Slim to none

That's what posting will be like here for the next three weeks. My wife and I are taking a trip to South-East Asia, and for some reason I don't like the idea of scheduling entries to be posted automatically.

Here is a link to a summary of an interesting paper about the strange political economy of Singapore.

Non sequitur of the month: pure and simple

This one is also communicated personally. In a conversation I've had with a friend I argued it's silly to avoid travelling to Middle East if the reason for it is fear of being a victim of a terrorist attack because the probability of that happening to you is negligibly low. His answer was: "Yeah, but those statistics mean a lot less if it's you who's the victim, don't they?"

Some non sequiturs are really other fallacies in disguise. Not this one; this is a non sequitur in its purest. There isn't much you can say in ways of explaining what is wrong with it except it just does not follow.

Kindness is a luxury good

I've previously classified safety as such, but I think kindness belongs to this category as well. (By "kindness" here I mean being good to strangers; love towards family members and close friends is universal.) When times are very bad, man is wolf to man (the great novel Blindness drives this point home extremely powerfully). And conversely: on average, the richer a society is, the kinder its members are towards one another. I can't prove the latter, but am convinced that it's universally true.

Oh boy

Ohhhhh boy.

Hate the player, hate the game

Note: this post will make a lot more sense to you if you're familiar with the HBO series The Wire.

Social equilibrium is a very powerful force. It's also often underestimated. We think that just because the rules aren't written down anywhere, or enforced by formal contract, we can ignore them or change them arbitrarily. Not the case. Life is really just a series of games, each with its own rules and equilibrium behaviors; and if you behave differently, there's a price to be paid. You don't set the rules, and you're powerless to change them.

If you enter a highly competitive market, for example, you will soon discover how little freedom you really have. Open a grocery store in a large city, and you'll see that you can't even choose prices you charge for your own merchandise, or wages you pay your own employees. There's an equilibrium price for what you sell; charge too much or too little, and you'll go out of business.

The Wire, which is not only the best TV show but one of the best works of art I've ever seen, captures this observation in a very powerful way. It shows people being thrown around by forces larger than they are. But the show is much more insightful than just that. There are of course some rules of life that will never change, or at least not in foreseeable future: people want status, money and sex; there's pressure for supply and demand to balance each other, etc. We all know this; it's trivial. But the show also makes another point which is often overlooked: institutions shape culture. There are certain equilibrium behaviors required by the rules of the drug trade; you can't change what those behaviors are--if you want to be successful, you must follow them. But if the rules of the game were changed, so would the behavior of its participants. The problem is that the participants themselves cannot change those rules--change has to come from outside.

Illegal drug trade (or, as it's called by its participants, "The Game") is by and large a game of status. Gangs and gang leaders fight over territory and prestige; profits are only secondary. That's the way The Game has always been, as played by its old school participants (like Avon Barksdale and Marlo Stanfield). Then, new participants show up (such as Stringer Bell or Proposition Joe) and try to turn drug trade into a game of profits; a business. Stringer Bell says "TVs, cars, CDs, all this other shit gets bought and sold without n****s shooting each other. I don't see why what we're doing should be any different." They try to eliminate fights over turf and concentrate on improving quality of the product they sell and overall efficiency instead.

They can't win. There actually is a good reason why people shoot each other over drug transactions but not over "other shit" that gets bought and sold: drug trade is illegal. The most important implication of this is that there's no guaranteed non-violent way of enforcing contracts. If you cheat me on a drug transaction, I can't take you to court; I have to get back at you some other way. Given this, plus the high profit margins, drug trade offers strong incentives to cheat. It attracts people who enjoy cheating and violence for its own sake, like Marlo Stanfield. If it were legal, it would attract people like Proposition Joe, who'd try to improve product and maximize profits instead of the number of corners they own.

This leads to another (though related) point that The Wire makes very skillfully: People have personalities, life has roles to play. The rules of life are such that certain roles have to be played by certain personalities. One person can play more than one role; if Detective McNulty were born on the other side of the tracks, he could easily have become an Omar Little (and vice versa). But if you try to play a role that your personality is not the "equilibrium" for, you'll be forced out of it (just like Stringer Bell was forced out of his role of a drug lord), and someone with the "right" personality will replace you. Unless powers that be change The Game itself.

Below is a clip showing a scene where Omar, a freelance drug thief, kills Savino, who is "muscle" for one of the biggest drug lords, Marlo Stanfield. Marlo's soldiers have just very cruelly killed one of Omar's dearest friends and Omar is trying to find them. Savino tells Omar he was not one of the killers. Omar knows he's telling the truth--but kills him anyway, because if Savino were there he'd have done exactly what the killers did. In other words, Omar is wreaking vengeance not on the person, but on the role that person plays.

Ah the good old days

Here's a graph from Gregory Clark's thoroughly great book A Farewell to Alms:

Rarely do we realize how fortunate we are to have been born now as opposed to just a few hundred years earlier. Ever since income per capita started growing, we simply got accustomed to that fact and took it for granted, as if it were a fact of life. When the Great Depression forced us to experience, just for about a decade, income levels that our parents experienced their entire lives, it felt to us as if the world had ended.

Before 1800, the world was desperately poor; it's obviously hard to compare standards of living across so much time, but the horizontal line y=1 on the graph is an equivalent of about $400 a year today. The world was also stuck in a "Malthusian Trap:" whenever income started rising, population would expand until all the surplus was gone. Technological progress wasn't quick enough to prevent it. In fact, many significant spurs of income growth that occurred in our Malthusian past were due not to innovation but depopulation. For example, the Black Death epidemic of 1348-1350 raised the average standard of living in Europe: as labor became scarce, wages rose to unprecedented levels. But then (by about 1600), population level would return to what it has been before the epidemic, and income started falling again.

