Truuuuust Meeeee!!!

Climate scientists are becoming concerned that the public no longer holds them in high esteem and no longer finds them trustworthy. It seems that the leaked University of East Anglia emails ("Cimategate") showing scientists in a less than stellar light coupled with numerous revelations of mistakes in the IPCC's reports has enraged much of the public, especially in Britain.

As a result, many scientists are trying to reach out to the public in order to restore that trust. An example is Dr. Judith Curry's essay that was posted on several skeptics blogs. Here's an excerpt:

Rebuilding trust with the public on the subject of climate research starts with Ralph Cicerone’s statement “Two aspects need urgent attention: the general practice of science and the personal behaviors of scientists.” Much has been written about the need for greater transparency, reforms to peer review, etc. and I am hopeful that the relevant institutions will respond appropriately. Investigations of misconduct are being conducted at the University of East Anglia and at Penn State. Here I would like to bring up some broader issues that will require substantial reflection by the institutions and also by individual scientists.

Climate research and its institutions have not yet adapted to its high policy relevance. How scientists can most effectively and appropriately engage with the policy process is a topic that has not been adequately discussed ... The interface between science and policy is a muddy issue, but it is very important that scientists have guidance in navigating the potential pitfalls. Improving this situation could help defuse the hostile environment that scientists involved in the public debate have to deal with, and would also help restore the public trust of climate scientists.

The problem is not so much that the scientists are untrustworthy (some are, some aren't just like all other humans), but rather that the system itself is untrustworthy. The interface between science and policy is not "muddy" at all. It's crystal clear that interfaces like that are ripe for corruption and distortion, and not at all amenable to seeking and finding truth.

I decided to write Dr. Curry an email to point that out:

Dear Dr. Curry,

I read your excellent post regarding "Rebuilding Trust" with the public. You are certainly to be commended for being one of the first (and bravest) to attempt to begin a dialogue between an at least somewhat disillusioned public and the Climate Science Community.

However, I believe you've overlooked a critically important question:

Can the overall political-social-scientific system itself be trustworthy when it comes to Climate Science?

If that overall system is untrustworthy, it makes no sense to trust the output of anybody that's part of that system.

From my days of studying Economics and Political Choice Theory, any time you have a mix of big-government, big-advocacy, government funded science, and the possibility of using the output of that science to further big-government and big-advocacy ends, ClimateGate is exactly what you’ll get.

Every time.

It’s not the fault of anybody or even any group. It’s inherent in the system.

I believe that we cannot trust climate scientists because they are part of an utrustworthy system. And there is no way to make the system trustworthy.

Where there is money and power, there is corruption.

Power corrupts. Absolute power corrupts absolutely. (Lord Acton).

You (and many other scientists) may be saints, but unfortunately, we can't trust the system.

Thanks,
Bret

She actually responded:

Bret, thanks for your email. You may be right, but somewhere in there science needs to be science, and the institutions that support science need to do much better job. Not sure how all this will play out, but hopefully reason will play a role somewhere in all this!

If reason plays a role, I suspect she won't like the result.

Post-Normal Science

Climate scientists have not been shown in a particularly favorable light lately. The "Climategate" emails, a number of high-profile mistakes and retractions by the IPCC, and the continued inaccuracy of the predictions of the climate models have shown the climate scientists to be all too fallible, biased, and not particularly trustworthy human beings.

An Oxford philosopher, Jerry Ravitz, has contemplated the special stresses put on the interface between science and the public and policy makers when there is a situation which can be described as "facts uncertain, values in dispute, stakes high and decisions urgent".

He considers it to be a new paradigm and calls it:

"Post-Normal Science, which until now has not really attracted very much attention in the mainstream. I’ve met people who found it an inspiration and liberation, as it enabled them to recognise the deep uncertainties in their scientific work that colleagues wished to ignore. ... We are not saying that this is a desirable, natural or normal state for science.

