Ah, Cassandra

Ah, Cassandra, as I grow older I empathize with you more and more. While I don't have your clear foretelling of the future, the signs and portents point to catastrophe. When?  I don't know.  Precisely how? I don't know.

The paths of those making decisions are ignorant, foolish, and short-sighted, amplifying the destructive effect of past foolish, ignorant, and short-sighted decisions.  I have made my share of short-sighted, ignorant, and foolish decisions.  I have had to live with the consequences of those decisions, and taken my lumps.  Out of those experiences I draw several lessons:

1. There's no free lunch.  When you screw up, you or someone else pays, one way or another.
2. Violate Walter's Law that the unintended consequences of any decision always vastly outweigh the intended consequences and its corollaries at your peril.
3. Delay in taking corrective action makes things worse, not better.  Things don't fix themselves.  See item 1.
4. We do not live in an existential universe where belief orders the universe.  Just because we would like something to be true, does not make it so.
5. Reality always trumps pretend in the end.

These realities don't vary, no matter what your beliefs and values, implicit or explicit.  We ignore them at our peril.  Since we don't live in a perfect, fair world, it is sometimes possible to defer or displace consequences so they are borne by others.  This doesn't alter the fact that the consequences will be borne by someone.

The current irresponsible actions that ignore each of these realities — such as the recent tax vote; action rejecting the new START treaty; the failure to regulate systemically threatening institutions; the failure to act so as to preserve a viable middle class as a large portion of the population; the allocation of resources to consumables instead of true (not financial) investments in people and projects having long-term, general benefits; the sacrifice of individual liberties for apparent security; and the deferral of costs into the future — are simply continuations of threads begun many years ago.  My impressionistic belief is that these threads came into being in the U.S. as those who had experienced want and the implacable, impersonal impact of extrinsic forces — primarily, for the generations immediately preceding us, World War I, the Great Depressions, and World War II — ceased to be the primary decision makers.  Instead, both individually and as a society, those who had inherited prosperity from those who had come before and had faced only (seemingly) individual hardship transitioned into decision making positions, believing that they, not their precursors, were the creators of the blessings of political security and liberty and economic bounty bestowed upon them, or, even worse, that these conditions are the natural state of things and not the result of vast efforts by many people over many years.

As this transition occurred, the fallacious belief also gained ascendency that individual actions are the sole cause of consequences to the individual, and that therefore the conditions each of us finds ourselves in are a result of our own actions.  On one level this is certainly true, but it is also incomplete, since actions are taken in the context created by the greater community and the objective reality of the universe.  If left alone without the context of the community and the resources we together provide to each other, most of us would starve within weeks. We must view our actions as having both individual and community consequences, and take responsibility for both.

Altruism is a species trait because it is beneficial. We take care of each other not only because there will be times when we cannot take care of ourselves, but also because the aggregate of contributions by all are greater than the sum of the individual contributions of each.  Synergy is real.

Perhaps each cycle must have its ragnarock.  I hope this is not true, that we can learn from what has gone before, and act in wisdom reflecting the realities listed above, but the course of events is not encouraging. If we do not learn from the past, reflect, and act in wisdom, catastrophe and re-creation await.

Energy and the economy

In the interesting note found in the UT Alumni newletter, this research draws a correlation between energy efficiency in the production and use of energy and expansion in the economy.  Makes sense, and introduces an additional argument for policies that encourage energy that efficient to produce and efficiency in consumption.

Misleading graphs

I really dislike misleading graphs.  Here is an example of one that appeared in the New York Times on December 3, 2010 (http://economix.blogs.nytimes.com/2010/12/03/so-much-for-momentum/?src=busln ):

At first glance, one would have the impression that the amount of construction spending was slightly higher at the time of the last bar in October 2010 (35 on the graph below — sorry, I'm not good enough with Excel to put the month names) than in December 2008 (13 on the graph below), and things were getting better still.

Wrong!

Note in the light gray type the "Change from previous year."  While this type of graph is accurate as a trend display (and even better for that if on a rolling average not a year-over-year), it can be very misleading if seen as a display comparing state from period to period.