Then around 1800 in Europe, something happened. Technological progress started outpacing population growth. No one really knows why it happened then and there. One thing is probably that for income growth to jump-start, a very delicate balance needs to be struck: if population density is too low, technological progress will not accumulate; if it's too high, population growth will eat all the profits from this progress. And then there's the whole issue of political institutions.

It's amazing how little we understand about the most important event in the history of our species.

Quote of the day award

Goes to Mark Thoma:

From what I've read, there are two points to make. First, it would be crazy to rule that the individual mandate (...) is unconstitutional. Second, we have four crazy justices on the Supreme Court.

A very annoying meme

There is a number of extremely ignorant claims concerning past and present of Polish economy floating around in public space. Some of them are claims that glorify economic past in order to criticize Poland's present policies (see, for example, my post about the quite common belief that joining EU has turned a vibrant, booming economy into a smoldering wasteland). Some of those arguments go even further: they glorify not just the early nineties, but actually try to convince us that some aspects of Poland's economy in its communist days are superior to what goes on right now. (To add another layer of incomprehensilbitity to this picture: it is usually the Polish right who glorifies communism in this way.)

One of the most widespread claims of this sort is one saying that Poland's external debt is now much higher that it has been in the old days of communism, which means that our rising income is just an illusion, because it has been obtained through loans that can't be repaid. The claim is usually followed by quoting numbers: for example, that Poland's external debt stood at about $26 billion in 1980, but in 2008 was as high as $243 billion. The quoted numbers are actually correct, so the comparison does look catastrophic. But it only looks catastrophic to someone who doesn't know the first thing about how the structure of Poland's external debt has changed, and doesn't have the common sense to realize that comparing debt is quite meaningless without also comparing income.

Let me now talk about two major ways in which this claim is stupid.

First, apples and oranges. Even though, when browsing Poland's macro data, you will find a column titled "Debt, External" both in 1980 as well as in 2008, the numbers you will see in those columns are not values of the same variable. Here's why. External debt can be public or private. Public debt is debt incurred abroad by Polish government agencies (both central and local) by taking out loans, issuing bonds and whatnot. Private debt is debt owed abroad by Polish businesses and individuals. Public and private debt are two very different beasts altogether. The amount of private debt owed is outside of government's control. Whereas the entire stock of public debt is really owed by a single entity (the state), the stock of private debt is owed by millions of individuals and firms. In addition, while it can be argued that the government has an incentive to borrow indefinitely, this incentive is absent in businesses and individuals.

To put it differently, private debt is Polish debt, but it is not Poland's debt.

Here's a very important fact that those who say our debt has grown since 1980 conveniently ignore: In 1980, Poland had no private external debt. The entire economy, including foreign trade, was nationalized, so the whole $26 billion was owed by the government (a.k.a. the taxpayers). Given that, the 2008 statistic that those $26 billion should be compared to is not the entire external debt, but public external debt. How much was that in 2008? About $70 billion.

All of a sudden, the comparison looks a lot less catastrophic. But this is only the beginning. A much more outrageous stupidity of the claim that we owe more now than we did back in 1980, is talking about debt without mentioning income this debt is being paid out of. Unfortunately there is no reliable data on Polish government revenue in 1980, so the relevant incomes cannot be compared directly; however, it's rather uncontroversial to say that government receipts are very strongly correlated with GDP. In 1980, Polish economy was worth about $58 billion. In 2008, it was worth about $420 billion. In 1980, Poland's external public debt was about 45% of its GDP. In 2008, it was about 17%.

Suppose Adam owes $10,000 in loans and Madison owes $30,000. Which one of the two is more indebted? If you have any common sense, your answer to this question will be: "I don't know; not enough data. To answer this I'd need to know how much they make." And if I told you that Adam makes $22,000 a year while Madison makes $177,000, would you say that Madison has more debt than Adam?

Sometimes I hear a mutation of this claim which says that it's Poland's public debt that's now higher. Assuming that those who say this actually know what they're talking about (as in, know the difference between external debt and total public debt), this one is a bit harder to disprove. The reason is that total public debt includes internal debt, and communist Poland officially had none. However, just because it's harder to disprove doesn't mean it makes more sense. Communist Poland didn't have any internal debt on the books not because it didn't collect money internally, but because it was a dictatorship. Communist governments did not have to sell bonds to or take out loans from their citizens, the way normal countries do. Whenever they wanted money from their citizens, they would simply take it. They'd do it by either raising prices (most of which were controlled by the government), decreasing supply of goods and services (most of which were produced by the government), or by inflating currency (which the government could just print without having to worry about pesky obstacles such as independent central banks). If you ignore this fact, then you are either too young to remember anything about communism, or simply have no idea what you're talking about. Or both.

Poland's public debt is now about 50% of its economy. That's high, and in the long run something has to be done about it. But, even though the exact number is not known, it's safe to say that in 1980 that percentage was much, much higher. The enormous hyperinflation that happened in Poland after wage and price controls were lifted suggests that the communist government was essentially in default long before it had actually collapsed.

What do you mean "Can't afford it?"

