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.