The dark and evil bugbear of income inequality is making the rounds again.
The problem: a tiny sliver of the people own a huge portion of 'the wealth'. According to Stiglitz, the top 1% of Americans control 40% of the wealth. If you don't understand economics, (or in Stiglitz' case, you have a political agenda), this is a 'problem'. The assumption is that these massively wealthy people have taken their filthy riches from the rest of us poor slobs. They *must* have done something to us, something wrong. Nobody should be that wealthy - it's disgusting.
The answer from the left is that this money should be taken from the wealthy, and redistributed 'fairly' to the rest of us.
Whether you subscribe to this idea or not, I've got some news for you. The 'problem' is only going to get worse. I believe that the factors responsible for the current distribution of wealth will only become more powerful over time. But I'm here to tell you why it's *not* a problem, and you shouldn't be worried, or angry, or resentful.
First, some remedial economics. Sorry if this is boring, but it's critical to understanding wealth and its distribution.
Take a CEO - a real fatcat like ING's Jan Hommen. Why does he earn so much money? What could he possibly do that would justify a £1m bonus?
CEO's are like any other employee: their wages are subject to the laws of supply and demand. And the truth is, the supply of people with the business experience, the training, the track record, the sophistication, and the wardrobe necessary to run a bank like ING is limited. Imagine the consequences if the Dutch were to pass a law limiting his total salary, stock, and benefits of all kinds to £200,00/year. This lower wage would make the job a lot less attractive. At that salary, a job as a government clerk, or an airline pilot, or a dentist, might seem a better deal - one with a lot less stress. ING will be unable to compete in the global marketplace for CEO's. [How would they respond? Naturally, they'll have to weasel out of the law somehow, or go out of business due to their inability to hire sufficient talent to run the company. Has society benefitted?]
Why is his income so high? Because prices are signals. And wages are simply the price the company must pay to hire him. A high wage - in any occupation - is a signal to the market that more supply is needed. When your mother tried to get you to go to medical school, she was responding to that signal. If the supply is allowed to grow, the wages will eventually come down, until they reach an equilibrium.
By pressuring ING to take away Jan Hommen's bonus - you hamstring the bank at a critical time. Think about it. When times are good, the economy is soaring, and profits are rolling in - do you really need that world-class banking expert as your CEO? Or do you need them the most when everything is falling apart? Or during the recovery?
It's currently in fashion to hate bankers, stock brockers, basically anybody that has anything to do with finance. This is a backlash from the 2008 crisis. And some of that emnity is deserved. But spare a few moments while I try to defend these folks.
Look at Larry Page and Sergey Brin. Almost nobody hates those guys, or resents their wealth. They clearly deserve it. They provide services that the entire world uses - Google probably greases the wheels of commerce in ways that we don't even understand yet. But most people don't actually understand what they did, or what they do. To most people it's technical gibberish. But the market understands what they do. Most of their vast holdings right now are not in a sense a 'reward' for creating Google - but rather a massive bet by the market that they'll continue to innovate and create even more wealth. This is price signalling at work again.
But those guys in finance that you despise - they also do stuff - stuff that you might not understand - stuff that the markets value highly. Just because you don't understand it doesn't mean it's not real, or that they don't deserve their income.
So is this really a problem? Is there some way that Jan Hommen's, or Larry Page's salaries make you worse off? Did they really take that money from you? Of course not. And in fact, in both cases you probably derive some benefit from their existence. Taking their wealth away wouldn't improve things, and could make things worse. How many young Stanford computer science students will want to give up the security of a comfortable job at Cisco for the risky life of an entrepreuner - when the only reward is to be vilified by society?
This resentment of other people's wealth stems from a broken world-view. Subscribers to this view imagine that wealth is an island - an island that everyone has to share. If Bill Gates owns 10% of that island, and you live in a tiny closet, then clearly something is unfair. But this metaphor is completely wrong. Wealth is created - rather than picturing an island, think of the Netherlands. Over the past several hundred years, the Dutch have carved their land from the North Sea by filling it in. This is what entrepreneurs do - they create wealth that wasn't there before. And believe it or not, they don't keep all of the wealth they create - they share it with the rest of us. This newly-created land then provides a place for the growing of a 'crop' of future wealth.
Now, think about that 'top 1% controlling 40% of the wealth' problem again. Rather than seeing a wealthy man or woman that has stolen land from you - you should now see a bold entrepreneur - someone who risked their capital and their time to create new land for everyone to share. It shouldn't be surprising that the people who are the most adept at creating new land should be sitting on big portions of that new land.