"We place it by means of a diagram, a quadrant-rainbow with two axes. These are ’systems uncertainties’ and ‘decision stakes’. When both are small, we have ‘applied science’, which must be the vast majority of scientific work in keeping civilisation running. When either is medium, we have ‘professional consultancy’, like the surgeon or consultant engineer. The basic insight of PNS is that there is another zone, where either attribute is large."

Ravitz, as is the wont of many philosophers, tends to use a thousand words to explain a concept where ten would almost do. The other 990 words are used for nuances that are ornately twisted into pretzels and chained together to embroider and frame the concept (this paragraph is my feeble attempt to directly illustrate the sorts of extraneous prose used by philosophers - did I succeed?). As a result, it's very difficult to know exactly what the hell he's trying to say.

But the gist is that under the "decision urgent" criterion, it is permissible - nay necessary! - for scientists to frame the debate in such a manner that the public and policy makers will come to the "correct" conclusion and therefore take the "correct" actions.

It's no wonder to me that Post-Normal Science "has not really attracted very much attention in the mainstream" since it has some rather serious problems, in my opinion. The most glaring is that if we have "facts uncertain", then in general, and with Climate Change in particular, how can we know that we're in a "decision urgent" state? Especially since "decision urgent" is then used to trump truth, honesty, ethics, legality, and all of the other mores and institutions upon which civilization is built. Especially when the "correct" conclusion involves committing staggering levels of resources, remaking civilization, and consigning masses of humanity to poverty. Other than that, hey, I'm an open-minded kinda guy.

Unfortunately, Post-Normal Science has attracted attention in the Climate Science community. Using Ravitz's logic, Stephen Schneider, a Stanford Climatologist wrote:

...we are not just scientists, but human beings as well. And like most people we’d like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climate change. To do that we have to get some broad-based support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have.

While the above statement is fairly old (1989), at this point it's pretty obvious to me that this attitude is pervasive throughout climate science, especially for those scientists who interact with the media, directly or indirectly. But Schneider left out one thing. Not only are the scenarios scary, but remember, the science is settled, especially if it's Post-Normal Science.

The Wisdom of the Swivel-Eyed Loons

James Delingpole gives blog commenters a big compliment:

... without wishing to flatter you [blog commenters] too much, you blog-addicted, foaming-mouthed, swivel-eyed loons – I’ve found the comments sections on blogs to be bastions of wisdom, rough-hewn common sense, wit, and often amazingly well-informed insight. And I don’t just mean on my blogs. What I always find equally heartening is when you look up an article online by, say, Polly Toynbee or some crack-papering fraudster from the Met Office and find its inconsistencies and idiocies being torn to shreds by a readership far more intelligent and on the ball than almost anyone in the liberal commentariat.

And this, I think, is the crux of the matter. The main reason so many left-liberals so loathe and fear the internet is that it is a medium that favours the libertarian right.

I don't think that the internet particularly favours the libertarian right. I think that it favours any group with at least some reasonable arguments that has limited or no access to any other media outlet. Libertarians happen to be one such group.

Since I'm feeling particularly loony today (though perhaps not swivel-eyed), I'll take the compliment whole-heartedly.

Affirmative Action Marriage

The existence of race, or at least the moderately clear delineation between races, is proof that the majority of us are hopelessly racist, and racist where it counts the most. It is one thing to prefer members of your own race when it comes to hiring people, but quite another with far greater impact for racial preferences to come into play when it comes to choosing that special someone to share those lifelong commitments of marriage and raising a family.

If we were all or even mostly all truly colorblind when it comes to love, I would expect that statistically we would see far, far more interracial marriages than we do. Therefore, in the equations of love, race clearly plays a significant role.

Clearly this is wrong, immoral, and a detriment to society. What possible reason is there to give preference to members of your race? All races are equally beautiful, intelligent, compassionate, etc., so there is no possible rational reason to marry someone of your own race.

Since the government already administers affirmative action for employment and education, and since marriage is a legal institution created and supported by the government, and since this proven racism in regards to marriage is clearly irrational and wrong, and since the government has and does get to decide who can marry (gays cannot, siblings cannot, interracial marriage was once illegal but is now legal, etc.) the government has a right - nay a duty! - to correct this egregious wrong.

