Emphasis Added

Thursday, July 31, 2003

Rant Counter Rant - Part I

So I�m sitting at my computer, waiting for news of the big Mariners trade that never happened, when I get a message from my old pal Duffy. Now Matthew DeLuca has been doing an excellent job representing the loyal opposition in Duffy�s absence (for which, thanks Matt, your views are most welcome and you are making everyone think a little bit harder), but there�s nothing like a shot of the straight medicine to get the blood running. So here�s a synopsis of the good parts of our exchange, followed by my lengthy reply.

Duffy (in green text) starts with a note about Howard Dean, offering commentary on his positions as outlined in a Fox News story. Since I just this morning sent my first $50 to the good Doctor, I felt obliged to respond (in dark blue), and then Duff elaborated on my responses.

(says Duffy) Among his suggestions, Dean would:

� Repeal all of the president's tax cuts;(Great, let's get the economy going by taking more money out consumers pockets!)

ROB: Yes, because the tax cuts have proven so effective at getting the economy moving. I bet we will find that most people who could actually use the tax refund are using their extra bucks to pay off old debt � which has absolutely no stimulative effect on the economy. Responsible fiscal policy and deficit reduction, on the other hand, bring down long term interest rates and reduce the amount of debt service owed by the government. A few more years of Clinton-Gore economics and the impact of public finance on private investment would have been completely removed, creating the basis for long-term structural economic growth, permanently lower taxes, and increased latitude for government programs without a debt overhang. But no, we couldn't have that�

DUFF: The tax cuts have been very, very successful. The first cuts, though small since Dems forced them to be phased in slowly over ten years, along with radical monetary stimulus headed of a potential disastrous depression, given the enormous bursting of the phony Clinton bubble. Some CEO's at the time Bush was taking office seemed to take a cue from the outgoing President, throwing morals to the wind, inflating profits for short term personal gain. Consumers, with more money in their pocket and who reflect 2/3's of GDP, kept the economy afloat. Throw in the worst terrorist attack ever on our own soil, and it's amazing that '29-41 was not repeated. We have Mr. Bush and Mr. Greenspan to thank for it. The latest tax cut is just now hitting wallets and the economy alike. Today's off the chart GDP number shows the anticipatory bounce in our economy-the realization that the economy is bouncing if not booming again. A booming economy increases tax rolls which in turn fixes deficits. Raising taxes stalls growth, lower tax rolls, which wipes out any net gain on any deficit.

And when people pay off debt, that opens their capacity to spend more. Instead of servicing the debt, they now have more disposable income to spend, TO STIMULATE!!!!!!!!!!

� Raise the minimum wage;(Screw people who want to decide what they will and will not work for.)

ROB: Right, let's have a free labor market like they have in Bangladesh and Guatemala. If you want to put money in consumers' pockets, the minimum wage is a great way to do it (because people actually get to work for it), especially in time like now when there is no danger that it will be inflationary.

DUFF: Oh, you mean the Bangladeshis and Guatemalans who had no work but now have some? Everyone has to start somewhere. That's what Markets are all about. Minimum wages are a net/net game. The higher wages paid are offset by the employment losses of businesses closing. Just ask those janitors in Santa Monica and Cambridge who got laid off after those cities passed living wage resolutions.

� Expand unemployment insurance;(Don't worry about finding another job, we'll take care of you.)

ROB: Never collected it, hope I never have to, but I know plenty of people who would be out of their homes or really up against it if they didn't have that check while they were finding their next job. But regardless, it's not for them: it's for us. Keeping those people off the streets or from becoming so desperate that they turn to crime is a good, cheap social policy. Pay now with unemployment insurance or pay later with cops and jails. Seems like a bargain to me.

SUFF: Short term unemployment(14 weeks) is fine, especially since it is insurable with little risk of moral hazard. But extending benefits is again a zero sum game. If you or I were about to lose our home, I would think we'd work three shifts at McDonalds before turning to crime. Are you that disgustingly pessimistic about the nature of man, that you think crime would be the result? What a dark world to live in...

� Increase aid to states; (Let's let the federal taxpayers bail out poorly managed States that blew all their huge surpluses with prolifigate spending!)and

ROB: Remember when Republicans used to be for "federalism"? You know what that means? More money to states! It was one of Reagan's favorite ideas. Problem is, sometimes you need a national tax base, even if the problems are local. I'm beginning to think states are a pretty bad idea anyway. At the very least, we don't need 50 of them. But that's a different discussion.

DUFF: I am completely about Federalism. The less control the buffoons inside the Beltway have, the better off we all would be, and the less influence all the K Street hangers on would have would be the best benefit of all. The closer decisions are made to home, the more accountability for those decisions. Besides, Why should a federal taxpayer from Colorado, whose State has maintained fiscal responsibility at the State level, be asked to bail out the State of Kalifornia with some of his Federal tax dollars??? How can you logically argue for that???

� Cut the cost of health insurance for employers.(By federally subsidizing the trial lawyers!)

ROB: Doesn't matter who else benefits � this needs to be done, otherwise health care in this country will be reserved only for the very rich. I suppose if you're rich yourself, you don't have to worry about it. But how would you feel if your employer decided to take away your health plan next week because it was too expensive?

DUFF: So let's Federalize one seventh of our nations economy? Should I even dare get into the public vs. private debate with you again?? Markets=efficiency and incentives. Bureaucracy=Waste, bloated budgets, expanded claims to taxpayer monies. Health Care which has made all of humankind and life potential incredibly better over the last century was completely driven by innovation. Innovation derived by entrepreneurialism.