Actually, while the rate of decrease in construction spending has slowed during 2010, the actual amount of decrease continues to accumulate, albeit in an uneven trend with a slight upward movement over the past three months.  Thus, if one takes December 2007 (1 on the graph below), at the beginning of the crash, as the base year, and compares each period to that base, one can see the real trend in total construction spending (using the source Census Bureau data http://www.census.gov/const/www/totpage.html).

The more accurate impression is given by the same type graph with a full scale:

With this graph, you can see that the amount of construction spending in December 2008 had dropped about 10% from the base year, while construction spending in October 2010 had dropped nearly 30% (27.7% to be exact)!

If, conversely to the first example, one wished to emphasize how badly things are developing, on can limit the scale to the display scale, which is often done in publications.  Thus the graph would be:

This, of course, is depressing, thus the choice of a misleading graph to represent the information in a way designed to make it look more favorable than it really is.

Let Them Fail!

Once again Ireland has come into the limelight with failing banks, excessive public debt, and a failing economy.

The idea of converting private debt -- that owed by the banks to private individuals -- into the public debt of a sovereign state is simply ridiculous.  Making depositors whole assures that there will be an orderly banking system.  Making creditors of banks whole simply assures that those creditors and the banks funded by them will take irresponsible risks.

It is not a goverment's job to assure that banks do not fail.  Failure is the way resources are reallocated in a capitalistic system:  wise decisions are rewarded, and unwise ones punished.

Ireland and any other government faced with failing banks should simply let them do so, then use government resources to mitigate harms directly while allowing those responsible to bear the consequences of unwise decisions.

Acts of Desperation

Last week, immediately after the election, the Fed announced that it would expand its 'Quantitative Easing' – another more acceptable term for printing money – by $600 billion (just so we remember, sometimes its better to use the actual zeros for the orders of magnitude:  that's $600,000,000,000) in purchase of US Treasury bonds.  This is an act of desperation of the first order, utilizing untested monetary tools no-one ever thought would be necessary.

With the loss by the Democrats of the election (as a result of not doing enough in my opinion, not too much), this move came as no surprise.  Although fiscal policy actions by the federal government through direct expenditures for goods and services (think road, trains, research, and education) is the best and proven way to stimulate the economy, this was not to be.  In fact, proposed government action is exactly the opposite.

This action is likely to ineffective.  Free capital markets allow the capital put into circulation to go to markets offering much higher returns than the US, such as those in developing economies that have interest rates of 8% or more (as opposed to a real negative rate on US funds).  Thus the funds are likely to tend to produce significant asset bubbles and high inflation in the recipient economies, while doing little for the domestic economy.

If the state and federal governments really do reduce spending, as they seem likely to do, watch out and batten down the hatches as we revisit lessons which should have been learned in the early 1930's.

The way governments deal with money annoys me

As I was walking this morning, I happened to pass someone in a brand new city pickup truck.

Most of the city, state, and federal vehicles I see are like this; almost none are older than 3 or 4 years. Now, the city I live in is broke. Not desperately broke like some, but they are cutting fire protection, police protection, park and recreation operating hours and maintenance, and streets.

But still, there was this brand new truck!  Now I know that new vehicles have less maintenance and are more reliable than old ones. I, however, drive a 12 year old, well maintained car, and do just fine.  So do most of the people I know.  Only those with considerable resources have new cars, and even then often buy lightly used vehicles because it makes more economic sense.  The most recent information I remember said that the fleet average age for all cars in the US was now somewhat in excess of 8 years.

Why don't government employees drive cars that long or longer?  Maintenance should be less expensive with fleets and employee (or volume contract) workers and parts.  We all would save money.

This is only one symptom of how government (and sometimes other organizational) spending gets out of synch with what we do in our private lives.  It annoys me.

Folly Day

I hereby nominate July 11 as a new holiday: Folly Day, to celebrate foolish decisions. The date is in honor of the decision to allow Skylab to deorbit instead of being boosted to a higher orbit and maintained for future use, all because of funding issues. 21 years of space policy idiocy and underfunding, to be followed, it appears, by even more as we lose the ability for manned launches to orbit. Of course, the Saturn-Shuttle-Constellation sequence is itself an example of the folly of scrapping working technology before newer technology is fully proven and reliably available.

Perhaps others have nominations for such decisions?

...over the next ten years.

