Organizing Entropy

The Super Committee - WASF edition

So, the Super-Committee failed.  I suppose that's not surprising.  The sad thing, though, is that their mandate was only to reduce the deficit by about $1.5 trillion over ten years.  While that sounds like quite a lot, it's only about 12% of total projected deficit over the next decade - expected to be around $13 trillion.  Even if they were successful, we'd still have about $11.5 trillion to go.  If we can't agree on 10% of the problem, how are we going to tackle the other 90%?  WASF

Yglesias on Regulation

Matthew Yglesias has written a lot recently on regulation and overregulation at the local level (primarily DC and New York City) -  a topic that doesn't get enough attention in my opinion as most people seem to focus on the federal level.  His latest effort is really good, especially the conclusion:

 

...A city’s going to need some business regulation, but a city’s also going to need some people to start businesses. If there’s no way to do this without consulting a lawyer first, that’s convenient for local lawyers. It’s also convenient for big companies who can easily afford lawyers, and it’s also convenient for smaller-time but already-established players who can benefit from insider knowledge and who appreciate the protection from competition. But it’s not good for workers who might appreciate more employment opportunities, it’s not good for consumers who might like more options and it’s not good for the city’s tax base.

 

This kind of thing is another practical example of the false dichotomy of more regulation vs less regulation that permeates the standard partisan narratives.

 

 

Understanding the financial crisis

For a long time I've been reading and trying to understand the 2008 financial crisis.  What I've determined so far is that the crisis defies simplistic explanation.  The more I research, the more I've come to the conclusion that the two competing narratives put forth by the two political parties are, at best, inadequate.  While it's not a surprise that partisans will gravitate toward explanations that comport with their particular worldview, I worry (as I always do) that policy solutions will be based on those political explanations and not a deeper, holistic understanding of the problem. 

 

So far I think my worry is justified. The "more regulation" vs. "less regulation" conflict is emblematic of this trend.  There were a lot of factors that precipitated this crisis that had nothing to do with the "amount" of regulation, however one defines that. One of those factors is the structure of the regulatory system itself.  Paul Seabright, writing in Foreign Policy, explains the structural issues in a comprehensive, coherent and readable essay:

The Imaginot Line, as I'll call it, was an idea about how to protect our economy, not a physical construction. It was a system of institutional and (as we can now see) ideological defenses against financial crisis erected over a period of decades beginning in the 1930s. It had three main components, and what was subtle about the system was that while none of the components seemed impregnable on its own, the whole appeared vastly stronger than the sum of its parts.

He goes on to explain the three components (deposit insurance, bank regulation (like capital requirements), and the Fed), how they work as a system, and how they collectively failed to prevent this crisis.  Mr. Seabright argues that the interaction of the 2nd and 3rd components (Bank regulators and the Fed) were the biggest problem:

In effect, the second and third lines of defense came down to this: trusting the other to do more of the work than either was prepared to shoulder. The better the central bankers performed, the more everyone else was content to rely on them to sort out the obvious tensions in the system, such as the fact that real U.S. housing prices rose nearly 150 percent from 1995 to 2006. Everyone knew it couldn't go on forever, but if Greenspan had taken care of the crises of 1987, 1991, 1998, and 2000, surely he would be on hand if there were a crisis this time. Not everyone agreed there was a bubble, but the danger lay not with those who didn't believe in bubbles. It lay instead with those who thought there might be a bubble but that we could handle it.

He identifies another point which I hadn't heard of or considered previously, namely that the system is designed to keep people from worrying too much about risk:

But as we discovered once the crisis broke, it was not just nonexperts who had stopped worrying about risk on a day-to-day basis. Most professional investors had also gotten into the habit of not worrying about it either, including those who had money invested in the repo markets and other parts of the vast shadow banking system. Before we rail against their stupidity, we should remember that not worrying about risk is precisely what a modern banking system enables its customers to do. That the lack of worrying had gone too far is now undeniable, but it happened precisely because of how impressively the modern banking system works when it is working well.

In essence there was too much trust in the system and everyone assumed the relevant players would identify and deal with any problems - after all, they had done so many times before.  Complacency and hubris in an evironment where risk is perceived to be minimal or nonexistent is a dangerous combination. The essay is disappointing in that it doesn't suggest a way forward, other than making sure people aren't overly protected from risk, but I think it's probably the best single piece I've read on the structural causes of the crisis. 