Everyday use of the word "afford" conflates possibility with preference. When I say I can't afford to buy a penthouse apartment in Manhattan, I mean I can't buy it: I don't have enough cash to do it, nor will anyone loan it to me. When I say I can't afford a lobster dinner, I mean I can buy it but don't want to: I do have enough cash but I'd rather eat a cheaper dinner and spend the difference on other things I want.

This confusion isn't just verbal, but can be quite visceral. Recently, a friend complained to me bitterly about not being able to afford to go see a band she loves because the tickets were too expensive. They were $70. That sounds too expensive to me, but I don't like that band. I know that paying those $70 wouldn't exactly force my friend into bankruptcy, so the fact that she didn't do it wasn't really a matter of income constraints; it was a matter of preference.

Nationalize how much?

I don't have a quick source at hand, but I'm sure everyone has heard this claim before: the new healthcare bill is going to nationalize one-fifth of the U.S. economy. One-fifth of the U.S. economy--that's roughly how much the country spends per year on all healthcare related expenses, public and private.

In terms of administrative measures, the bill does not come anywhere close to instituting government control over the entire private healthcare industry. In terms of subsidies and similar expenses, it is projected to cost a bit less than $100 billion, or slightly more than half a percent of GDP, per year. In other words, the claim that the new bill will nationalize 20% of the U.S. economy is, well, slightly exaggerated.

Happiness and GDP per capita

A neat counterexample (due to Steven Landsburg) to the idea that income per capita measures happiness: If this were the case, then the day your first child is born should, all else equal, be one of the worst days of your life.

The most profound way in which we're fooled by our language

We have a very strange relationship with words. We perceive them as possessing almost magical powers, and as having a primary existence over all other things in the world. Very often we confuse the act of naming with the act of creating (for example, in the Book of Genesis, naming things is equivalent to making them: "And God called the light Day, and the darkness He called Night"). This sort of magical thinking also leads us to believe that words precede concepts, when the truth is exactly the other way around. This mistake is evident in two ways: we think that if there is a word then there must be a meaning that it designates, and we also think that one word can only have one logically distinct meaning. On both counts, we're wrong. There are distinct words that name just one concept (as in: "speed" and "velocity"); there are names that don't have any meaning because they do not designate any coherent concept (e.g. "glocal" or "social capital"); and, there are words that we use without realizing that they designate more than one logically distinct meaning. Take, for example, the simple word "is." We use it in at least three different meanings:

1) To indicate that something exists ("There is a tree in Brooklyn;" "There is such a thing as an innocent bystander")

2) To indicate that something has a certain property ("My hair is black;" "Ghana is a country in Africa") and

3) To indicate that two things are equivalent ("To love is to suffer;" "To think is to create;" "Two plus three is five").

The fact that the word "is" has more than one meaning has been first noted by the pioneers of mathematical logic (Gottlob Frege, Charles Sanders Peirce, Giuseppe Peano, Bertrand Russell, etc.), and recently rediscovered by Bill Clinton ("It depends on what your definition of "is" is).

A profound implication of all this is that language can hamper discovery. There are still many concepts we are not aware exist because our language muddles them with other concepts by naming them all with one word.

U.S. vs. Europe insanity challenge

Having experienced life both in Europe as well as in the United States, sometimes I can't help but compare those two places in different regards. Yes, I realize that Europe is not one country, but there are certain comparisons for the sake of which it could be treated as "close enough" to one, and those are the ones I wish to write about here. What is interesting to me are the instances of laws regulating the same aspects of life being extremely different on both sides of the Atlantic, and different in a common way: being reasonable in one place and absolutely insane in the other. (The standard of "reasonableness" and "insanity" I am applying here is of course that of my own subjective judgment. Though I have to add that many people agree with me on what follows.) Here, then, is a list of some such differences in legal regulations. In making the comparisons, I am only interested in formal rules, i.e. laws or law-like regulations that are in the books somewhere and are at least supposed to be enforced; I'm not concerned with informal social rules though of course I realize those can be just as powerful. I didn't research the topic, so the list is incomplete: it only contains things that come to my mind immediately. I'll most likely be adding to it later. Here goes:

1) Freedom of speech. Here the U.S. is normal and most of Europe is crazy. The U.S. protects it fully, for the most part, while most of Europe has stringent libel laws that can (and are) used to stifle free speech, as well as Holocaust denial laws which open a whole another can of worms. As if that was not enough, some European criminal codes also prescribe punishment for speech denigrating heads of state or religious sentiments.

2) Drug war. On the principal count--indiscriminate drug prohibition--both parties are criminally negligent; but the U.S. adds its own bits of insanity that do not exist in most of Europe. Some European countries (such as the Netherlands or Switzerland) have ceased penalizing personal use of marijuana. The utter lunacy of mandatory sentencing for drug possession, drug-related asset forfeiture by law enforcement, no-knock warrants etc., is an American phenomenon.

3) Sodomy laws. Here Europe is normal (as in: doesn't have them) and the U.S. is batshit insane. I don't think this point needs a lot of explaining. It's a good thing that in most of the U.S. those laws are not enforced. Added: As pointed out by a commenter, in 2003 the Supreme Court of the United States ruled sodomy laws unconstitutionally insane, so this shouldn't really be on the list. I'm keeping it as an honorary mention though, just because laws so deranged were actually in effect as recently as eight years ago.

