There is a in financial economics a theorem that goes like this:
Suppose that 1) markets are in an efficient equilibrium, 2) there are no idiot ("noise") traders, and 3) the structure of possessing private information is common knowledge. If that were true then there would be no trades whatsoever.
To quote Wikipedia:
The idea behind the proof of the no-trade theorem is that if there is common knowledge about the structure of a market, then any bid or offer (i.e. attempt to initiate a trade) will reveal the bidder's private knowledge and will be incorporated into market prices even before anyone accepts the bid or offer, so no profit will result. Another way to put it is: all the traders in the market are rational, and thus they know that all the prices are rational/efficient; therefore, anyone who makes an offer to them must have special knowledge, else why would they be making the offer? Accepting the offer would make them a loser. All the traders will reason the same way, and thus will not accept any offers.
Now since we know damn well that asset trading happens a lot we know that this isn't true in general. Further for any trade to occur either 1) some or all of the assumptions of the theorem must be false for a trade to occur or 2) the parties have to have different risk or liquidity preferences.
Which naturally leads me to parking meters.
In 2009 Chicago leased the cities parking meters (and associated revenue stream) to a private company for a large cash payment. A transaction itself isn't of a remarkable sort - exchanging streams of payments for lump sums is the most basic kind of finance there is.
What is remarkable is that it obviously never make any sense for the city. If both parties have the same liquidity preferences (risk is negligible here) then by the no-trade theorem the transaction shouldn't have taken place. If the meters were worth more than the asking price, then the city would be better off holding onto them, if they were worth less the company wouldn't buy, and if the values were equal then the city is no better off - but since transactions aren't totally cost-less, there would be no trade then either. Same sort of logic as the no-trade theorem.
Of course, its possible that the city has different liquidity preferences than the buying firm. But this seems unlikely, given that the city preferred more liquidity, since they can issue bonds, access the money market, and have fairly predictable expenses and revenues. Its possible that the city could be considered to have a lower discount rate than the buyer, but that a (responsible) government would be more present-oriented than a private firm seems implausible.
So given that the sale happened, which of theorem's assumptions were violated?
There's no market here to be efficient, but we're just valuing a stream of payments which is a trivial problem. How about the structure of information? Again, knowledge about the value of this asset is symmetrical, and both parties know it.
The best case scenario here is that the city was indifferent between buying and selling at the sale price. If you believe that, do you have a toll bridge for sale?
So what we're left with is 2 (plausible) explanations: an idiot trader or a government that's incredibly shortsighted.
Either way, the lesson here is to assume any sale of public revenue streams that has a buyer is be a bad deal until proven otherwise.
Thursday, August 29, 2019
Monday, August 26, 2019
Why the Government's Budget Isn't Like Your Budget
It is popular to analogize the household budget the governments budget to your household budget. Now, I'm a big fan of analogies. They can explain complicated notions in simple terms that are, technically, inaccurate, but get "close enough" to how things work.
But the analogy has to work, the correspondences have to make sense. The "government budget as household budget" meme isn't like that. Rather, it is very dumb.
How is the government's budget not like your budget?
Well, how is the government not like you?
1) You will die. Governments live for an indefinite length. This means that while you might have trouble borrowing money to be paid back over 100 years, little Austria can sell 100-year bonds - and the market thinks it'll lend to Austria at 1.2% interest. You try borrowing money for 100 years, and let me know if anyone is foolish enough to lend to you.
This long life with low borrowing costs has other benefits. If the economy (and thus government tax revenue) grows at 2% a year, and the debt costs 1.2% a year, then as long as the borrowing isn't too big, the government can borrow money forever and keep paying it back. This might not be a prudent plan, but its an option that's open to governments that isn't open to
2) You cannot rob people. Fools like to say"taxation is theft". Why this is foolish is for another time, but it does cut to the heart of the matter. If you decide one day you want to make an extra $10,000 you can't just go to a bank and demand to be given that money. Governments can do that. Maybe you think they shouldn't but they can. Your promise to pay someone back is a promise that you'll earn the money to pay them back. The government's promise to pay someone back is a promise that they'll tax the money to pay them back.
3) When you print money, its counterfeiting. When the government prints money, its monetary sovereignty. The US government borrows US dollars. It also controls completely the supply of US dollars. The risk to lenders is not (barring an insane sovereign default) that the US won't pay you back, but that it will print too much money when it does so.