A Lesson in Basic Economics

H/T Arnold Kling:

 

 

Income Inequality and Taxes

It's demonstrably true that income inequality is rising in the US.  It's also rising in other major industrial countries but, we are told, to a lesser degree.  It might not be as simple as that, however.  On a thread over at Milpub, we got to discussing this topic.  After some research at the OECD data site, I came up with these two charts on gini coefficients for OECD countries (click for larger versions):

Each chart holds the same data, simply sorted differently.  The top chart sorts the gini coefficient before taxes and transfers and the latter sorts by after taxes and transfers.

What is surprising is that the US is average among OECD countries before taxes and transfers are taken in account. Germany, for example, actually has greater inequality (.54) than the US (.46) based on gross income. I suspect party of Germany's high inequality is due to the lingering effects of German reunification.

By contrast, low US taxes compared to most OECD countries pushes US disposable income inequality to the top of the stack.  Alternatively, high taxes in places like Germany serve to either hide income inequality or correct for it, depending on one's perspective. I was very surprised that gross income inequality is so high in several European countries.

One question I wasn't able to definitively answer is whether the US data includes state and local taxes. I'm assuming they're included somehow, otherwise the US figures wouldn't be comparable.

 

Where I stand

First, I have to credit Dave Schuler with both the idea for this post as well as the title. Dave is, in my opinion, one of the most astute and thoughtful bloggers out there and it's not simply because I often agree with him.  He deserves a lot more recognition and readership than he gets.

On to "where I stand:"

Government and Governance:

Most of my positions are governed by two essential principles:

1. The first is is the principle of subsidiarity.  Governance should take place at the lowest effective level possible consistent with good and effective governance.  Obviously, reasonable people can and do disagree about where to draw the lines.
2. Second is the principle of sustainability.  Government policies and programs need to be practically and politically sustainable.  Promoting unsustainable policies is not only bad policy, but immoral policy in my view since it amounts to making promises that can't be kept.

In my view many problems in government today are due to inconsistency with one or both of these principles.

Recently I've seen a lot of rhetoric that divides governance into a binary:  "Good" government vs. "bad" government.  To me, that doesn't make any sense. Claiming that government is "good" or "bad" is like claiming that fire is "good" or "bad."  Government, like fire, is neither good nor bad - it is simply necessary for a functioning society.  Government can certainly ACT good or badly, but that all depends on context and the details of a particular situation.

 

Partisan Politics:

I am nonpartisan to the point of anti-partisanship.  My non/anti-partisanship is not how most partisans view non-partisanship however - it is not a vaporous, wishy-washy, spineless sort of centrism filled with false equivalence.   I don't claim to sit in the middle, attempting to mediate between two extremes or attempting to find some kind of middle ground (though sometimes there is a viable middle ground).  I see myself on the outside and view both parties as inherently dysfunctional and increasingly irrelevant at dealing with modern problems and failing to represent the interests of the American people.  Both party platforms are increasingly non-inclusive, operate contrary with my two principles above, and are rife with internal contradictions.  They are still trying to recreate their respective glory days which makes them anachronistic to a certain extent. The cause of all this, in my view, is structural, mainly due to control over the primary system and gerrymandering.  For more, read this essay on partisanship - I agree with almost all of it.

All of this isn't to say that I disagree with everything both parties say or do.  Since I am more issue and policy oriented than ideological, I do find areas where I support one party or another on a particular issue.

 

Foreign Policy:

To provide some perspective, I am currently a member of the National Guard and the military has been my principal occupation for the past two decades - not only in the Guard but also with the active forces and reserves - so my perspective is largely informed by my status as an instrument of foreign policy (and I want to make clear that all my comments on this blog are mine alone). 

My views changed over time.  For example, I am much less disposed today to think that intervention by the US is a good idea that will yield positive outcomes.  The reason is that I've spent most of my career participating in interventions of various kinds and have seen the results for myself.

The main problem with US foreign policy is the lack of any kind of coherent grand strategy. I think the US is still basically coasting on inertia following victory in the Cold War.  As the so-called undisputed world superpower we have not been forced to make choices and it seems we, as a nation, simply assume we'll always be #1.  Nothing lasts forever and so sooner or later our nation will have to examine assumptions and make fundamental changes.  I would much prefer to do that sooner rather than have change forced upon us.

With that in mind, I think the US needs to reduce its military commitments abroad.  This should be done over a long time scale (a couple of decades) to allow for a stable transition for our allies and, indeed, this is happening now in some areas.  America still needs the ability to defend interests abroad, however, which can be achieved through equipment prepositioning and by continuing to maintain an expeditionary Navy and Marine Corps.  As our commitments are reduced, most of the Army and Air Force can be transferred to the reserve and their main purpose would be fighting existential wars or dealing with threats to vital American interests.