4) Genetically modified organisms. On this count, the U.S. is reasonable (i.e., allows genetically modified crops) while Europe is bonkers (i.e., forbids them). There are no environmentally sound reasons not to allow engineering and trading GMOs; the true reason that the EU bans them is good old fashioned trade protectionism. Plus, EU wins some more insanity points with their staggering hypocrisy: they have just allowed producing and selling a genetically engineered potato developed by a chemical corporation called BASF. I'm sure the fact that BASF is German had nothing whatsoever to do with that decision.

5) Gambling laws. Here most of Europe is sane while the U.S. is nuts. Most gambling activities, including such benign ones as playing poker for cash or betting on sports games, are illegal in most of the U.S. Similarly to sodomy laws, I don't think it's very hard to see why this is crazy; however, as opposed to sodomy laws, those are actually enforced.

This is it for now, although as I said I will be adding to the list as I find new items. I don't think I'll keep a tally; some pieces of insanity are worse than others, so in order to come up with a scoring system I'd have to figure out how to weigh them relative to each other. Which I do not feel like doing.

If the game is fixed, it ain't the bookie's fault

Some of the worst legislation is generated as an immediate response to a crisis. That is because, faced with a crisis, government institutions face pressure from the public to "do something immediately," without much care whether or not the something that is done makes sense or not. For example, if there is a stock market panic caused by a spreading belief that some assets are wildly overvalued, the government will face pressure to prohibit betting on those assets being overvalued. If there is a scandal going on that has to do with the gambling industry, the government will face pressure to punish betting houses.

This is what recently happened in Poland. Last year, a number of Polish governing coalition MPs have been caught red-handed doing some shady deals with some shady businessmen. The allegations are that some coalition members who worked on legislation designed to regulate the market of slot machines, took bribes from the owners of slot machines. As damage control, the prime minister fired or suspended some people, as well as had the coalition work on a new piece of legislation that is supposed to regulate the whole gambling market, making it more transparent and less prone to corruption.

At least that's the rhetoric. In reality, the new gambling bill (which has taken effect January 1 this year) does nothing of the sort; it just gives the appearance that the government is "doing something" about the "gambling industry problem." One of the provisions of the new bill forbids sports teams to display any ads of sports betting houses. It's an attempt to prevent cash flows from betting houses to sports teams, and as such it must be made on an assumption that those transactions can create conflict of interests. This assumption is a result of a very common (and very false) belief that betting houses want to fix games.

Betting houses do not fix games; it's against their interest to do so. They make their money through fixing odds, not games. While the details of how they do it can be complicated, there's a simple way to think about it that allows you to understand the incentives they face: What the betting houses are doing is essentially equivalent to charging a fixed percentage fee on each bet placed with them. Given that, they maximize their profits if an only if two things happen: 1) the volume of bets is as high as possible and 2) there are approximately equal amounts of money placed on both sides of each bet. First condition is obvious: if you live on commission, you want to sell as much as possible. So is the second one, really: if the bet amounts are imbalanced and the result breaks the wrong way, the house can lose much more money than they made in fees. So what the betting firms are doing is adjusting the odds of, say, a Brazil vs. England soccer game such that those who favor England will bet about the same amount of money as those who favor Brazil. This means, of course, that the house does not care about the actual result of a Brazil-England game at all and so has no incentive to fix it. (It does care what bettors think the outcome of that game will be, but it doesn't have much control over that.) In fact, betting houses have an incentive to disclose large game fixing conspiracies, because very large amounts of money being placed on one side of the bet may make it impossible for them to offer realistic odds that could balance those amounts.

I think the belief that betting houses want to fix games comes mostly from a false notion of how they make their money, that notion being that their profits come from figuring out which team is more likely to win and then somehow fooling lots of people into betting on the other one. This can't work; if profits of the house depended on one team winning, then everyone would bet on that team (because, by looking at the odds, they would know which team it was)--thereby wiping out the profits.

This is not to say that game fixing doesn't exist. It does, of course; very large game fixing scandals have been recently uncovered in German and Italian first-tier soccer leagues, for example. But it was never the bookies who did the fixing: it was bettors or teams themselves. I am also far from thinking that Polish soccer league, in particular, is clean as a whistle. In fact, I think it's corrupt as hell, as evidenced by the fact that literally hundreds of Polish referees and team officials have pending corruption charges. But, as everywhere else, the fixing is done by bettors who want to cash in on their inside knowledge, by teams that need wins buying them from teams that don't, and by players and referees who take their cut for making sure that what's supposed to happen, happens. Cutting sports teams from a legitimate source of advertising revenue is definitely not going to change that.

Too complex for its own good

This is a bit late for The Pi Day, but still interesting: an intricate crop circle in England encodes the value of pi! How? Look at the image below; it consists of ten concentric arcs joined by short line segments. Reading from inside out, the angular lengths of those arcs equal 3, 1, 4, 1, 5, 9, 2, 6, 5, and 4 tenths of a circle (the value of pi rounded to the ninth decimal digit is 3.141592654).

I'd like to point out to the designers of this image, whoever they are, that there's a method of graphically encrypting the value of pi that is much simpler as well as infinitely more precise than what they've done. This method consists of drawing a damn circle.

The largest cash crop in America

Is marijuana, by far. With an annual production value of about $36 billion, it is way ahead of number two on the list, which is corn (annual production value of about $23 billion).

It's hard to find a statistic that would better illustrate the dismal failure of drug prohibition as a policy. If you get caught growing lots of marijuana, you'll go to prison. If you get caught growing lots of corn, you'll receive huge government subsidies. And yet, the prohibition has managed to artificially boost marijuana prices so much that growing pot is still much more profitable than growing corn.