The solution is obvious. When social security cards are issued, race identifiers are added to the card (and social security database) with the proportion of cards getting marked with each race the same as the proportion of that race in the general population. Then you are legally limited to marry only those people who have the race identified on your social security card.

Then, in a few generations, the problem will be completely solved and we'll have a pleasing continuum of skin color.

Too Big to Fail

I'm an advocate of providing incentives to entities that are "Too Big to Fail" to split up into smaller, independent components that won't endanger the economy or even civilization itself if they happen to fail. The devil's in the details regarding how to do that, but I think it's probably plausible and desirable for private companies.

However, the Federal Government is the 800 pound gorilla (or rather the $3,800,000,000,000 gorilla) in the room when it comes to entities that are "Too Big to Fail". Failure doesn't necessarily mean a short-term catastrophic failure. An entity that becomes increasingly sclerotic and non-functional to point where it parasitically sucks in an enormous vortex of resources from its increasingly beleaguered hosts also becomes a failure at some point.

Since the Government is "Too Big to Fail" (and therefore "Too Big to Exist"), it should be broken up. Since it is so large it should be broken up into numerous entities. Picking a number out-of-the-air, I'd say that breaking it up into 50 entities (or 57 if you're Obama), would be about perfect. Conveniently, we happen to have 50 mostly functioning government entities to which we can transfer responsibilities and authority. Also conveniently, with the possible exception of a few of those States, none of them are "Too Big to Fail". Problem solved.

Wasn't that what our Founders had in mind? Smart dudes.

Hi Mom!

My youngest daughter (10) wrote "Hi Mom!" on her hand this morning. I hope she doesn't get in trouble for it at school.

The Writing's on the Palm

I don't particularly like or dislike Sarah Palin, but I'll have to admit she has comic genius. The Media had a conniption fit and gave widespread coverage regarding her scribbling a few words on her hand (allegedly notes?) during the National Tea Party Convention in Nashville.

Her response? She wrote "Hi Mom" on her palm while campaigning for Rick Perry in Texas. Let's see if the Media gives that one as much coverage. The Media will look foolish whether they do or don't cover it since it has more or less the same level of relevance (i.e. none) as the "notes" at the Tea Party.

These events led one commenter at Gateway Pundit to quip:

Next speaking stop, she will have “John 3:16″ on her hand.

Media goes mad trying to figure out the code; calls for separation of palms and psalm...

Well, you asked for it Mr. President

Every president inherits the consequences of policies and events from their predecessor. Most people know that and remember to cut a new president some slack. Continuing to blame a prior executive for problems 6 or 12 months beyond assuming office is juvenile and unseemly. It depletes any sense of goodwill afforded by the opposition.

Well, there you go again:

The same thing that swept Scott Brown into office swept me into office.

People are angry, and they're frustrated. Not just because of what's happened in the last year or two years, but what's happened over the last eight years.

Surely Just Coincidence

When Obama announced that he would travel to Massachusetts to campaign for Coakley against Scott Brown, her probability of winning the election according to Intrade's prediction markets plunged from 80% to 40% in the approximately 48 hours following the announcement. I'm sure it's just a coincidence. Surely Obama's presence could only help?

Wrongheaded even before the drift

In response to a comment to the previous post, presenting a David Hogberg review of the latest book by Thomas Sowell:

With his new work, Intellectuals and Society, Sowell has finally made good on his 20-year-old promise to write about intellectuals. He has also made good on his threat. Sowell takes aim at the class of people who influence our public debate, institutions, and policy. Few of Sowell’s targets are left standing at the end, and those who are stagger back to their corner, bloody and bruised.

Sowell defines intellectuals as an occupation, as people whose “work begins and ends with ideas.” This includes academics, especially those in the humanities and social sciences, policy wonks, and, to a certain extent, journalists. This distinguishes them from occupations in which the work begins with ideas and ends with the application of ideas. Physicians or engineers usually start with ideas about how to approach their work, but eventually they have to put them into practice by treating patients or constructing bridges.