Now I don't mean for this to be an apologia for every 'filthy rich crook' in America. In reality, there are quite a few people who are undeservedly wealthy - people who actually *have* taken land from others rather than creating new land. Often, these are people who take advantage of government or monopoly power to fleece either their customers or the taxpayers. We all know who the 'crooks' are - even if they don't break a law (perhaps because they lobbied for a loophole?). I'm not defending those guys. What I'm saying is that you shouldn't automatically assume that all billionaires are crooks. Or even that most of them are.
Ok, now for the bad news. I think the 'problem' is only going to get worse. Twenty years ago, the canonical 'filthy rich guy' was an Oil Baron or a Saudi Sheik. Today, the names that come to mind are of young technocrats, instant rock stars like Page & Brin, or Mark Zuckerberg. Their meteroic rise in fame and wealth are hints of the world to come. Our society is speeding up. Information and capital move at a blinding speed - a speed that will seem glacially slow only a few years from now. Technology is making possible huge leaps in productivity - and productivity is the main engine of society's wealth creation.
So I see over the next few decades an ever-widening distribution of wealth. Using our 'land-creation' metaphor, the North Sea will be filled faster and faster as time goes by. If the broken 'island' metaphor takes hold, then resentment and anger will rise, too. But if we can get people to understand what's really going on, maybe we can avoid a foolish class war.
Tuesday, April 5, 2011
Monday, March 21, 2011
Debate: How to Protect Yourself
How to ensure that debate takes the form of pointless posturing, and avoid the risk of actual communication:
- Deliberately misrepresent the other side: choose their most outrageous 'representative' and/or focus on any verbal missteps or outtakes - pretend that this is the crux of their position. Ignore moderates or moderate positions.
- Make an impassioned, perfectly reasonable response to *that* position. Slather on the self-righteousness, with plenty of smarm for added points. Bask in the glow from your choir.
- When confronted by a reasonable person and/or reasonable argument, tar this person and/or argument using the brush from step 1.
- Radicalize! Take an even more extreme position than the one you actually believe in! This makes it easier for the other side to do their part!
Friday, March 18, 2011
The Government has No Business being in the News Business
- The vast majority of NPR's budget comes from donations, both from individuals and corporations.
- Those donors should be unhappy about any attempt to influence the content produced. It's your station - much more so than Fox News or CNN.
- Since a small sliver of funding comes from the taxpayer, the government has repeatedly pressured CPB/NPR about its content, and has arguably succeeded in biasing that content over the years.
- The current debate is a clear sign of exactly that influence.
- The best way to eliminate that influence is to get rid of all government subsidies. Cut the strings, cut the influence. If you listen to NPR, you can afford to make this problem go away for good.
Tuesday, March 15, 2011
How is Nuclear Power like Alcohol and Cigarettes?
Because of the idea that recreational drugs are 'bad', we've had almost no advancement in the 'science' of recreational drugs. A few new substances have slipped through the cracks. Much of the interesting work has been done by a lone chemist, Alexander Shulgin. But every new drug, if at all effective in being 'recreational', is made illegal. The result? Rather than banning all recreational drugs, we insist that people stick to the two well-known drugs that cause by far the most damage to society: alcohol and tobacco.
The same thing has happened with nuclear power. Since Three Mile Island, no new reactors have come online in the United States. Opponents of nuclear power have succeeded in stopping all improvements in safety, cost, and efficiency. The result? 40+ year old plants are continually relicensed even though there are much safer designs available. Fears of proliferation have stopped fuel reprocessing, creating the problem of where to store spent fuel. NIMBY activism has stopped the use of the Yucca Mountain storage facility, forcing on-site storage of spent fuel.
We should be building modern, passive-safe plants. We should be investigating inherently-safe alternatives like thorium-fueled molten salt reactors. The best way to get rid of these old power stations is to make them obsolete.
Of course the anti-nuclear activists don't want the old plants to continue to run. They want them shut down, forcing society to retreat to even older and more toxic drugs: coal and oil.
The same thing has happened with nuclear power. Since Three Mile Island, no new reactors have come online in the United States. Opponents of nuclear power have succeeded in stopping all improvements in safety, cost, and efficiency. The result? 40+ year old plants are continually relicensed even though there are much safer designs available. Fears of proliferation have stopped fuel reprocessing, creating the problem of where to store spent fuel. NIMBY activism has stopped the use of the Yucca Mountain storage facility, forcing on-site storage of spent fuel.