In California, the value of marijuana production ($14 billion) is five times larger than the value of grape production. (Side note: if you say anything about medical marijuana being the cause of this, explain why pot is the largest crop in such liberal states as Kentucky, West Virginia, South Carolina, or Tennessee.) Now legalizing and taxing marijuana sales would surely decrease the value of those sales significantly--but it would still add a large source of revenue to the most troubled state budget in the Union. And yet, because of the drug prohibition hysteria, California government would rather violate the Constitution and issue its own devalued currency (in the form of IOUs) before even considering such an obvious measure.

Hilarious translating mistakes

Blogger island1 of Polandian has a funny post about annoying mistakes made by Polish translators. My personal favorite didn't make his list, so I'll write about it here instead. It's the assumption that if a certain English word closely resembles some Polish word, it has to have a similar meaning. For example, English word eventually looks a lot like the Polish word ewentualnie. The problem is that ewentualnie does not mean eventually; it means possibly. Therefore, lazy translating from English to Polish can lead to unwittingly hilarious sentences like "We will all die possibly." Another, even funnier example is the English word lunatic. There's a Polish word, lunatyk, that looks similar to it (and has almost identical pronunciation). But, lunatyk doesn't mean lunatic; instead, it means sleepwalker. This accidental similarity leads to translation gems like "He's a raging sleepwalker."

Freedom of speech is freedom to say what I agree with

Here's an infuriatingly daft quote from not the unlikeliest of sources, Sean Penn:

(...) Every day, this elected leader [Hugo Chavez--p.], is called a dictator here, and we just accept it! And accept it. And this is mainstream media, who should--truly, there should be a bar by which one goes to prison for these kinds of lies.

Isn't it interesting that those who demand that the government have the power to imprison people for saying what it considers to be lies, always assume that said government will be in perfect agreement with them as to what is and what is not true?

Either that or what they're really saying is: "I wish I had the power to put people in prison for saying things I think are lies."

(HT: Ed Brayton.)

There are absolutely no limits to what people can convince themselves of

For example, you can make yourself believe that Polish economy was in a much better shape before Poland joined the European Union than it is now. I'm not joking; if you don't believe me (and speak Polish), see here. The author of the linked post, Magda Figurska, makes altogether too many ridiculous statements to try to debunk all of them, so I'll just pick a few of the most egregious ones.

Let's start off gently. Ms. Figurska counts the fact that EU regulations forbid member states from taxing goods and services imported from other member states on a level higher than they tax their own goods and services, as a cost of joining. The thoughts that 1) taxing imports means higher prices for Polish consumers and 2) this regulation favors Polish exports in foreign markets, apparently do not cross her mind. Figurska then writes:

The sum total of our contributions to the EU budget (...) exceeds the amount of money we receive from it.

The truth, as it were, is exactly the other way around: Poland is a net beneficiary of the EU budget. Then, Figurska shifts gears and enters the Conservapedia mode: her claims become so stupid they are actually entertaining. Take this, for example:

During the so-called adjustment period, we have lost 80% of productive assets, destroyed our trade (...)

Let's take the second part of this statement first. Here's a graph illustrating the dynamics of Polish trade between 2000 and 2008 (the source of data is the CIA World Factbook):

Try as I might, I really cannot see much trade destruction going on here. Now for the first part of the statement: that during the waiting period before joining the EU we have lost "80% of productive assets." I am not sure what Figurska means by "productive assets," and she does not provide any sources of this rather staggering claim, so all I can do is speculate. At any rate, there are only two possibilities: she either means "production" or something else. If she means "production," then her statement is ridiculously wrong: the output of Polish economy has never contracted since 1990. If she means something else, then her statement is meaningless: if it is possible for a country to "lose 80% of its productive assets" but nonetheless consistently increase its production, then I submit that "productive assets" is not a terribly useful concept.

Now let me quote this sentence again, this time in its entirety:

During the so-called adjustment period, we have lost 80% of productive assets, destroyed our trade, our best businesses, steel mills, coal mines, sugar refineries, centers of scientific, technical, medical and agricultural thought.

There's really not a whole lot one can say to that, except: what world do you live in? Where on Earth did you see all those amazing things you write about that once existed but now are no more?

I'm not saying that all of the economic growth we've experienced is due to joining the EU. I think a lot of it is, but I don't know how much, exactly, and it is possible to make informed arguments to the effect that if we didn't join, we'd have grown even faster. But if you're telling me that our economy is in a catastrophically worse shape now than it has been in before 2004, you're simply ignorant.

Collective morality

If you tell a group of people you've just met that you don't buy from businesses that use sweatshop labor, you will most likely be applauded without anyone asking you questions as to why you think what you're doing is beneficial. If you say that doing so actually harms people it is supposed to help, you'll most likely be called a heartless corporate hack.

Apparently, the rules of our society are such that it's much more acceptable to support an action without trying to inform yourself about its consequences just because said action makes you feel better about yourself, than to express an opinion that it might not work.

The food pyramids

This chart, put together by the Physicians Committee for Responsible Medicine, shows that the government subsidizes mostly those foods that we're supposed to eat less of.

So let me get this straight. The government has been consistently subsidizing unhealthy foods so much that they've become very cheap and people have been eating way too much of them. To remedy that, the government is now considering taxing those unhealthy foods in order that they wouldn't be so cheap anymore.

How's that for efficiency?

(HT: Catherine Rampell.)

Can Germany buy some Lebensraum in exchange for debt relief?