As a result, intellectuals are free from one of the most rigorous constraints facing other occupations: external standards. An engineer will ultimately be judged on whether the structures he designs hold up, a businessman on whether he makes money, and so on. By contrast, the ultimate test of an intellectual’s ideas is whether other intellectuals “find those ideas interesting, original, persuasive, elegant, or ingenious. There is no external test.”

An intellectual’s reputation, then, depends not on whether his ideas are verifiable but on the plaudits of his fellow intellectuals.

Intellectuals, of course, have expertise — highly specialized knowledge of a particular subject. The problem, according to Sowell, is that they think their superior knowledge in one area means they have superior knowledge in most other areas. Yet knowledge is so vast and dispersed that it is doubtful that any one person has even 1 percent of the knowledge available. Even the brightest intellectuals cannot possibly know all the needs, wants, and preferences of millions of people. Unfortunately, they have considerable incentive to behave as if they do.

Reinforcing these incentives is what Sowell dubs the “Vision of the Anointed.” Intellectuals’ belief in their own superior knowledge and virtue leads to a belief that they are an anointed elite who are qualified to make decisions for the rest of us in order to lead humanity to a better life. Under this vision problems such as poverty, injustice, and war are not due to inherent human weaknesses, but are the products of society’s institutions. Solving those problems requires changing those institutions, which requires changing the ideas behind the institutions. And who is better suited for that task than those whose work begins and ends with ideas?

“There could hardly be a set of incentives and constraints more conducive to getting people of great intellect to say sweeping, reckless or even foolish things,” Sowell states. He warns that if “no one has even 1 percent of the knowledge currently available . . . the imposition from the top down of the notions favored by the elites, convinced of their own superior knowledge and virtue, is a formula for disaster.”

The most telling portions of Intellectuals and Society are the ones in which Sowell chronicles the disasters that occur when intellectuals succeed in getting politicians, judges, and other policymakers to impose their vision on society.

Sowell writes that it “was part of a long-standing assumption among many intellectuals . . . that it is the role of third parties to bring meaning into the lives of the masses.”

Sowell also emphasizes the fact that intellectuals take their beliefs as axiomatic truths rather than hypotheses to be tested.

Since the 1980s, conservatives and libertarians have pushed back to the point that intellectuals’ “overwhelming dominance has been reduced somewhat.” Yet he warns that the intellectuals’ vision is still dominant: “Not since the days of the divine right of kings has there been such a presumption of a right to direct others and constrain their decisions, largely through expanded powers of government.” But now that Sowell has given us a penetrating analysis of that vision, perhaps it will be easier to fight it.

A previous post dealt with the folly of intellectuals presumed divine right.

Drifting Elites

The intellectual elites have always lived in their own bubble of ideas, quite apart from the rest of us. That bubble has been drifting away quite rapidly and looks set to continue to do so.



The above graph, courtesy of Charles Murray, shows political attitudes from the General Social Survey of non-Latino whites ages 30–49 in the survey year. What it shows quite clearly is that while most of the country (at least the white part) is mildly trending towards being more conservative, the "intellectual uppers" are heading off the charts on the liberal end (for more details on the chart visit Murray's post).

This ties in well with a recent New York Times column by David Brooks where he whines that, "Every single idea associated with the educated class has grown more unpopular over the past year." Perhaps that's because the "educated class" (or "intellectual uppers") have ideas that are so far removed from the reality that the rest of us experience that those ideas simply don't make any sense to us commoners anymore.

The Foundation of the Blue State Blues

Some Blue States, like California (my home State), are really hurting. Not only do they face never ending fiscal crises, but people, especially people in their most productive years, are starting to leave these States in droves.

California was once a really great place to live. It had (and still has) great weather, beautiful terrain, and bountiful natural resources.

The typical conservative explanation is that all this wealth attracted leaching liberals who took over the government and taxed and regulated the State from prosperity into its current mess.