4) Your borrowing costs are higher. By which I mean, right now the US can borrow money for a month for about 2% APY, about a tenth of the costs for the average consumer credit card. This dramatically changes the picture in terms of what is and isn't "responsible" spending and borrowing. If you could borrow money for that cheap, what would you do?
But the analogy has to work, the correspondences have to make sense. The "government budget as household budget" meme isn't like that. Rather, it is very dumb.
How is the government's budget not like your budget?
Well, how is the government not like you?
1) You will die. Governments live for an indefinite length. This means that while you might have trouble borrowing money to be paid back over 100 years, little Austria can sell 100-year bonds - and the market thinks it'll lend to Austria at 1.2% interest. You try borrowing money for 100 years, and let me know if anyone is foolish enough to lend to you.
This long life with low borrowing costs has other benefits. If the economy (and thus government tax revenue) grows at 2% a year, and the debt costs 1.2% a year, then as long as the borrowing isn't too big, the government can borrow money forever and keep paying it back. This might not be a prudent plan, but its an option that's open to governments that isn't open to
2) You cannot rob people. Fools like to say"taxation is theft". Why this is foolish is for another time, but it does cut to the heart of the matter. If you decide one day you want to make an extra $10,000 you can't just go to a bank and demand to be given that money. Governments can do that. Maybe you think they shouldn't but they can. Your promise to pay someone back is a promise that you'll earn the money to pay them back. The government's promise to pay someone back is a promise that they'll tax the money to pay them back.
3) When you print money, its counterfeiting. When the government prints money, its monetary sovereignty. The US government borrows US dollars. It also controls completely the supply of US dollars. The risk to lenders is not (barring an insane sovereign default) that the US won't pay you back, but that it will print too much money when it does so.
4) Your borrowing costs are higher. By which I mean, right now the US can borrow money for a month for about 2% APY, about a tenth of the costs for the average consumer credit card. This dramatically changes the picture in terms of what is and isn't "responsible" spending and borrowing. If you could borrow money for that cheap, what would you do?
Monday, August 19, 2019
There is No Such Thing as Safety
There is no such thing as safety; only degrees of risk.
This can be a very hard thing to wrap your head around. People want to engage in dichotomous, black-and-white thinking, and while this is easy and useful and isn't always wrong, it often is.
Save vs. unsafe is one of those false dichotomies. Because the truth is that right now, whoever you are, wherever you are, whatever you are doing other than reading this, and whenever you are reading this, you are not safe. A previously undetected asteroid could be hurtling towards earth at this very moment, about to kill all life on earth, an undetected brain hemorrhage could kill you in the next minute, a gamma ray burst could be hurtling toward us the speed of light, about to microwave the Earth on "high" before we even have time to panic.
The thing about all of those things is that they are incredibly, vanishingly, unlikely. So we feel "safe" from those things even though they could, technically, in theory, happen. Thinking probabilistically is basically an unnatural contortion of normal human thought patterns, and people almost never really do it, because frankly they don't usually have to. So they round up to 100% or down to 0%, and maybe if they are feeling particularly uncertain they settle on 50%. Then they live their lives as if those numbers where, y'know, correct.
The heuristic reasoning part - cognitive corner-cutting often enable human flourishing and is unavoidable anyway. I know people make trade-offs against risk and reward in all sorts of ways, and have heterogeneous preferences, but this "feeling of safety" thing is just weird to me. The most dangerous thing most Americans do is drive. They drive to work and worship, to pick the kids up from school and to get groceries and visit Grandma, and when people do all of these things most of them are confident they're good drivers and feel pretty safe behind the wheel. The most dangerous jobs in America involve working with heavy machinery and being far from medical attention, heavy machinery like a car.
And people shrug their shoulders and just get on with their lives! Meanwhile they panic about crime, which has been basically falling my entire life, or fight tooth-and-nail against nuclear energy, which kills fewer people than any kind of fossil-fuel power. People's intuitive senses of danger and risk seem to be finely honed for avoiding tigers and poorly suited for managing the "invisible" risks of modernity.
All of this bothers me immensely. Not the heuristics or the rounding but the sheer inconsistency of it all. Because what I want to be able to to is say "okay, so your said this is what you have to get in time, money, or something in order to be willing run these risks" but it changes completely depending on the threat, as if it matters even though dead is dead. We'll ban shuriken but let any jackass with pulse buy a fucking gun. We'll ban weed but build whole social lives around alcohol. People are willing to make the trade-offs inherent with using cars, but lose their damned shit over scooters.