The trend toward stating government expenses and project costs "over the next ten years" is insane and misleading.

I have even seen it starting to crop up in contexts projecting not cumulative income or expenditures, but in results five or ten years from now.

First, no one knows what is going to happen next week, much less next year, or ten years from now – not to mention the fifty years frequently mentioned. How close were folks in 1960 to projecting our particular future? Such statements simply create a false sense of certainty about the unknowable. While we must plan, we must also recognize uncertainty. It is almost as if uncertainty increases (with length of time involved), people's desire to pretend otherwise increases as well.

Second, changing the time base for periodic expenditures distorts the ability to compare amounts (just as does use of the word million, billion, and trillion – and shortly to come quadrillion – instead of using strings of zeros or powers of ten). People's brains just don't work that way, even if they have a high degree of numerical sophistication.

Quick, how much is more: $10 million a year for the next ten years, or $100 million over the next ten years? The natural reaction is that the latter is more, when actually it varies from less to much less than the first, depending on assumptions about discount rates and inflation.

Delusion is a source of suffering, and use of "over the next ten years" invites delusion and distortion.

What's wrong with "immigration reform"? Part 1

This morning my girlfried saw an extraordinary design project in a magazine she reads, done by a student in India. She asked "Can I hire her?" I responded, "No, not unless you want to hire her in India."

And therein lies the fundamental problem with our understanding of what immigration policy should be, and what is wrong with "immigration reform."

Over the past thirty years, world capital has been increasingly free to reallocate to different countries and regions, with a corresponding opening of trade in goods, all generally referred to as "free trade." There has been no corresponding opening of labor markets, which are increasingly protectionist. This dichotomy reflects a fundamental — and incorrect – view that values capital over labor, and political policies which reflect that view, enhancing further the value of mobile capital and devaluing immobile labor.

To see that this is true, one need simply consider the results of a typical outsourcing decision in the current environment. Widget Maker, facing high labor costs in Country A, closes production facilities in Country A. Working capital formerly deployed in Country A is available for other uses. Noting the much lower cost of labor in Country B (often a factor of 30 less) and relatively unimpeded in the movement of goods between countries, Widget Maker redeploys the working capital to Country B. Workers in Country B cannot relocate to the location with the highest wages with labor demand, but instead must stay within Country B. Since Widget Maker can simply move its operations, and workers cannot move, the negotiating position of the workers is severely disadvantageous, resulting in lower wages with a corresponding increase in return on capital.

One of the most pernicious effects of the current system is that workers in any given country perceive that they are disadvantaged by the availability of additional workers, since additional workers are simply competing for a limited number of available jobs. If a rising pool lifts too many boats too high, those controlling the water will just drain the pool and move to a shallower pool.

This situation can be fixed in one of two ways: by restricting the flow of capital, or by allowing the free flow of labor. Since the free flow of labor and capital would tend to maximize overall good by lifting all boats, I prefer that path. (I discuss why this creates a virtuous circle in Part 2.)

Consider the result of such policies. Capital would not only be able to seek the lowest wage labor market, but labor would be able to seek the highest wage labor market. If capital were reallocated, labor could follow, tending to reduce the advantage of relocating but increasing the wage base of all labor. Each person could legally seek the highest wage consistent with their knowledge and skills, in whatever location maximized the value of their knowledge and skills – unlike the current system where too frequently such action is illegal.

"Immigration reform" is not a debate regarding optimal policy, but a reflection of this fundamental value error and resulting negative feedback loop for those on the labor side of the equation. It does not address and facilitate the optimization of the free flow of labor, but attempts to lock down labor flows further, to the benefit of those controlling capital and the detriment of the rest of us.

True immigration reform would simply open residence and eventual citizenship, if desired, to all those willing to relocate and work, as was true in the late 19th and early 20th century.

What do they expect?

Sometimes I am just amazed.

The NYTimes article headline: "School Is Turned Around, but Cost Gives Pause" with the lead "As recently as 2008, Locke High School here was one of the nation’s worst failing schools...."

What do they expect?  It costs money for a functional school, and more money for an excellent school.  For some reason, most folks seem to have forgotten that you get what you pay for when it comes to governmental functions like schools as well as things we consume and use privately and in business.