The short answer is: no, they can't; but since stopping at the short answer is little fun I'll elaborate.

Two members of German parliament have recently said that Greece should consider selling some of its assets to reduce its enormous debt. Quoting from one of the German MPs:

Those in insolvency have to sell everything they have to pay their creditors. Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.

Some of the Polish blogosphere is extremely worried by this. "Germany wants Greek islands in exchange for helping them pay their debt," bloggers write; "When will Germany offer to help Poland in exchange for assets?," they add. The nightmare scenario is that Polish finances get so bad that the government is on the brink of bankruptcy, and then the German government tells Poland that it'll bail it out but only in exchange for, say, some land. This is a charmingly naive way to view politics, but also an entertaining thought experiment. And it is true that Polish government could be in some deep fiscal trouble in the long run, so Poland becoming insolvent is certainly not an impossibility.

Before I go on to consider if this scenario could actually happen, two things need to be set straight. First, Germany doesn't actually want Greece to sell any assets, at least not officially and not yet. Those quotes I was talking about are just cheap talk that politics is full of; they've appeared in press interviews with German MPs, and no member of the German government has ever said anything like that. Second, even those quotes do not say anything about Greece selling assets to Germany; rather, the point they make is that Greece should try to sell them to its creditors.

But forget for a moment that what the bloggers fear is happening actually isn't, and think about if it could happen. Suppose the German government does (unofficially) make a threat like that. Would this be a viable way for Germany to blackmail Greece or Poland, or whoever, into doing something that Germany wants?

The answer is no, and here's why. The German government wouldn't be able to force Greek or Polish governments to do anything that would be hugely unpopular in the eyes of Greek or Polish voters, because even a government that is completely insolvent has some options and doesn't have to accept a bailout on arbitrarily bad terms. And, the German government wouldn't want to force Greek or Polish governments comply with its smaller-scale demands, because that would in all likelihood not be worth the money that Germany would need to spend on paying down Greek or Polish debt.

Suppose Poland is insolvent; the government can't borrow anymore, at any interest rate, nor does it have the money to pay down any of its public debt. Then, Angela Merkel comes and says, "We'll pay down enough of your debt so that you'll reattain liquidity--but only if you give us some of your land that we feel belongs to us." What happens next? The government of Poland definitely does not want to default; that would mean not being able to cover budget deficits, huge riots on the streets, etc. It's almost certainly impossible for any government in Poland to survive politically after defaulting on its debt. But, it's also almost certainly impossible for any government in Poland to survive politically after giving land away to Germany in exchange for debt relief. So, the government would tell Angela Merkel, "Screw you, we're going to the IMF." Now IMF emergency loans are no fun; they come with many strings attached, in the form of having to implement some very unpopular policies. But, from the point of view of a hypothetical Polish government, they're still much better than either defaulting or selling off to the Germans. (And if Merkel's offer is rejected, Germany couldn't force Poland to comply anyway--because if they could, then why on Earth would they be offering to pay Polish debts in the first place?)

The same is true for Greece now; as soon as Germany started making any demands for "uninhabited islands" or some such, Greece would leave the Eurozone and go to the IMF for help instead. That's not a real possibility, however, because Germany isn't demanding any islands, because they know they can't get them. And that's also why the Greeks want Germany to help them instead of the IMF--they think that German bailout will have better terms than the IMF one would.

What if, instead of demanding half of Poland, Germany demanded that Polish government do something less spectacular, something that perhaps Polish voters wouldn't even be aware of? As opposed to the first scenario, this one isn't an outright impossibility; but I'd still argue that it's extremely unlikely. What type of favor would it be that Germany could want? Large shares in government-owned companies? You can't keep transactions like that a secret, even if they're done secretly. And transactions that you can keep secret are most likely too small to be worth the price. Again, the example of Greece is useful. German government does not seem to think their helping Greece is a good deal at all. They don't want to do it. It's expensive, plus German voters are angry at the thought of their tax money being used to pay Greek pensions and public sector wages. Merkel's government is probably going to have to bite the bullet on this, but it's already taking measures to ensure that if this sort of thing happens again, they won't be the ones stuck with most of the bill. Now Greek debt amounts to about $350 billion (which is 110% of their GDP). Polish economy is bigger; its GDP is about $450 billion and, presumably, its debt would have to get somewhere close to that level for insolvency to become a real possibility. (Currently it is at about half that amount.) In other words, bailing out Poland would be considerably more expensive than bailing out Greece for the Germans. I don't think they'd want to pay that much for anything they could realistically get in exchange for such bailout.

Price controls are always a bad idea

In one of his recent speeches in which he was arguing for some form of regulating health insurance premiums, President Obama said:

Health insurance companies ration coverage according to who can pay and who can't.

This is a common complaint not only with the insurance companies, but with the market itself. It's wrong in a very subtle but crucial way. The market rations goods and services according to who is willing to pay for them, not who can. If I don't want to pay for lobster dinner at a local seafood restaurant, the local seafood restaurant will not serve me lobster dinner even if I can technically afford it. Why is that distinction important? Because if you're aware of it, you will also be aware that it's possible that the fact that lots of people don't buy lobster dinners may be due to factors other than the price of lobster dinners being too high (whatever "too high" means).

The trouble is that the market prices of some goods or services are so high that some people cannot afford them even if they'd be willing to pay for them if they had enough money. But if the government thinks this is the problem (and in the case of health insurance, it certainly is), then price controls are a terrible way of solving it. All that price controls do is generate more shortages of supply while somewhat shifting the burden of those shortages. For example, in Poland under Soviet rule, prices of most goods and services were set by the government, which of course set them well below market rates. The result was that most thus priced goods and services were inaccessible to anyone, even those people who were willing and able to pay their market prices.

