they subconsciously made the association that every bit of laundry they put in the hamper became a bit of laundry they had to fold. And that every time they pulled out a new outfit instead of wearing the one they left draped on a chair became a bit of laundry that ended up in the hamper. It was all an incremental, evolutionary and unconscious optimization.

This result was also completely unforeseen by me. I was surprised as could be. Indeed, it was only because of the stunningly obvious reduction in laundry that I even noticed.

Remember, my only goal was to relieve my wife of a hassle. It takes me almost no time to load the washer and dryer. I really don't care how many loads I do. So my wife was freed from laundry slavery and I didn't mind my part so I didn't think it through beyond that point.

Unintended and unforeseen consequences are often negative, but not always. In this case, they were extremely positive. Not only did we help save the planet (and some hard earned money) by reducing the number of loads of laundry and the resources required to do them, but my children have learned to be responsible citizens of the household and have developed good habits.

This is yet another example of incremental improvements that are being continuously made by people everywhere when not hampered by outside interference that move civilization forward.

The Paradox of Thrift

Are you feeling a bit poorer right now? Did your portfolio get a haircut lately (or a massive defoliation from head to toe)? Does the future suddenly not look as rosy to you? Are you thinking of saving more in the coming months and years (and centuries) to try and make up for recent losses?

Yeah, me too. Join the crowd.

Unfortunately, savings is inherently selfish. It's only good for the saver, not for the economy as a whole. Even worse, in a recession due to weak demand, the more we try to save in aggregate, the less we'll all end up saving. This is known as the Paradox of Thrift (or Paradox of Saving):

[It] is a paradox of economics propounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population. One can argue that if everyone saves, then there is a decrease in consumption which leads to a fall in aggregate demand and thus leads to a fall in economic growth.

The extreme case is easy to see. If we all decide to buy and consume absolutely nothing at all (i.e., save everything we make), then there would be no reason to produce anything, therefore no reason for employers to employ and pay anybody, and therefore no one would have a job or any money to save. We'd all ending up starving in the dirt.

Applying The Paradox of Thrift to the current situation, Bob McTeer, who was the President of the Federal Reserve Bank of Dallas, writes:

The problem for the economy is this: consumption makes up about 70 percent of total spending, and consumption has been supporting the economy for years even though the personal saving rate is close to zero. The reason is that individual consumers who have experienced capital gains in their homes and in their stock or mutual fund portfolios (including those in their pension funds, 401Ks, IRAs, and the like) have thought of those capital gains as saving and thus have been willing to consume virtually all of their current income. (This is legit for individuals, but not for the nation as a whole since resources aren't being made available by capital gains.)

His conclusion (which I agree with), isn't a happy one:

I've recently heard economists say that, if saving increases, it will reduce consumption; but they imply that the result will be just a reduced growth rate. Perhaps. However, if saving increases on a broad scale, as it should, based on individual circumstances, the outcome could be a severe recession. [...]

I hope I'm wrong, but this is not just a curiosity. Consumer spending is key to a recovery from the recession. A sharp decline in consumer spending would only make the recession worse even though-individually-it is the right thing to do. We are in a pickle.

Apparently, he doesn't like pickles.

So if you really want to help the country, don't save! Instead, consume till you drop!

Reactive Versus Predictive

Conservatives and Republicans have been relatively calm about Obama's victory. Numerous conservative pundits have called for measured responses. For example, Pajamas Media's NeoNeocon advises:

But I suggest that everyone stand back, take a deep breath, and wait. Wait, and observe. ... The goal of each of us should be to react only to evidence, not fear.

Unfortunately, some of us are not in a position to just wait, observe, and react. Those of us who are attempting to build companies actually need to do some predictin' along with our reactin'. We don't have the luxury of only reacting to events as they unfold.

We've got to guess what sort of capital will be available as we grow. We've got to foresee new and onerous regulations (like the devastating Sarbanes-Oxley). We have to forecast demand for our goods and services.

The less we can do that, the more risk there is in every decision. And there's a lot of risk and guess work in the best of situations.

This is not the best of situations. And I'm not even talking about the financial fiasco, credit crunch, market meltdown, or whatever.

Obama won the election as a blank slate. That means I have no idea what he's going to do. Is he really going to raise tax rates for the "rich"? Is he really going to increase the capital gains rates? Is he really going to spend (literally) untold sums on massive new government programs requiring huge government borrowing?

If so, I'm screwed. Plain and simple. Because while leviathan companies like IBM, GE, Microsoft, etc. might be somewhat inconvenienced by higher real costs of financing, small companies like mine, at the margin, are the first to lose access to capital. Only the rich invest in speculative startups like mine. It's actually illegal for non-rich people to invest (or, more accurately, illegal for me to knowingly accept investments from the non-rich). So if the rich decide that, due to taxes, they're better off with tax-free municipal bonds instead of riskier, speculative investments, I'm out-of-luck. So are my suppliers, my employees, their families, etc.

Even worse (or at least as bad), I have no choice but to assume the worst, because I have no idea what Obama and Congress are going to do. Since many of the decisions that I need to make are long term, it's not even good enough to guess what's going to happen next year. I need to have an idea of the tax and regulation trends for the next three to five years.

I guess for people who have steady jobs, it is possible just to sit back and react to whatever comes like NeoNeocon suggests. But for those of us trying to build viable companies, that just won't work.

High Finance

The financial problems continue to be of great interest to me so I'm continuing to investigate it in my slow and plodding manner (hey, it's mostly just a hobby for me these days so it gets a low priority). Someday, I may be able to actually draw some solid conclusions about it with some confidence. I'll be sure to report back when and if that happens.