Instead its all "feeling safe" and "feeling unsafe" - and they expect politicians to fix this! How? When people's feelings are so inconsistent? Building invisible bridges over invisible rivers, I suppose. But what do I do, no, what do we do when the politicians are fear-mongering and quaking in their boots at that invisible river? You can't magic people better.
Look, my dream job is social planner, but how am supposed to fucking do that if y'all can't even give my a straight answer on the risks you're okay with running.
This can be a very hard thing to wrap your head around. People want to engage in dichotomous, black-and-white thinking, and while this is easy and useful and isn't always wrong, it often is.
Save vs. unsafe is one of those false dichotomies. Because the truth is that right now, whoever you are, wherever you are, whatever you are doing other than reading this, and whenever you are reading this, you are not safe. A previously undetected asteroid could be hurtling towards earth at this very moment, about to kill all life on earth, an undetected brain hemorrhage could kill you in the next minute, a gamma ray burst could be hurtling toward us the speed of light, about to microwave the Earth on "high" before we even have time to panic.
The thing about all of those things is that they are incredibly, vanishingly, unlikely. So we feel "safe" from those things even though they could, technically, in theory, happen. Thinking probabilistically is basically an unnatural contortion of normal human thought patterns, and people almost never really do it, because frankly they don't usually have to. So they round up to 100% or down to 0%, and maybe if they are feeling particularly uncertain they settle on 50%. Then they live their lives as if those numbers where, y'know, correct.
The heuristic reasoning part - cognitive corner-cutting often enable human flourishing and is unavoidable anyway. I know people make trade-offs against risk and reward in all sorts of ways, and have heterogeneous preferences, but this "feeling of safety" thing is just weird to me. The most dangerous thing most Americans do is drive. They drive to work and worship, to pick the kids up from school and to get groceries and visit Grandma, and when people do all of these things most of them are confident they're good drivers and feel pretty safe behind the wheel. The most dangerous jobs in America involve working with heavy machinery and being far from medical attention, heavy machinery like a car.
And people shrug their shoulders and just get on with their lives! Meanwhile they panic about crime, which has been basically falling my entire life, or fight tooth-and-nail against nuclear energy, which kills fewer people than any kind of fossil-fuel power. People's intuitive senses of danger and risk seem to be finely honed for avoiding tigers and poorly suited for managing the "invisible" risks of modernity.
All of this bothers me immensely. Not the heuristics or the rounding but the sheer inconsistency of it all. Because what I want to be able to to is say "okay, so your said this is what you have to get in time, money, or something in order to be willing run these risks" but it changes completely depending on the threat, as if it matters even though dead is dead. We'll ban shuriken but let any jackass with pulse buy a fucking gun. We'll ban weed but build whole social lives around alcohol. People are willing to make the trade-offs inherent with using cars, but lose their damned shit over scooters.
Instead its all "feeling safe" and "feeling unsafe" - and they expect politicians to fix this! How? When people's feelings are so inconsistent? Building invisible bridges over invisible rivers, I suppose. But what do I do, no, what do we do when the politicians are fear-mongering and quaking in their boots at that invisible river? You can't magic people better.
Look, my dream job is social planner, but how am supposed to fucking do that if y'all can't even give my a straight answer on the risks you're okay with running.
Tuesday, August 13, 2019
An Example of Why Bicameralism in State Governments is Dumb, Dumb, Dumb
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| Nebraska, Land of Unicameralism |
Let me illustrate this with an example from Indiana, a state with which I am fairly familiar. The Indiana General Assembly consists of two chambers, a House and a Senate in a poorly-thought-out imitation of the US Congress. The House has 100 members elected to 2 year terms, the Senate 50 seats (from 50 districts) elected to staggered 4 year terms, i.e. 25 are up for election every 2 years.
Why is this dumb? Because the Indiana State Senate is pointless. It serves no purpose. It is redundant, surplus to requirements, excess, useless, frivolous, and unnecessary.
The US Congress has two chambers because those chambers are meant to represent two different constituencies on two different basis. The Senate was initially (prior to the 17th Amendment) intended to represent state governments, while the house was meant to represent the "the People" (initially defined to mean propertied white men, but nevermind that now). Thus, two chambers were created, whose members would be elected in different ways. Representatives are elected for two-year terms from districts of equal population, while each state sent (or now, directly elects) 2 Senators to serve for staggered six-year terms.