END of PART I. Part II posted in the morning.

6:16:17 PM

Emphasize This! []

No Future

I�ve had several recent conversations about the aborted �Terror Futures market� that appeared on the radar earlier this week, and the first reaction of everyone who heard the story seemed to be to think it was a hoax perpetrated by the Onion. Nope. File this one under �stranger than satire.�

My own personal reaction to a proposal this bizarre is to suspect that there�s more here than meets the eye � maybe some kind of interesting counterintuitive theory at work that makes an easy target for knee-jerk anti-intellectuals in the media, but may actually have something going for it. So far, Bush�s policy proposals (wars, tax cuts, religious nonsense and rollbacks of corporate and environmental oversight mostly) have been dully predictable and transparently self-serving. Say what you want about the terror market, but it does not fit either of those categories.

It�s almost too easy to take potshots at the terror market on ethical grounds. Frankly, this is a �gimme� for critics of the Administration, and it�s shocking that something this politically tone-deaf would emerge from such an image-conscious White House and DOD. There�s also the issue that encouraging profit-taking from violence and terror might actually encourage people to cover their bets by making prophecies self-fulfilling. That also is a valid point, and one that I haven�t heard defended. But in light of these glaring problems with the policy proposal, I became intensely curious as to what possible benefit might justify these costs.

After some searching, I found a sympathetic analysis at Reason Online, a right-libertarian site (�free minds, free markets�) that I consider both principled and substantial. The theory comes from an economist named Robin Hanson, who has written extensively on �idea markets� as a means of aggregating various currents of speculation into a system that can be tracked using sophisticated econometric modeling. The idea is that creating a marketplace will make trends and patterns in cultural behavior more obvious, and thus more susceptible to rigorous analysis than the tried-and-true method known as �keeping your ear to the ground.�

This has some echoes of the pseudo-sociological discipline known as psychohistory, first propounded in the Foundation novels of science fiction author Isaac Asimov in the 1940s. Asimov � who accurately predicted many developments in computing, robotics and space travel � at least has a better real-world track record than Arthur Laffer (father of �supply side economics�). Nevertheless, there are more than a couple of things about the idea-market theory that ring with the flat timbre of a cracked pot.

The principle assumption behind idea markets is that ideas can be traded like commodities on the Chicago Board of Trade. Prices rise and fall based on volume of buyers and sellers, and, at a certain point, the event opportunity takes place and the idea either pays off or expires worthless like a put-call option. The critical difference, however, is that commodities in traditional futures markets eventually refer to something with underlying value � pork bellies, or index shares, or baskets of real-estate holdings, or whatever. The final holder of the option � often the market-maker, or some large institutional investor with an interest in the final product � presumably exercises the option and takes delivery of the goods, which they then liquidate at market value. Even the most esoteric financial derivatives are not complete abstractions, although the notion of underlying value is often so far removed that it rarely comes into play as a practical matter.

Idea markets � especially ones like the terror market, which speculate on global events rather than innovations that might be of value to particular industries � lack this underlying value. The market-maker covers the bets like the house dealer at a casino blackjack table; the value of the information traded is therefore entirely abstract and arbitrary. This is critical because it decouples cause-and-effect from the logic of the marketplace. Commodity futures, for example, rise and fall on information such as crop reports, which tangibly impact the value of the underlying asset. There�s a link between information trends and market behavior - between the data and the money - even if the market behaves in odd and contrary ways to particular information (as it often does).

If you are looking to glean insights on economic patterns from this kind of market activity, you are more likely to find them because participants in the market recognize from their expertise and experience a direct connection between their financial interest and certain types of data. Sure, there will be a certain amount of uninformed speculation and trend-riding, but there's a word for people who play in commodities futures without knowing what they're doing: paupers.

The problem with the terror market is that no one financially benefits from the assassination of a world leader in the same way that a market-maker can financially benefit from exercising the option to buy and sell a commodity. The incentive for people to participate in the terror market is simply to speculate, and perhaps to profit on some inside information or keen intuition. But unlike financial markets, there is not necessarily a qualitative connection between the information driving the market and the likelihood of the underlying event. If the line on a coup in Jordan goes from 5-1 to 2-1, the most you can say is that more people think it will happen. What, really, is the value of that insight to a practical intelligence-gathering operation?

Well, a lot, if you have a mystical faith in the intelligence of markets. But faith is what it is. If everyone in the country suddenly decided to bet that the Detroit Tigers will beat the Mariners this afternoon, it wouldn�t have the slightest effect on a single play that happens between the lines. Even if a tiny percentage of the participants were betting based on genuine insider information, that small bit of �signal� would be drowned out by the �noise� of odds-players, guessers, bandwagon-jumpers and others with no meaningful connection to the underlying event. The �smart money� can still be wrong if it�s not based on anything except wishful thinking and idle guesswork.

It�s too bad the Administration folded their tents so quickly on this idea. Deep thinking, even of the crackpot variety, is in such short supply in government these days that it would have been refreshing to have a debate on the big theories and methods behind the terror market. However, as a consolation prize, it would do the country just as much good if this flap brought about the final disgrace and exit of John Poindexter, the evil Reagan-era mandarin who apparently sponsored the terror-market policy.

10:46:15 AM

Emphasize This! []