There may be a grain of truth to that, but the question is why did everybody else (besides the leaching liberals) let this happen. The answer, in my opinion, is that changes in Federal Tax law deserves a substantial part of the blame.

Let me explain.

From FDR's administration until after Reagan was elected, the top Federal Tax Rates were always above 70% and even exceeded 90% at points. But State Income tax was deductible. During that period, in those States with a preponderance of high income earners, both the earners and the rest of the State could benefit from instituting high State income tax rates for the high income earners and returning part of those taxes as services.

To illustrate, let's consider an example. Let's say your marginal Federal Tax rate is 90%. Then for each dollar the State taxes and receives from you (which you then deduct from your Federal taxable income), your total income tax bill (State plus Federal) rises only 10 cents. The State then provides 15 or 20 cents in services to you, a bit goes to help the poor in your State, and the rest is pocketed by the bureaucrats and lobbyists. Everybody wins! Well, everybody but the poor and middle class in all States who have to pay more to provide the revenue needed by the Federal government.

California leveraged that situation wonderfully well. They built great infrastructure (like the University of California), provided great services and funded fabulous levels of graft and corruption. Everybody assumed this gravy train would run forever.

However, two things happened that ended the free ride fairly abruptly. Federal income taxes were slashed by Reagan and the Alternate Minimum Tax (AMT) scheme was instituted which greatly reduced the ability to deduct State income tax. Suddenly paying State income taxes was a big net negative for the taxpayer. A dollar of revenue to the State was pretty much a dollar out of the pocket of the high income taxpayer.

Suddenly the services to the high income tax payers couldn't possibly make it worth it to pay the tax (that's why high income earners are leaving in droves), the programs for the poor couldn't be lavishly funded, infrastructure couldn't be maintained, and, worst of all, the fabulous levels of graft and corruption to which so many people had become so addicted could only be maintained by massive and unsustainable borrowing. Since graft and corruption are the lifeblood of politicians and lobbyists, the massive and unsustainable borrowing is a given.

This is simply a case of people responding to incentives created beyond their control. Unfortunately, bureaucracies can generally only expand, so it can't really be undone at this point until the Blue States go hopelessly bankrupt. It's a bit like a Roach Motel - or for my State, "Welcome to the Hotel California."

Subjective Warming

Let's say that scientists determined with certainty that pistachio is the best flavor for ice cream. Pistachio ice cream lovers everywhere would no doubt scream, "I told you so!" and many people might switch to eating only pistachio ice cream. Those of us who dislike pistachio ice might be a little skeptical of the settled science, but we probably wouldn't much care and would continue to enjoy other flavors. The pistachio ice cream lovers might then call us skeptics or deniers and look down on us from their moral high ground.

None of this would much matter, unless pistachio ice cream lovers and scientists latched onto politicians (or vice-versa) to have the government ban (or at least tax and regulate) all flavors of ice cream other than pistachio. This clearly crosses an important line since one group is now limiting the subjective choices and opportunities of the second group. Yet nobody was ever stopping anyone from eating pistachio ice cream.

Now substitute "something should be done about global warming" for "pistachio is the best flavor for ice cream". The substitution, while having elements of absurdity, works surprisingly well.

Even if one accepts that global warming is happening with certainty, and even if one accepts that the scientific consensus is that something should be done about it, once that group forces its subjective preference for doing something on the rest of us, a very serious line is crossed.

It's the line of oppression and totalitarianism.

My Fifteen Minutes of Fame

Well, more like two paragraphs (and the bottom picture) in The Economist:

Even pruning can be mechanised. Vision Robotics, a company based in San Diego, has demonstrated a prototype vine-pruning robot. Good pruning requires skill to balance the growth of the vine. The vines also need to be trimmed at certain locations and at precise angles to grow the best grapes for winemaking. The robot is a bit slower than a good human pruner, but it will speed up. It should be able to prune vines at about half the cost of manual labour, says Derek Morikawa, the chief executive of Vision Robotics.