The Indiana General Assembly does not do that. It has one chamber which consists of representatives directly elected from equal population districts and another chamber that also consists of representatives elected from equal population districts. This is dumb.
Adding more chambers creates additional veto points in the political process, gumming up the works and making it harder to get anything done, and adding legislators means more people who want favors or other considerations for their support to which tends to increase wasteful "pork" spending. This is dumb.
Staggering elections makes sense if you're electing multiple representatives from the same district, but if the districts all have only one representative and serve for 4 year terms then half of the State Senators will be arbitrarily and perpetually "on-cycle" with the Governor, and half off-cycle. This might be desirable, as it allows people could decide to punish a governor in mid-term elections. But since the entire lower house, not just half of it, stands for midterm elections as well as on-cycle gubernatorial elections, the Senate adds nothing in this regard, also. Dumb.
As the sea of stupidity is bottomless, I'm sure I'm missing other dumb arguments, but I feel I've made my case well enough.
Friday, August 9, 2019
Is Violence a Natural Monopoly?
A long time ago, I saw a very heated argument in a comments thread on Hulu (yes really) between an anarcho-capitalist and a sane person. It went something like this, though truthfully I'm probably steel-manning the Ancap.
Ancap: We shouldn't have a state; the market will provide.
Sane: What about roads? Courts? Protecting your private property?
Ancap: The market will provide! Private companies will build the roads, and I'll pay a usage fee! Private arbitrators will resolve disputes like in 9th century Iceland or pre-colonial Somalia!
Sane: And your private property? Who will protect your stuff in this brave new world?
Ancap: I'll protect it myself or contract out someone to do this!
I think about that exchange a lot, and every time I want to reach through my screen, grab the Ancap by his (these guys are almost always male) shoulders and shout:
What could you possibly offer a mercenary that's worth more to him than just shooting you and taking all of your stuff right now? A series of payments over time? Congratulations motherfucker, you just invented the state! But not even a good state, with rights or democratic accountability or anything, but the most shitty, primitive kind of state, a mere stationary bandit. You've just reset political development back to square negative fucking one! The blood of millions shed over ten millennia to get to where we are now, boiling away in this stateless vacuum! All for what! For some macho bullshit, some myth of total self-sufficiency, or have you just not thought this through?
...deep breath...
And from that my mind turns to a more intellectual question: Is (legitimate) violence a natural monopoly?
Max Weber defined a state as being the institution with the monopoly on the legitimate use of force in some geographic area. But supposing an Anarcho-capitalist society existed, and there was a competitive market for legitimate violence. Would such a market remain competitive, or would a monopoly on legitimate violence (i.e. a state) emerge?
Having defined "state", let me define "legitimate violence". By "legitimate violence" I mean violence to protect property or enforce a contract or agreement.
Now my assumptions:
Suppose there were n mercenary firms, numbering from 1 to n, with 1 being the most powerful and n being the least powerful.
Now if I contract with a firm, it can assuredly protect me against less powerful firms, but it cannot secure me at all against more powerful firms.
A firm will not destroy itself resisting a more powerful firm - i.e. it is costless for stronger firms to overcome weaker ones
The unprotected lose everything - even a lone individual cannot resist the least powerful mercenary. Thus all people would hire someone
But who would hire firm n, which cannot protect against any other? No-one, so firm n exits the market. But now firm n-1 is the weakest, and so its services are therefore worthless, and so it too must exit the market. Thus by induction, only 1 firm can exist in equilibrium. Thus a state emerges naturally from (capitalist) anarchy. Intuitively, the thinking might be summarized as "why would you hire the second strongest mercenary?"
This begs some questions.
First, if a single state is emergent from anarchy, how is that one universal state hasn't emerged from the present international anarchy? My simplified model must be omitting some important details - and indeed it its.
By assumption, distance to irrelevant in my model; all the mercenaries contest the same geography. A more "realistic" model would have a spatial component, weakening firms the further out they are from their "base". I suspect the the equilibrium there would have multiple firms spread out, like our present international anarchy.
My model also assumes the mercs have fixed strength relative to one another, although given the strong presumably have the greatest ability to earn money from their "customers", this seems to enhance a centralizing equilibrium.
And of course i ignores the role of prices in consumer choice. I have avoided this so as to avoid solving equations to maximize utility, etc. which a reader might find tedious or intimidating. It won't make a difference though - as long as the leading firm asks for less than everything, their "customers" will pay it before losing everything.