In the meantime, I grow more and more convinced that the government should have just let the financial institutions fail and then compensated by having the Fed pump liquidity into the system at a much higher rate. Don Luskin's recent National Review article identifies problems so far with the bailout which illustrates just how fiendishly difficult it is for a central agency to plan and execute such things:

When the Fed sets the precedent that it will, on a weekend when normal market processes aren’t available, hand over a troubled bank to a competitor at a price well below its market value—below even its value in bankruptcy—there’s no incentive to remain a shareholder at all. Long-term shareholders, who ought to be incentivized to stick with banks that run into difficulty, instead receive the message that they should flee at the first sign of trouble lest they be wiped out by the “rescue.” Stronger banks, sovereign-wealth funds, and other private investors that might profitably help a troubled bank by investing in it learn instead to wait for trouble to boil over into crisis, at which time the Fed will practically give the bank away on a Sunday night.

What’s worse, speculators get the message that they can push banks over the brink by shorting their stocks and spreading rumors, driving share prices so low that it becomes prohibitively costly to raise new capital—assuming anyone would dare invest new capital—and the Fed or some other regulator then has no choice but to step in and put them out of their misery. Such speculative attacks work on any bank the government deems “systemically important”—the new way of saying “too big to fail.”

The other thing I've noticed while investigating the subject, is that the ratio of profits in the financial industry versus all other industries has been steadily rising. Forty years ago (1967), about $1 in $7 of total profits in the United States was made by a firm in the financial industry. Twenty years ago (1987) it was about $1 in $4. Last year (2007), it was almost $1 in $3.

Both the trend (which is pretty smooth) and the direction are worrying to me. The financial industry is an enabler of production, but doesn't actually produce anything of value itself, so to absorb that much of the entire economy's profit incentive seems like a distortion. There may be perfectly good reasons for the trend. For example, the total profit relative to the global economy has probably not increased as much, and the United States does have an oversized share of the global finance business. But still, bailing out the most profitable sector is a bit tough to swallow.

Amazing contrast

Over at Maggie's Farm

One quote from Obama on the Constitution:

(It )"says what the states can’t do to you. Says what the Federal government can’t do to you, but doesn’t say what the Federal government or State government must do on your behalf, and that hasn’t shifted and one of the, I think, tragedies of the civil rights movement was, um, because the civil rights movement became so court focused I think there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalition of powers through which you bring about redistributive change. In some ways we still suffer from that.”

The community organizing? Are you joking? More at Surber. I do not think that he understands the concept of freedom at all. That concerns me. I think the Constitution is quite clear about the role, and mainly the limits of the Federal government. They knew all about power-seeking. It's one of the things that makes us unique.

OJ presents this from Bill Kristol and the enduring Reagan Revolution:

It's interesting that Barack Obama keeps talking about spreading the wealth, and yet sometimes he comes across as an elitist.

He is very much a product of Harvard Law School…and that's fine. But I do think he believes that if he gets the really smart guys in a room in Washington or New York, they can sort of retool the American economy. I don't think he has that fundamental, I would call it a Hayekian belief—after Friedrich Hayek, the great Austrian economist—in the limits of central planning, the limits of very smart people's abilities to figure things out. I do think Obama is instinctively very much a government-knows-best guy.

I can't help but contrast the Obama view with that of Maggie Thatcher:

There is a great story of Margaret Thatcher, after being urged to be more moderate at a political meeting, reaching into her handbag for a book which she then held up for all to see. Throwing this book down on the table she proclaimed, "this is what we believe."

The book was Hayek's The Constitution of Liberty. What a truly amazing contrast.

I'm Grateful

I think that the United States is going through a realignment towards socialism right now and that realignment will continue regardless who wins the election tomorrow. I think that's unfortunate for the United States in general and for me in particular.

However, at the same time, I'm thanking my lucky stars that I was born in the right place at the right time. Reagan was elected when I was 21 and I've gotten 28 years of entrepreneur friendly administrations and witnessed an explosion in the technologies that I find interesting. In a few more years my career will probably start to wind down anyway as I get older, so socialism won't have nearly the negative impact on me now as it would have when I was young.

Before the positive career implications of the Reagan tax cuts occurred to me, I was pretty wild and unpredictable. I would work a couple of months as a programmer, then take off several months to party. I motorcycled across the country twice, crewed on a sailboat for many weeks, and generally goofed off.

That was a really fun, if somewhat austere, life. I was in some sense homeless for awhile. Sure, I had places I could go if I so chose. But for weeks on end it was just me and my motorcycle. I had no mailing address, no phone (this was before cell phones), and there was no way to get hold of me. I slept on the ground and I would go swimming in lakes with my clothes on to get me and my clothes clean at the same time (I didn't have anything else to wear so I couldn't go to a laundromat). I lived on less than ten dollars a day. But, I was really, really, really free.

Several of my friends discussed starting companies while we were in college (and some of them actually did so), but I figured that taxes were so high that there didn't seem to be much point in putting in all the effort. I figured it was much better to be free and party.

But with Reagan's tax cuts, the equation changed and my laziness lost out to my greed and I've averaged more than 60 hours of work per week since I was 23. As much as I liked the "free spirit" portion of my life, the working portion of my life has turned out to be significantly more fulfilling - especially when considering the wife and kids thrown in as an added bonus. I haven't made all that much money, but I've had the opportunity to start interesting companies and work with interesting people doing interesting things. I've had every chance that one could hope for and a large part of that chance and opportunity was the low tax, pro-market environment created by Reagan and mostly maintained by his successors (so far).

For that I am grateful. I will vote my conscience tomorrow, but I will fully accept the decision of the majority, and if that involves a change in the direction of the country going forward toward socialism, so be it. I will keep doing the best that I can.