The US should promote liberal democracy primarily through example.  Activist policies to promote our values will be necessary but should be rare.  Interventions or invasions to create democracy are incompatible with the very idea of democracy.

The US should remain wary of transferring sovereignty to international institutions because they are undemocratic and unaccountable to the American people.  The US should continue to be an active participant in those institutions as well as engage in international diplomacy however.

Iraq:  The US should continue to draw down forces there and then use non-military tools to promote regional stability.  We need to keep an active naval presence in the region but few ground forces.

Afghanistan:  My view is that Afghanistan policy is currently being driven by domestic political considerations, not genuine strategic concerns.  The US needs to withdrawal most forces from Afghanistan and utilize proxies and limited military actions (covert action and strikes by aircraft and special operations forces) to continue to attack Al Qaeda and its associated movements.  Nation-building and population-centric counter-insurgency are too expensive, too time consuming, are unlikely to succeed and are unnecessary to defend US interests. In my judgment, the main impediment to implementing this policy is fear by politicians that withdrawal would be perceived as weakness or capitulation.

Iran:  I oppose an attack on Iran to either destroy its nuclear program or overturn the government for two reasons:  First, and most importantly, military actions is unlikely to achieve the stated objectives.  Secondly, the risks of military action are likely greater than any rewards.  I support continued containment of Iran while at the same time increasing opportunities for cooperation.  There is currently too much bad blood for major initiatives, so we should begin greater cooperation on areas of mutual interest (especially Afghanistan).

Israel/Palestine:  US efforts to broker peace are doomed to failure because neither side is currently willing and/or capable of negotiating and then delivering the kinds of compromises necessary to achieve peace.  Instead I would put more emphasis on  rapprochement between Syria and Israel.

Domestic Policy:

Taxes:  The tax code is overly complex and needs substantial reform.  I would not be opposed to examining an alternative scheme to the income tax, such as a VAT.  Whatever the case, my view is that taxes need to rise for pretty much everyone.  Our national fiscal position is to the point where acting at the margins is no longer sufficient to bring about fiscal sustainability.  Because of many decades of unsustainable practices, there is no alternative to significant tax increases along with reduced government spending and benefits.

Entitlements:  Government assistance to the needy is an important government function in my view.  However, the assistance provided must be sustainable.  Promising benefits that cannot be kept is immoral in my opinion and that is exactly what we're currently doing.  I believe entitlements should be means-tested. I am not opposed to radical solutions to Medicare unsustainability provided those solutions make the program and health care costs sustainable.  I'm not ideologically invested in any particular proposal - if moving to vouchers or to a single-payer health-care system would produce a sustainable system that provides adequate care then I would support it.  Sustainability must be demonstrated, however, I do not take advocate's claims at face value.

Energy:  Like almost everyone else, I would like to see less dependence on fossil fuels, particularly from foreign sources.  Of course, making it happen is not easy or it would have been done already.  I support a long-term transition that would phase out subsidies for fossil fuel use & production while phasing in incentives for alternatives.  Government should not bet on particular technologies. Like health care, I am not ideologically wedded to any particular technology, though I think nuclear will have to be, by necessity, a large part of the mix.  Energy delivery infrastructure also needs significant investment.

Infrastructure:  More emphasis should be placed on 21st century infrastructure:  Energy distribution, a modern air-traffic control system, and ubiquitous internet access.  We obviously need to maintain roads, but I would like to see more stuff produced locally and more rail transport.  Not only would this lessen the burden on the transportation infrastructure, but it would also improve the resilience of local communities and make carbon reduction easier.

Climate Change: I am concerned about the potential effects of increased CO2 concentration in the atmosphere and there is no doubt that levels are increasing due to human use of fossil fuels.  I'm much less confident regarding projected impacts, particularly alarmist calls that catastrophic effects are certain unless something is done now. However, pumping large amounts of CO2 into the atmosphere has the potential for large impacts and therefore I think CO2 reduction is an issue that needs to be addressed.  Since our economy is based on carbon energy, reducing carbon output is going to be a difficult long-term project effected by policy in many different areas.

Environment:  I am a conservationist and I strongly support protection of public lands and expansion and maintenance of the National Park system.  I think regulation of pollutants and protections for wildlife are necessary and current policy is sufficient.

Economy:  I believe that a well-regulated market system is the best way to allocate economic resources in the vast majority of cases. I think too many people confuse support for free markets with support for corporatism. I think government's primary role in the economy to set a level playing field for economic activity, not determine outcomes.  Unfortunately I think government does too much of the latter at the expense of the former by intervening in the economy to produce winners and losers.  I think this is a primary cause of the rise in corporatism (the old cliche' "big government, big business and big labor"). In general I am skeptical of claims that the government can and should "manage" the economy.  