Second, I assumed that overcoming weaker rivals is costless. If it isn't costless, then its possible for the profits gained from a new "customer" to be insufficient to justify the costs of acquiring them, and a firm could stay independent.
At this point, we've away from economics and markets and into international relations, so I'll bring it back into my comfort zone by asking the next obvious question: suppose there was a competitive market for "legitimate violence" - why wouldn't the firms just combine into a monopoly to maximize their profits? Such a thing could not be prevented in Anarcho-Capitalistan. And such a firm (state, now, I suppose) could maintain such a monopoly by murdering or co-opting anyone who threatens it. State monopolies are after all a time honored tradition.
Ancap: We shouldn't have a state; the market will provide.
Sane: What about roads? Courts? Protecting your private property?
Ancap: The market will provide! Private companies will build the roads, and I'll pay a usage fee! Private arbitrators will resolve disputes like in 9th century Iceland or pre-colonial Somalia!
Sane: And your private property? Who will protect your stuff in this brave new world?
Ancap: I'll protect it myself or contract out someone to do this!
I think about that exchange a lot, and every time I want to reach through my screen, grab the Ancap by his (these guys are almost always male) shoulders and shout:
What could you possibly offer a mercenary that's worth more to him than just shooting you and taking all of your stuff right now? A series of payments over time? Congratulations motherfucker, you just invented the state! But not even a good state, with rights or democratic accountability or anything, but the most shitty, primitive kind of state, a mere stationary bandit. You've just reset political development back to square negative fucking one! The blood of millions shed over ten millennia to get to where we are now, boiling away in this stateless vacuum! All for what! For some macho bullshit, some myth of total self-sufficiency, or have you just not thought this through?
...deep breath...
And from that my mind turns to a more intellectual question: Is (legitimate) violence a natural monopoly?
Max Weber defined a state as being the institution with the monopoly on the legitimate use of force in some geographic area. But supposing an Anarcho-capitalist society existed, and there was a competitive market for legitimate violence. Would such a market remain competitive, or would a monopoly on legitimate violence (i.e. a state) emerge?
Having defined "state", let me define "legitimate violence". By "legitimate violence" I mean violence to protect property or enforce a contract or agreement.
Now my assumptions:
Suppose there were n mercenary firms, numbering from 1 to n, with 1 being the most powerful and n being the least powerful.
Now if I contract with a firm, it can assuredly protect me against less powerful firms, but it cannot secure me at all against more powerful firms.
A firm will not destroy itself resisting a more powerful firm - i.e. it is costless for stronger firms to overcome weaker ones
The unprotected lose everything - even a lone individual cannot resist the least powerful mercenary. Thus all people would hire someone
But who would hire firm n, which cannot protect against any other? No-one, so firm n exits the market. But now firm n-1 is the weakest, and so its services are therefore worthless, and so it too must exit the market. Thus by induction, only 1 firm can exist in equilibrium. Thus a state emerges naturally from (capitalist) anarchy. Intuitively, the thinking might be summarized as "why would you hire the second strongest mercenary?"
This begs some questions.
First, if a single state is emergent from anarchy, how is that one universal state hasn't emerged from the present international anarchy? My simplified model must be omitting some important details - and indeed it its.
By assumption, distance to irrelevant in my model; all the mercenaries contest the same geography. A more "realistic" model would have a spatial component, weakening firms the further out they are from their "base". I suspect the the equilibrium there would have multiple firms spread out, like our present international anarchy.
My model also assumes the mercs have fixed strength relative to one another, although given the strong presumably have the greatest ability to earn money from their "customers", this seems to enhance a centralizing equilibrium.
And of course i ignores the role of prices in consumer choice. I have avoided this so as to avoid solving equations to maximize utility, etc. which a reader might find tedious or intimidating. It won't make a difference though - as long as the leading firm asks for less than everything, their "customers" will pay it before losing everything.
Second, I assumed that overcoming weaker rivals is costless. If it isn't costless, then its possible for the profits gained from a new "customer" to be insufficient to justify the costs of acquiring them, and a firm could stay independent.
At this point, we've away from economics and markets and into international relations, so I'll bring it back into my comfort zone by asking the next obvious question: suppose there was a competitive market for "legitimate violence" - why wouldn't the firms just combine into a monopoly to maximize their profits? Such a thing could not be prevented in Anarcho-Capitalistan. And such a firm (state, now, I suppose) could maintain such a monopoly by murdering or co-opting anyone who threatens it. State monopolies are after all a time honored tradition.
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