The company is also developing apple- and orange-picking robots with multiple arms. These too rely on building 3-D models of trees and the fruit growing on them. Mr Morikawa thinks the crop-scouting ability of such automated machines will prove highly valuable. Supermarkets, for instance, like uniformity so if they want, say, apples of a certain size and in a particular state of ripeness, a farmer could use the model to identify exactly where such apples are growing.

Vision Robotics is the company I founded about ten (long, long, long) years ago.

I was hoping for The Cover of the Rolling Stone, but hey, a couple of paragraphs on page umpteen gazillion of The Economist is a start. It's certainly a step up from Good Fruit Growers Magazine (I'm not kidding - that's actually the name of a magazine) and the numerous other ag rags that you've never heard of and I can never remember that we've been featured in.

I'm rather hoping this isn't my company's entire 15 minutes of almost fame, but we'll see.

Happy Thanksgiving

My thanks to the free market for delivering my free range turkey:

The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.

Happy Thanksgiving!

Hat Tip: MJ Perry (Carpe Diem)

Hide the Decline

I'm glad I posted my view of the science, economics, politics, and philosophy of Climate Change before the recent email hack of the Climate Research Unit of East Anglia. It enabled me to be a brave contrarian speaking truth to overwhelming consensus (or something like that), whereas now I seem to be just one of the majority skeptics.

I'm, of course, not even vaguely surprised by the revelations found in the emails, code, and data released by the hack. The revelations in and of themselves are not seriously damaging, in my opinion. However, they completely vindicate skeptical climate folk like McIntyre, Lindzen, Svensmark, Spencer, etc. and make it far more likely that people will listen to them now, and in the future. The tide (so to speak) is turning against climate alarmism, and just might be unstoppable.

I sure hope so.

Smart Phones and Internet Radio

Before last week, I'd never really used Internet radio. That's because if I'm working, I find music distracting, and if I'm not working, I don't want to be near a computer.

My new smart phone (Motorola Cliq) has changed all that. I'm pretty amazed by the concept: a free and customizable set of virtual "radio stations" that learn your preferences over time, with no (audio) advertising, and can be used with headphones or a home or car stereo system. I love it. It's the best thing since sliced bread.

I'm finding it takes about 100 songs to train a station (by hitting the "love" and "ban" buttons appropriately when various songs that you like or don't like play) and after that I end up liking 80 to 90% of the songs it serves up which is certainly better than standard radio (which I rarely listen to) and even most albums that I own.

The business model is pretty cool too. As the song plays, the album and other identifying information is displayed along with an unobtrusive ad at the top. In addition, if you hear a song you'd like to buy, you just hit the "buy" button and it's automatically added to your library (the cost per song is around $1). Unlike iPods, which need to be connected to a computer to download music, it happens automatically.

I realize that iPhone and other smart phone owners probably are mostly all using the Internet radio feature already, but I'm a slow adopter of technology, so it takes me a while to catch on.

House health care bill and jobs

William Jacobson had some key observations on his Legal Insurrection blog:

The message of the bill is that whatever you do, if you want to grow your business without paying the health care tax, do not add employees.

Obama does not understand these provisions. Obama gave a speech this morning in which he stated that these provisions are directed at small businesses operating on thin margins. But these provisions have nothing to do with profit margins. This is a wage-based tax.

Obama does not understand the difference between profit margins and wages. This is exactly what you would expect from someone who always has been on the receiving end of wages, and never had to meet a payroll. Wages are not profits and have nothing to do with the success of a business. Just ask the auto companies.

I don't think Obama and the other Democrats are lying about this aspect of the health care tax. They truly do not understand how the private economy works. In their blissful ignorance they are designing job-killings provisions which they do not understand.

Job losses at large establishments have slowed considerably as monetary policy has helped stem panic. Small businesses are still shedding jobs at a high rate or are failing to even form. When we see net job creation some time next year it would help if a bill like this was not in prospect. Otherwise it will be a nearly jobless recovery for longer than many people expect. It might be so anyway if regime uncertainty doesn't abate.