Every time one of my friends who educated their kids in private schools in the city where I live start to bitch and moan about how the public schools waste money and should do more with less, I ask two simple questions: How much did  XX (insert name of truly excellent private school here) cost a year?  Was it worth it?

In my city at the moment, the best private schools charge annual tuition of between $25,000 and $35,000 a year, plus the normal expenses one incurs.  Almost always my friends answer the first question in line with this reality.  Almost always they answer the second question with "yes," albeit sometimes with a little hesitation.

Now, since no one is required to send their kids to private school, those amounts are the definition of the fair market value of an excellent education.  Almost all of these schools are non-profit institutions, and charge only enough to cover the expenses required to provide the excellence demanded by their customers.  They make no profit, and waste as little as possible, since their customers are discriminating and there are market alternatives.

For simplicity, let's assume the average of $30,000 is what is required. (By the way, the average spent at the best public systems where I am is about $8,000, due to the insane Texas school finance system, but that is another rant....) Locke High School, according to the linked article, there are 3,200 students. Thus we could reasonably assume that an excellent educational environment would cost $96,000,000.  Perhaps a bit less, if there were efficiencies of scale (although I don't really think any apply, larger is not more efficient after a certain point in school size — note how those rescuing Locke broke it into smaller subunits).

Locke's annual operating budget is stated to be about $30,000,000 a year (or $115,000,000 over 4 years), with a $15,000,000 supplement from philanthropic and federal turn-around funds, or about $26,000,000 a year in tax funding, or about $8,125 per student per year. Contrary to the amazed "Experts are debating whether Locke is a good model for other turnarounds...'I don’t doubt they’re putting all those resources to good use,' Mr. Cohen said of Locke’s $15 million costs. 'But that’s high.'," it is not only not high, it is astounding that they can do so much with so little, including beginning to remediate what obviously was years of neglect, deferred maintenance, and lack of capital improvements.

And the federal government (who shouldn't be in the business of funding local schools at all, but that also is another rant) limits provided funds to $2,000,000 a year for school improvement, when what is really needed in a school the size of Locke is closer to $70,000,000 a year? And people really expect significant results?

What is really needed is for school districts to be allowed to raise appropriate amounts of tax revenue to fully fund excellent schools, and for the citizens of each locale to value and prioritize excellence in education and support those taxes and expenditures, and be realistic about what excellence — and mediocrity and failure — costs.

We live in a profligate time

Every time I go past the new bridge on Northwest Highway here in Dallas north of White Rock Lake, I am reminded how profligate we are with resources.  Many of the piers (some of which apparently will not even be able to be seen from a roadway) have stone facings on the concrete.  How much must this have added to the cost of the project?  My guess would be at least $50,000 to $100,000 since stone and stonework are expensive.  What's wrong with concrete? It is functional, and requires no or little maintenance.

Other reminders are giant interchanges where there is only modest traffic in smaller towns and cities, and short stretches of four-lane highway that dead end against a wood or field.  Contrasting color paint on major interchanges that will require eternal major maintenance or become derelict also comes to mind.

Not to mention foreign military adventures, and insane pricing in health care items that no one would individually would pay.

Meanwhile, our schools and needed infrastructure improvements go woefully under funded.

Everyone acts as if no one is paying, but we all are and will in many ways.  The piper must be paid.

Humpty Dumpty had a great fall....part one

We live and participate not in a capitalist culture, but in a debtist culture.  Why?  It's easier until it's not.

Capital requires savings derived from past effort.  Since it is derived from past effort and productivity, its value is not speculative.  We know how much work, material, and time was required to produce the tangible or intangible item reflecting the aggregation of those items. (For the moment, set aside the variable value of the measuring and exchange tool — money — itself.)

Debt, on the other hand, is intrinsically wholly speculative.  While the principal lent may appear to be fixed, and the return is stated in a way which may be definitely computed, its value is completely contingent on future events.  Will it be repaid, or not?

Where the source of principal is capital, only the lender is at risk.

Where the source of principal is debt, at least two lenders (more in our current system) are at risk.

In our current system, where does the money financial institutions lend come from?  Coming in part two....

Hello World!

This blog is intended to just reflect my idiosycratic view of the universe and happenings therein (and maybe out...). Hope you enjoy, or are at least led to think a little differently.