Regulation: I think the battle between more vs less regulation is obscuring the main problem which is overly complex regulation that promotes gaming the system, rent-seeking and regulatory capture. I'm therefore skeptical of calls by liberals and conservatives for "more" or "less" regulation.  Changing the amount of regulation does nothing by itself beyond boost the incomes of corporate lawyers and hinder small firms who can't afford them.  It's no surprise, to me at least, that the most highly-regulated industries tend to have limited competition among a few large companies.

Unions:  I believe that unions have been so successful at changing American culture over the past 100 years that unions border on irrelevancy.  They decisive won the biggest and most important fights in the 20th century. Still, I do think at least the threat of unions is necessary check on the excesses of private enterprise.  I am, however, uniformly against unions for government workers.

 

Crime:  I'm generally against criminalization of consensual activities between adults.  I'm against "three-strikes" type laws because they are too rigid.  I personally oppose the death penalty but think it should be up to the people in each state to decide whether or not to have it.  I think fighting a supply-side "drug war" is stupid and bad for society - pot should be decriminalized and the "drug war" should instead focus on reducing demand.

Gun Control:  I don't think any government entity has the right to ban citizens (excepting felons, the insane, etc.) from owning a firearm and keeping it in their own home.  States and localities should, however, have the authority to implement reasonable restrictions on bringing firearms into public spaces.  In short, I am generally happy with the current status quo.  Two areas for change would be closing the so-called "gun show" loophole by requiring instant background checks at such shows.

Social "hot button" issues:  I support the right for any two consenting adults to legally marry.  I think the concepts of legal marriage and religious marriage should be separated. I'm am pro-choice but support some mild restrictions/oversight on third-trimester abortions.  I would support "amnesty" for illegal immigrants provided the immigration system was fixed so we don't have to deal with it again in 20 years (like the last amnesty).  I am generally pro-immigration and would like to see a fair and rational immigration system implemented. I support the right of religious groups to put displays on public property on holidays so long as all religions can do so.

 

There's more, obviously, but those are the basics on where I stand.

 

 

The Danger of Overpromising

On this election day there's a lot of frustration among liberals and Democrats over the likely drubbing their party is expected to take today.  A common theme is expressed by Jason Sigger over at Armchair Generalist:

 

I still can't quite wrap my head around the idea that people are upset with President Obama because he didn't fix the massive train wreck caused by the last administration in two years. So these angry, fearful people are going to give the reins to the very asshole politicians who've been consistently obstructing our government's attempts to get back on the right track.

 

My sense is that the electorate is not voting GOP because they think the Republicans are better, but out of their frustration with the Democrat's handling of the economy. The unfortunate fact is that this Administration (along with Congressional Democrats), beginning in the campaign, over-promised and under-delivered on that one issue that matters most to people.  The Administration's predictions about what would happen in response to their policies were wrong, in some cases grossly wrong.  People, understandably in my view, don't want to hear the excuses and blame-shifting about why the predictions were wrong, nor do they believe the arguments about the stimulus "creating or saving" millions of jobs when unemployment remains close to 10%.  Maybe that's not fair and maybe their policies did prevent unemployment from reaching 11 or even 12%, but that is all politically irrelevant since the administration assured the public the stimulus would keep it under 8%.  The Administration persisted in overly-rosy projections with the "Recovery Summer" rhetoric which, again, failed to meet expectations.

 

The simple lesson here is credibility matters.  Credibility is a currency that is difficult to gain and easy to lose.  The quickest way to destroy credibility is to make promises and then fail to keep them.

 

Additionally, there is the perception, whether deserved or not, that the President and Congress moved off the economy too quickly and into health care.  The problems with the health care bill, both real and political, are compounding the negative view of Democrats and Congress.  The Democrats chose to push implementation back to 2014 in order to keep under the President's arbitrary cost limit of $900 billion.  That decision came with consequences in that the Democrats are suffering politically from all the legislation's negatives while not enjoying much in the way of positive benefits.

 

Finally, I think  it's important to point out that most people, especially "swing" voters are not ideologically in the bag for one party or another.  While it's obvious to point that out, it means that those voters aren't going to give the President and Congressional Democrats the benefit of the doubt for over-promising and under-delivering.  Those predisposed to the Democrats tend to believe that even if the policies didn't work, or didn't work as well as advertised, that the Democrats are a better choice regardless.  That's a view that I don't think is shared by most Americans which is why they are voting against Democrats this election.