Betsy McCaughey explains several passages of the bill under categories such as:

What the government will require you to do

Eviscerating Medicare

Questionable Priorities

I think this article gives an appropriate overall characterization of the bill as well as the relevant accounting used for scoring versus a more realistic tally:

The bill is instead a breathtaking display of illiberal ambition, intended to make the middle class more dependent on government through the umbilical cord of "universal health care." It creates a vast new entitlement, financed by European levels of taxation on business and individuals. The 20% corner of Medicare open to private competition is slashed, while fiscally strapped states are saddled with new Medicaid burdens. The insurance industry will have to vet every policy with Washington, which will regulate who it must cover, what it can offer, and how much it can charge.
...

Perhaps the most unsurprising news in this drama was the collapse of the Blue Dog "deficit hawks." Enough of them always cave in the end to give Mrs. Pelosi her way. It's nonetheless worth noting the surrender of that most vocal scourge of deficits, Tennessee's Jim Cooper, who voted aye on grounds that the bill can be improved in the Senate.

But Max Baucus's Finance Committee bill includes a similar gimmick of making the numbers look good by using 10 years of new taxes to finance only seven years of spending (six in the House). The deficits explode in the second decade and beyond in both bills.

The House also contains a new government long-term insurance program that starts collecting premiums in 2011 but doesn't starting paying benefits until 2016 and then runs out of money in 2029. North Dakota Democrat Kent Conrad called it "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of" in an interview with the Washington Post in late October. Mr. Cooper has with a single vote made his entire career irrelevant.

I saw an interview of Senator Bob Corker in which he said that a Senate Democrat agreed that if Republicans had proposed this exact same bill, Democrats would all vote it down. Hopefully a bill this bad simply dies in the Senate. Then they can start over again.

Imagine that - creating a distraction

Bruce McQuain at Q and O points to an Arnold Kling post

I think there is something even more sinister going on. I interpret the pay czar in terms of Murray Edelman's symbolic uses of politics. The idea is to focus on a symbol of the cause of taxpayer losses--bonuses of the executives of bailed out firms--in order to distract attention from the substance. The substantive issue is the extent to which the losses were caused by political actions and the extent to which they are concentrated at Freddie Mac and Fannie Mae.

The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.

Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.

Incidentally, the debate over the "public option" in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.

The aggressive government push for expanded home ownership and affordable housing in the form of easy credit made a huge contribution to the mess:

Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market..

Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

More F&F reform is needed:

All the debate of the last several weeks on changes to the financial regulatory system has omitted any discussion over reforming the entities at the center of the housing bubble and financial meltdown: Fannie Mae and Freddie Mac.

Total losses from the bailout of Fannie and Freddie are likely to exceed $250 billion — as much as the cost to the taxpayer of all bank failures in American history combined.

Note: F & F bailout loss estimates now exceed $350 billion.

Fannie and Freddie infected capital markets and spread through every sector of the banking system. Before the bursting of the housing bubble, holdings of government-sponsored enterprise (GSE) securities — bonds and mortgage-backed securities as well as preferred stock — constituted more than 150% of core capital for insured banks.

It was not only the commercial banking system that was stuffed with toxic GSE holdings; it was also many of the investment banks. More than 50% of Maiden Lane One, the toxic assets that the Federal Reserve guaranteed in order to persuade JPMorgan to buy Bear Stearns, are GSE securities.

Additionally, more than 40% of money market mutual fund holdings were in the form of GSE securities.

At the height of the bubble, Fannie and Freddie purchased more than 40% of the private-label subprime mortgage-backed securities. Between the two of them, they were the largest single source of liquidity for the subprime market.

Interestingly enough, the very vintages of subprime loans that performed the worst — 2006 and 2007 — were the years in which Fannie and Freddie entered the market in force.

With their massive leverage, Fannie and Freddie were levered more than 100-to-1 — a disaster waiting to happen.

Why then were foreign investors so willing to trust their money to Fannie and Freddie? Quite simply, they were assured by U.S. Treasury officials that their losses would be covered.

