Review: Free to Choose

This 1980 book by Milton and Rose Friedman (subtitle: “A personal statement”) is well-known for its role in promoting free markets and deregulation. It sold millions of copies and motivated not one, but two television series devoted to its contents. The book now often serves as a totem for those who rant against “big government,” often (in the case of Fox news et al.) without the covers being opened. (I got my unread copy from my dad, who supports  lots of these “causes.”)

I wanted to read the book to learn how the Friedmans analyzed policies and suggested reforms for the general public. I also wanted to know how many of their ideas stand up to scrutiny from someone (me) who appreciates markets but has some reservations related to the ways that markets interfere with the commons (via, e.g., negative externalities) as well as the importance of non-market public and common-pooled goods.

(Many anti-market types treat Milton Friedman as a corporate hack who supports dictators over babies, but they are often painfully ideological and misinformed.)

It turns out that most of the book is excellent, except where the Friedmans (Rose was perhaps a perfect example of the “woman behind the man” in the way she contributed to work that often bore his name) brushed over collective goods, in what looks to be a spectacular example of over-confident misunderstanding.

In this review, I will follow their ten chapter titles:

In Chapter 1 (The Power of the Market), the Friedmans discuss how prices signal information, provide incentives, and distribute wealth and income. They acknowledge the role of government in distribution and regulation of bads (negative externalities) but caution against trusting governments to choose on behalf of the majority when politicians might choose for themselves. They quote Adam Smith on the role(s) of government:

First, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. [OMG. I tried to get a page reference for this actual quotation. but it seems like there are no searchable editions of Smith on the internet (econlib is dysfunctional). What an ironic failure in the provision of public goods!]

It is in this third role — the provision of public goods — that the government’s place is essential — and contested, by liberals in the American (don’t trust markets) and European (do trust markets) traditions. Sadly, the Friedmans dismiss this role via a sophistic slight-of hand that still surprises me. Here is their text (pp 30-32) with [my comments in brackets]:

Adam Smith’s third duty raises the most troublesome issues. He himself regarded it as having a narrow application. It has since been used to justify an extremely wide range of government activities. In our view it describes a valid duty of a government directed to preserving and strengthening a free society; but it can also be interpreted to justify unlimited extensions of government power.

The valid element arises because of the cost of producing some goods or services through strictly voluntary exchanges. To take one simple example suggested directly by Smith’s description of the third duty: city streets and general-access highways could be provided by private voluntary exchange, the costs being paid for by charging tolls. But the costs of collecting the tolls would often be very large compared to the cost of building and maintaining the streets or highways. This is a “public work” that it might not “be for the interest of any individual to erect and maintain though it” might be worthwhile for “a great society.” [This example describes a collective action problem in providing a public good that government “solves” via collecting taxes to pay for the roads. The Friedmans do not address the problem of congestion that plagues such collective goods but not toll roads that use prices to limit demand.]

A more subtle example involves effects on “third parties,” people who are not parties to the particular exchange — the classic “smoke nuisance” case. Your furnace pours forth sooty smoke that dirties a third party’s shirt collar. You have unintentionally imposed costs on a third party. He would be willing to let you dirty his collar for a price — but it is simply not feasible for you to identify all of the people whom you affect or for them to discover who has dirtied their collars and to require you to indemnify them individually or reach individual agreements with them.


To lapse into technical jargon, there is a “market failure” because of “external” or “neighborhood” effects for which it is not feasible (i.e., would cost too much) to compensate or charge the people affected; third parties have had involuntary exchanges imposed on them.

Almost everything we do has some third-party effects, however small and however remote. In consequence, Adam Smith’s third duty may at first blush appear to justify almost any proposed government measure. But there is a fallacy. Government measures also have third-party effects. “Government failure” no less than “market failure” arises from “external” or “neighborhood” effects. [Here the Friedmans seem to imply that market failures will automatically lead to government failure] And if such effects are important for a market transaction, they are likely also to be important for government measures intended to correct the “market failure.” The primary source of significant third-party effects of private actions is the difficulty of identifying the external costs or benefits. When it is easy to identify who is hurt or who is benefited, and by how much, it is fairly straight-forward to replace involuntary by voluntary exchange, or at least to require individual compensation. If your car hits someone else’s because of your negligence, you can be made to pay him for damages even though the exchange was involuntary. If it were easy to know whose collars were going to be dirtied, it would be possible for you to compensate the people affected, or alternatively, for them to pay you to pour out less smoke. [This is a clear application of the “Coase Theorem” that was proposed in 1960; it depends on “low transaction costs” in measuring harm and finding those harmed.]