We should be building modern, passive-safe plants. We should be investigating inherently-safe alternatives like thorium-fueled molten salt reactors. The best way to get rid of these old power stations is to make them obsolete.
Of course the anti-nuclear activists don't want the old plants to continue to run. They want them shut down, forcing society to retreat to even older and more toxic drugs: coal and oil.
Wednesday, January 5, 2011
netflix, level3, comcast & 'network neutrality'
This Gizmodo story captures perfectly all of my issues with network neutrality. It starts out with the usual hysteria, claiming that there's some giant threat to the Internet from Evil Corporations. (Hey, remember the days of "OMG they are gonna tax our emails!").
After some time to ponder the issue, however, Gizmodo groks the situation:
Even if Netflix realizes that this is bad for their business, they are not allowed to voluntarily give Comcast money to help defray the cost.
In an unregulated environment, Netflix helps defray Comcast's costs, and the users that actually gobble up all that bandwidth help to pay for it.
So which situation is preferable:
1) network neutrality: netflix is not a viable business model, because the bandwidth to support it is not there.
2) network neutrality: netflix still works, but all of Comcast's customers are forced to subsidize those customers that use it.
3) unregulated: netflix works and grows, and comcast grows. Everybody wins.
Notice that I haven't yet mentioned the fact that bittorrent traffic probably consumes even more bandwidth. Once again, all of the ISP's customers are forced to subsidize the minority that are saturating the network with (mostly pirated) bittorrent content. This is actually an interesting problem, because although bittorrent itself is relatively easy to block, its successors will not be. Newer protocols will almost certainly involve some kind of cloaking/encryption, which will be deliberately indistinguishable from legitimate encrypted content.
Services like Netflix and iTunes represent legitimate high-bandwidth services, the kind that will eventually make pirating less attractive. So we are in the midst of a shift of traffic from bittorrent to netflix/hulu/itunes/etc, and I think most people will agree that is a Good Thing. But network neutrality regulations may well stifle this transformation. I don't know about you, but I don't like paying $100+/month to subsidize johnny-down-the-block's massive porn collection.
But oops, you have no choice. Because network neutrality means that Comcast isn't allowed to filter out bittorrent, even if it consumes 80% of their bandwidth. So $80/month goes to johnny-down-the-block, and $20 goes to your own connection. Yea! The Internet is Saved!
After some time to ponder the issue, however, Gizmodo groks the situation:
Indeed, recent reports suggest that Netflix is responsible for a fairly absurd amount of bandwidth, and as Wired points out, the contracts that dictate who is responsible for carrying what traffic are largely left undisclosed to the public. Comcast's statements (unsurprisingly) shift the debate from one of net neutrality to the esoteric and largely uninteresting business of service providers negotiations.But let me 'cast' this situation in a slightly different light. Let's imagine that 20% of Comcast's bandwith is being gobbled up by Netflix users. Now, the infrastructure that Comcast has to build out is expensive stuff. Under 'network neutrality' regulations, Comcast is no longer allowed to pass on any of this cost to Netflix. What happens? Does Netflix's business continue to grow? No. Does Comcast build out additional network to support services like Netflix? No. At least not as quickly as they might have. And if they do, who pays for it? Well, all of Comcast's customers pay for that buildout. Including the ones that don't use Netflix.
Even if Netflix realizes that this is bad for their business, they are not allowed to voluntarily give Comcast money to help defray the cost.
In an unregulated environment, Netflix helps defray Comcast's costs, and the users that actually gobble up all that bandwidth help to pay for it.
So which situation is preferable:
1) network neutrality: netflix is not a viable business model, because the bandwidth to support it is not there.
2) network neutrality: netflix still works, but all of Comcast's customers are forced to subsidize those customers that use it.
3) unregulated: netflix works and grows, and comcast grows. Everybody wins.
Notice that I haven't yet mentioned the fact that bittorrent traffic probably consumes even more bandwidth. Once again, all of the ISP's customers are forced to subsidize the minority that are saturating the network with (mostly pirated) bittorrent content. This is actually an interesting problem, because although bittorrent itself is relatively easy to block, its successors will not be. Newer protocols will almost certainly involve some kind of cloaking/encryption, which will be deliberately indistinguishable from legitimate encrypted content.