I agree with Obama that there are too many people going without health insurance right now. But in order to change this effectively, the government has to leave the prices alone and instead subsidize those who cannot afford to buy health insurance on their own.

That's what would happen in a perfect world; but it's easy to see why it won't happen in ours. Even though they are so much superior socially, politically subsidies do not stand a chance against price controls. That's because, from the government's point of view, price controls are both 1) cheaper and 2) easier to sell propaganda-wise. Point (1) is true because, while the costs of price controls are born by all taxpayers, the costs of subsidies are born directly by the federal budget. (In an aggregate sense, subsidies are actually much cheaper, but to the government this won't matter.) Point (2) is true because voters are likely to think that high prices of something are caused by the fact that providers of that something are extracting enormous profits from selling it. Now in a competitive market this is almost never the case--but it's much easier to win support by confirming what people already think rather than trying to change their minds.

"Avatar" is not the highest-grossing movie of all time

Not even close. The Hollywood statistics are absurd because they do not adjust box-office revenue for inflation. When said adjustment is done, it turns out that the highest-grossing movie of all time (highest-grossing in the U.S., that is) is "Gone with the Wind," followed by "Star Wars" and "The Sound of Music" (see the list of top 100 here). "Avatar" currently sits in no. 14, though it will surely climb as its immediate competition is pretty ancient.

Too little risk-taking

"Fortune favors the bold" exists as a saying in many languages. Its true meaning is that people, on average, don't take enough risks in their lives. How does it follow? Because fortune, by definition, favors no one; so if we observe that those who are more risk-accepting than the average person tend to do better in life, it must mean that most people are too risk-averse.

So few paragraphs, so much confusion

The massive amounts of confusion about basic economics that I am going to write about appeared in a recent NYT op-ed dealing with productivity and wages of American workers. The authors write:

(...) wage gains for the average worker have lagged behind productivity since the early 1980s (...)

According to them, this discrepancy arises because the statistics published by the Department of Labor use an inadequate measure of productivity. As is common practice in all econometrics, Labor Department defines productivity as simply "output per worker per unit of time." So an increase in the amount of output produced by an average worker in, say, one working day means an increase in productivity, regardless of the cause of said increase. This is wrong, the NYT writers argue, because

(...) labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures. The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

This argument has two fatal flaws, one factual and the other theoretical. The factual one is: wages have not been lagging behind productivity since the early 1980s. An argument could be made that they've been lagging since early 2000s, but even that isn't entirely clear. The theoretical one is: even if what they're saying were true, the "problem" with the productivity measure that they point out couldn't possibly be the reason. Suppose for the sake of the argument that they're right: indeed the "total number of worker hours per unit of output did not actually change." OK but so what? Some of those worker hours (namely the off-shored ones) have become radically cheaper from the employer's point of view. If their assumption were true then, we should still see an increase in the wages of American workers. Which, as you recall, they say isn't happening.

Another confused part of the op-ed is the way of fixing the problem of measuring productivity that the writers propose. They argue that increases in output due to off-shored labor shouldn't be counted as productivity gains; instead, they want to classify as productivity gains only those efficiency increases that happen in the U.S. (such as research and development, new technologies etc.) This is an example of a useless distinction. Suppose you're running a company here in the U.S., and part of your production process is analyzing data. The analysis is done by your workers that you pay some amount $X an hour. Now suppose you came into possession of a piece of software that can analyze your data faster and cheaper than your workers can. Or, suppose you signed a contract with a Chinese company that has workers which can analyze your data faster and cheaper than your workers can. Economically, what is the difference between those two situations? The answer is: none whatsoever. In both scenarios, output per American worker per hour will increase; less of American workers will be analyzing data (you will either assign them to different tasks or reduce employment); your profits, as well as your American workers' wages will increase. From the point of view of American workers and their employers, the economic effects of free trade are exactly the same as the effects of implementing a new technology.

Moving away from the NYT article but still staying on the topic of worker productivity: there is another common misconception about productivity gains, and that is that they can only happen due to people working harder than before. The truth is almost always the other way around. Take farmers, for example; today's farmers in the U.S. are incomparably more productive than their 1800s counterparts were. But they don't work harder; in fact, their workload is incomparably lighter now than it used to be. Their productivity gains are due to things like fertilizers, tractors, genetic engineering etc. The most important engines of productivity gains are technology and trade.

Bad forecasts

Here's Don Boudreaux quoting David Harsanyi:

(...) Congress estimated Medicare's cost at $12 billion for 1990 (adjusted for inflation) when the program kicked off in 1965. Medicare cost $107 billion in 1990 (...)

This seems like a catastrophic forecasting error. How come the U.S. government didn't go bankrupt by 1990? The reason is that while the increase in Medicare spending far exceeded anyone's expectations, so did GDP growth. For example, $5.1 billion that Medicare cost in 1968 amounted to 0.6% of GDP; those $107 billion it cost in 1990 were 1.9% of GDP--much higher, but not catastrophically so. (See Tables F-9 and F-10 here for data.) However, recently the rate of growth of Medicare spending relative to output has increased as well; in 2007 the program cost us 3.2% of GDP ($436.3 billion in absolute terms).