Ultimately, Fannie and Freddie were not bailed out in order to save our housing market; they were bailed out in order to protect the Chinese Central Bank from taking losses. Without the implicit federal guarantee of Fannie and Freddie, trillions of dollars of global capital flow would not have been funneled into the U.S. subprime mortgage market.

Some might argue that the problem with Fannie and Freddie was fixed with last year's regulatory reform bill. That bill created a new regulator, one with increased supervisory powers, including the ability to wind down a GSE, and independence from the congressional appropriations process, letting the regulator raise additional funding.

Nothing could be further from the truth. As one of the drafters and negotiators for that bill while on the staff of the Senate Banking Committee, I can say that there was a shared awareness by all parties that the bill was insufficient to prevent the failure of Fannie and Freddie.

It was not the best bill that could be crafted. It was the best bill that could pass, given the continued strength of Fannie and Freddie apologists in Congress.

Most of the worst economic and financial crises in American history have involved real estate. Such is likely to be the case in the future. Reform of Fannie and Freddie is imperative so that American taxpayers will not be on the hook for hundreds of billions of dollars for the next real estate bubble.

There were many contributions by private players but there were also other very large contributions from governmental players.

The Burden of Taxes

A common belief is that levying additional income taxes on those with high incomes has negligible adverse impacts on the poor. In this post, for a hypothetical economy, I will show why this isn't true. In future posts, I will discuss how this result for the hypothetical economy still has at least some relevance to the real world.

Assume the following:

1. All people have exactly equal talent and capabilities.
2. All markets are perfectly efficient and fair.
3. Return on Investment (ROI) for all occupations is exactly equal, where the definition of "Investment" is non-standard and includes the following:

a. Cost (Money & Opportunity Cost) of Education.
b. Difficulty/Stress/Unpleasantness of the job.
c. Negative of the Satisfaction produced by the job.
d. Other similar considerations.

Note that (b), (c) and (d) have a strong subjective component and even (a) has a significant subjective component via an individualized Discount Rate (a rate of interest that relates the value of future income to current income to a given individual). Because of the differing "Investments" required for various occupations, there would be significant differences in compensation for those occupations since the ROI for all occupations is constrained to be equal.

This means that only those occupations that provide adequate value to justify the ROI will exists. In other words, if an occupation requires a great deal of "Investment" and therefore requires a high wage according to the ROI constraint, but nobody is willing to pay for the goods or services that this occupation would provide at that wage level, the occupation won't exist.

The ROI is an after-tax ROI. In this hypothetical world, nobody cares what their compensation is before taxes and instead they focus on their after tax compensation.

Consider the effect of increasing taxes on a given occupation while leaving the taxes on all other occupations the same. It doesn't matter if it's an occupation with high or low compensation, the effect is the same. If everybody with the occupation stayed in it, the after tax ROI for that occupation would be reduced. However, this violates the ROI constraint, so enough people would leave this occupation and do something else until the supply of people working at this occupation is reduced enough so that supply and demand balance to drive the after tax ROI for this occupation back up to nearly its original level.

Since people have left this occupation and are now competing in other occupations, all occupations' ROIs are slightly reduced (including this occupation with its additional tax burden). Taxes and regulation essentially have the effect of reducing our ROI for the work we do.

That's the first interesting effect. All ROIs are reduced by the same amount. Any attempt at making income taxes progressive is completely thwarted. The ROIs for the occupations with the highest and lowest compensations remain equal after the tax increase.

Since the occupation with the new tax burden has similar after tax compensation, the pre-tax compensation must be higher. That means that the production of goods and services dependent on this occupation incur greater cost, which implies that everybody will end up paying a higher prices for these goods and services. Again, any attempt at making income taxes progressive is lost, since everybody, rich or poor, will pay the same increased cost for these goods and services.

In this hypothetical economy, it is impossible for income taxes, regardless how progressive by design, to actually be progressive in effect. Since the poor feel the burden of reduced ROI and higher prices most acutely, the poor feel the burden of higher taxes more than anyone else.

In future posts I'll argue why the real economy bears significant resemblance to this hypothetical economy in regards to taxation.