Services like Netflix and iTunes represent legitimate high-bandwidth services, the kind that will eventually make pirating less attractive. So we are in the midst of a shift of traffic from bittorrent to netflix/hulu/itunes/etc, and I think most people will agree that is a Good Thing. But network neutrality regulations may well stifle this transformation. I don't know about you, but I don't like paying $100+/month to subsidize johnny-down-the-block's massive porn collection.
But oops, you have no choice. Because network neutrality means that Comcast isn't allowed to filter out bittorrent, even if it consumes 80% of their bandwidth. So $80/month goes to johnny-down-the-block, and $20 goes to your own connection. Yea! The Internet is Saved!
Thursday, December 2, 2010
Truly Alien Aliens
With today's news from NASA about arsenic-substituted microbes from Yellowstone, I've decided to vent about an issue that has bothered me for many years. Nearly everyone that talks about alien life commits horrible acts of anthro-bias. The most annoying canard is the assumption that life will require water. Astronomers focus their hunt for planets in the 'goldilocks zone', not because it might harbor nice planets for humans to live on, but because it is somehow more likely to support any kind of life.
I don't see any strong reason to assume that alien life will resemble life on Earth. Perhaps Star Trek polluted everyone's mind with visions of bipedal blue-skinned aliens that just happen to be the same size as us?
There are two huge anthro-biases of scale: size and time. A single example can explain both: imagine a life form in a gas giant (like Jupiter), where each individual's diameter is measured in kilometers. For obvious reasons this lifeform will 'run' at a slower pace than something that is our size... it may take hundreds of seconds for a signal to move from one part of its body to the other. The organism, were it intelligent, might experience time at a far slower pace than we do. The time between stimulus and action, e.g., a decision to move away from a threat, might be measured in minutes. Such an organism might seem horribly impractical to you, but from the point of view of the organism - that's just the way time moves. It might view humans as outrageously frenetic; an exaggeration of the way we look at hummingbirds.
A contrasting example comes from Robert Forward's book "Dragon's Egg", where a nano-scale lifeform evolves in a matter of weeks on the surface of a neutron star. Most likely it was this book that originally opened my mind to the idea of truly 'alien' life.
Other biases are easy to spot now: assumptions about gravity, density, temperature, etc. I believe life will arise any place where a certain threshold of complexity is met. In Earth's case, the huge oceans, freely mixed, with an abundance of heavier elements are probably what made the difference. Carbon chemistry has definitely been a big win, but is it really impossible to imagine other kinds of 'organic' chemistry, like Silicon?
I don't see any strong reason to assume that alien life will resemble life on Earth. Perhaps Star Trek polluted everyone's mind with visions of bipedal blue-skinned aliens that just happen to be the same size as us?
There are two huge anthro-biases of scale: size and time. A single example can explain both: imagine a life form in a gas giant (like Jupiter), where each individual's diameter is measured in kilometers. For obvious reasons this lifeform will 'run' at a slower pace than something that is our size... it may take hundreds of seconds for a signal to move from one part of its body to the other. The organism, were it intelligent, might experience time at a far slower pace than we do. The time between stimulus and action, e.g., a decision to move away from a threat, might be measured in minutes. Such an organism might seem horribly impractical to you, but from the point of view of the organism - that's just the way time moves. It might view humans as outrageously frenetic; an exaggeration of the way we look at hummingbirds.
A contrasting example comes from Robert Forward's book "Dragon's Egg", where a nano-scale lifeform evolves in a matter of weeks on the surface of a neutron star. Most likely it was this book that originally opened my mind to the idea of truly 'alien' life.
Other biases are easy to spot now: assumptions about gravity, density, temperature, etc. I believe life will arise any place where a certain threshold of complexity is met. In Earth's case, the huge oceans, freely mixed, with an abundance of heavier elements are probably what made the difference. Carbon chemistry has definitely been a big win, but is it really impossible to imagine other kinds of 'organic' chemistry, like Silicon?
Thursday, November 4, 2010
How government broke the auto industry, an alternate history.
How broken is health care? Very.
Trying to explain how broken our current health care system is a difficult task, because it's nearly impossible to imagine an 'unbroken' system. It's a counterfactual. The system has been broken since the 1950's. The fact that it just keeps getting worse makes us long for the days of our youth, when it was only 'mostly dead'.
So I'm going to try an analogy tack.
What is it that is broken about health care? Well, the prices are out of control. The costs of health care spiral year after year, always outpacing inflation. This is an unsustainable situation. But how did this happen?