Stealing our jobs (and paying our Medicare bills)

One of the striking paradoxes of public debate in democracies is the fact that sometimes entire segments of voters can favor policies which are in direct conflict with their own interests. Example: many retired voters in the U.S. favor stricter immigration laws--even though, given rising life expectancies and falling fertility rates of U.S.-born citizens, more immigration may be the easiest way to keep Social Security and Medicare solvent in the long run.

Not made for us

Bertrand Russell once wrote: "We must learn that the world was not made for us." I think the fact that natural disasters hurt the poor more than the rich is one piece of evidence in favor of that view. Without realizing that the world is not made for our benefit it's all too easy to blame the victim when a disaster strikes. Note: I don't treat this observation as evidence of the fact Russell was pointing out. I do understand that that would be a fallacious appeal to consequences. But the ethical consequences of not realizing it are I think clear enough: if you're working from the assumption that nature is benevolent, or at least just, then you must think whatever happens is what ought to happen; thus you must also think that, for example, victims of the earthquake in Haiti were somehow at least partly at fault for what happened to them.

Nature is neither benevolent nor malevolent--but it's not overly friendly, either. A great majority of things that make our lives worth living were obtained through our conspiring against the forces of nature. I may be wrong, of course, but I do think that the utilitarian quality of our legislation, for example, would improve greatly if legislators fully understood just how profoundly nature doesn't give a shit about things people give a shit about.

Entertaining stupidity

Have you heard of a project called "Conservapedia?" If not, you definitely want to check it out. The idea for the site is based on Wikipedia: it's a free encyclopedia which anyone is allowed to edit but that also has a few moderators with the power to override any edits. Its stated purpose is to provide balance to Wikipedia which, according to Conservapedia's founders, exhibits a liberal bias.

(Note: in what follows, I don't provide any additional links to Conservapedia. Those clowns don't need any more traffic than they have already. However, what I write about them is researched and you can easily verify it for yourself if you feel like it.)

Conservapedia's entries on politics and economics are entirely predictable given the project's mission. However, when you move to science and math, things get really unexpected. And really funny. What's unexpected is exactly which mathematical and scientific ideas the website's writers think conservatives should find suspect. In math, for example, they postulate abandoning imaginary numbers (according to Conservapedia's founder, no one has proved the existence of i) and the axiom of choice. You may or may not find it funny. But this you definitely will: for some reason, the site's authors believe that thinking general relativity is true is inconsistent with being conservative. Where this belief comes from I have no idea; perhaps they think general relativity leads to moral relativism or something (and they're no strangers to the fallacy of arguing from consequences: for example, they argue that the fact that some people who "believed in evolution" were social Darwinists is evidence that the theory of evolution is false). Now prepare for some good laughs; in their entry on general relativity they provide a list of counterexamples to the theory. One of them is:

The action-at-a-distance by Jesus, as described in John 4:46-54.

Take that, physicists!

If you're still not laughing, I have another gem for you. Here's an entry titled "Conservapedia's Law:"

Conservapedia's Law is the observation that conservative insights increase over time at a geometric rate, as in 1-2-4-8-16 etc. For example, there is a doubling in effective new conservative terms per century. Conservapedia's Law is analogous to Moore's Law, which holds that the rate of increase in the number of transistors on a chip of a given size roughly doubles every two years.

You have to hand one thing to those guys: while most stupidity is incredibly dull, theirs is so outrageous it's actually highly entertaining. In that respect they resemble Young Earth creationists or postmodernist "scholars" in the humanities. In fact, some of Conservapedia's entries are so out of this world I can't help but think that the site is being hoaxed. Just as it was the case with postmodernists that were so masterfully duped by Alan Sokal, Conservapedia author's views are so outrageous that they themselves must have trouble realizing exactly when they're being made fun of.

Safety is a luxury good

The Washington Post features an article that, among other things, compares the impact of the earthquake in Haiti to the one which has recently hit Chile:

While the death toll rose steadily to more than 700 (...) it remained a small fraction of the tally from a far less powerful earthquake last month in Haiti that claimed at least 220,000 lives (...) the deaths there were mostly because widespread building collapses, which Chilean cities did not experience (...) the fact that so many Chileans survived was a testament to the nation's enactment and enforcement of stringent building codes.

No. It is a testament to a very cruel fact of nature: that natural disasters hurt the poor much more than they hurt the rich. Compared to Haiti, Chile is an incredibly rich country; Chile's GDP per capita is more than fourteen times that of Haiti. Safety is a luxury good. The reason Haiti does not enforce Chilean-level building codes is not because Haitian politicians are less responsible, but because Haitian economy cannot afford to do so. A sturdy, earthquake-proof building is much more expensive to construct than a makeshift one. If Haitian government enforced building codes similar to those we see in Chile, there would be no construction going on in Haiti: safe homes would be far too expensive for anyone to rent or buy, and thus no one would want to build them, either.

Another quote from the article talks about the importance of disaster-preparedness on part of the people:

"Unlike in Haiti, people think about earthquakes all the time in Chile. It's in their mind," said Michael Shifter, vice president for policy at the Inter-American Dialogue think tank in Washington. "This is a country that can mobilize its resources and meet these national challenges."

This is another example of ignoring the fact that safety is a luxury good. If the struggle to make ends meet is as hard as it is in Haiti, you cannot afford to "think about earthquakes all the time." How can you be expected to stock on emergency supplies if you can't even afford to buy enough food to provide for your family's day to day needs?

Buildings in Haiti will not be safer until either Haitian economy starts to prosper, or some charity simply has them built there free of charge.