Imagine if the government stepped in and mandated that employers pay for your auto insurance. Actually, that's not quite right, the original sin is more subtle. The government provides a *tax break* to employers who pay for your auto insurance. Now let's follow this exercise through, and see some of the follow-on effects.
First, you quit really shopping for your auto insurance. It comes as a perk with the job. The best jobs will offer you outrageous auto insurance plans, where you can basically plow through a flock of BMW's in a parking lot with your Bentley and walk away unscathed.
You're not the only person taking advantage of this perk. Lots of people are. The end result is a rise in the accident rate. Also, the subtle market pressure that would have made people want to buy cars that 'break' less is gone. So cars become flamboyant and fragile.
Now, let's imagine what happens to the auto repair business. Well, you take your car down to the shop to get it tuned up. They replace some fluids and belts, and check the air in your tires. Then they tear down the engine to replace all the gaskets and o-rings. What? Well, it's the only way to be sure, sir. Can't risk having the engine blow out, that would be dangerous!
When they're done with your car they don't give you a bill. Instead, you just file a claim with your insurance, and they take care of it. You don't notice that it cost over $2000 to get your car 'tuned up'. But even if you did notice, you wouldn't really care. Because you're not paying for it.
And cars are no longer built to last. The design of cars actually changes over the years, to one that favors cheaper manufacture, but requires regular maintenance. Some cheap cars are essentially rebuilt every 12 months.
After decades of this broken system, the cost of auto insurance begins to dominate the cost of an employee. Companies are in trouble, and they want to back down on these insurance plans. Some companies try to get by without providing auto insurance to their employees, but they are demonized by the public. Some try to offer scaled-back plans, but this is no better... the cost of auto insurance has risen to ridiculous levels, and few could afford it without employer subsidy. The government has a plan where the elderly and the poor get assistance with their auto insurance, but many people are still unable to drive. Or they decide to drive without insurance. That's right: we get the elderly and the poor driving these fragile, unreliable vehicles out on the roads with no insurance.
Now, how will you fix this broken system?
Trying to explain how broken our current health care system is a difficult task, because it's nearly impossible to imagine an 'unbroken' system. It's a counterfactual. The system has been broken since the 1950's. The fact that it just keeps getting worse makes us long for the days of our youth, when it was only 'mostly dead'.
So I'm going to try an analogy tack.
What is it that is broken about health care? Well, the prices are out of control. The costs of health care spiral year after year, always outpacing inflation. This is an unsustainable situation. But how did this happen?
Imagine if the government stepped in and mandated that employers pay for your auto insurance. Actually, that's not quite right, the original sin is more subtle. The government provides a *tax break* to employers who pay for your auto insurance. Now let's follow this exercise through, and see some of the follow-on effects.
First, you quit really shopping for your auto insurance. It comes as a perk with the job. The best jobs will offer you outrageous auto insurance plans, where you can basically plow through a flock of BMW's in a parking lot with your Bentley and walk away unscathed.
You're not the only person taking advantage of this perk. Lots of people are. The end result is a rise in the accident rate. Also, the subtle market pressure that would have made people want to buy cars that 'break' less is gone. So cars become flamboyant and fragile.
Now, let's imagine what happens to the auto repair business. Well, you take your car down to the shop to get it tuned up. They replace some fluids and belts, and check the air in your tires. Then they tear down the engine to replace all the gaskets and o-rings. What? Well, it's the only way to be sure, sir. Can't risk having the engine blow out, that would be dangerous!
When they're done with your car they don't give you a bill. Instead, you just file a claim with your insurance, and they take care of it. You don't notice that it cost over $2000 to get your car 'tuned up'. But even if you did notice, you wouldn't really care. Because you're not paying for it.
And cars are no longer built to last. The design of cars actually changes over the years, to one that favors cheaper manufacture, but requires regular maintenance. Some cheap cars are essentially rebuilt every 12 months.
After decades of this broken system, the cost of auto insurance begins to dominate the cost of an employee. Companies are in trouble, and they want to back down on these insurance plans. Some companies try to get by without providing auto insurance to their employees, but they are demonized by the public. Some try to offer scaled-back plans, but this is no better... the cost of auto insurance has risen to ridiculous levels, and few could afford it without employer subsidy. The government has a plan where the elderly and the poor get assistance with their auto insurance, but many people are still unable to drive. Or they decide to drive without insurance. That's right: we get the elderly and the poor driving these fragile, unreliable vehicles out on the roads with no insurance.
Now, how will you fix this broken system?
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