If it is difficult for private parties to identify who imposes costs or benefits on whom, it is difficult for government to do so. As a result a government attempt to rectify the situation may very well end up making matters worse rather than better — imposing costs on innocent third parties or conferring benefits on lucky bystanders.  To finance its activities it must collect taxes, which themselves affect what the taxpayers do — still another third-party effect. In addition, every accretion of government power for whatever purpose increases the danger that government, instead of serving the great majority of its citizens, will become a means whereby some of its citizens can take advantage of others. Every government measure bears, as it were, a smokestack on its back. [Here I think they lose the plot, by implying that the lack of a specific victim — of climate change, say — undermines government action that would also be unjustified due to its funding via distortionary taxes, which have nothing to do with the problems of externalities (the fallacy of an irrelevant appeal). Then they go on to make quite the leap…]

Voluntary arrangements can allow for third-party effects to a much greater extent than may at first appear. To take a trivial example, tipping at restaurants is a social custom that leads you to assure better service for people you may not know or ever meet and, in return, be assured better service by the actions of still another group of anonymous third parties. [Are they implying that pollution problems can be resolved via a system of tipping?  This trivialization signifies a failure of comprehension to me, as environmental damages — and government actions to reduce them — were well known in the 1970s.] Nonetheless, third-party effects of private actions do occur that are sufficiently important to justify government action. The lesson to be drawn from the misuse of Smith’s third duty is not that government intervention is never justified, but rather that the burden of proof should be on its proponents. We should develop the practice of examining both the benefits and the costs of proposed government interventions and require a very clear balance of benefits over costs before adopting them. This course of action is recommended not only by the difficulty of assessing the hidden costs of government intervention but also by another consideration. Experience shows that once government undertakes an activity, it is seldom terminated. The activity may not live up to expectation but that is more likely to lead to its expansion, to its being granted a larger budget, than to its curtailment or abolition.

So I agree that benefits must exceed costs, but the Friedmans appear to take this exposition as the end of the conversation, i.e., that governments should not, by default, be trusted to regulate negative externalities because such regulations create burdens on the market and require the services of bureaucrats who are paid via taxes. This discussion is oversimplified to the point of uselessness. Only someone as stupid as Donald Trump would read this and conclude that all regulations should be ditched, because it’s too hard to identify winners and losers, and that taxes are theft, but it’s exactly because of idiots like Trump that the Friedmans’ conclusion that regulations are unjustified unless they pass a strict benefits/costs test gets boiled down to “regulations are bad.” That’s a real missed opportunity.

That said, I must note that the discourse around non-excludable (public and common-pooled goods) was underdeveloped in the 1970s, so perhaps the Friedmans were working with the tools of the times. OTOH, they could have thought a little more about what even Adam Smith noticed in the 18th century. (The index has nothing on commons, public goods or collective action — perhaps because it has too many entries on “communism”? 😉 )

In Chapter 2 (The Tyranny of Controls), the Friedmans make a good case for freedom in trade and choice of occupation. They would have dismissed Trump as a short-sighted mercantilist whose policies would harm the country as a whole as they aided the special interests who got his attention. I agree with all this, with the only caveat that I would regulate industries (oil, finance, medicine) that create negative externalities (pollution; financial crises) and/or possess market power (asymmetric information) over consumers.

In Chapter 3 (The Anatomy of a Crisis), they go over the role of government in worsening the Great Depression, mostly by messing up the money supply (the topic that won Friedman his Nobel Prize) and interfering with trade. All I can say about this chapter is that its lessons were not heeded in the late 80s, as a too-big-to-fail financial system attracted government bailouts, and thus even larger risk-taking by those who would privatize profits and socialize losses. (The Friedmans were not fans of business per se.)

In Chapter 4 (Cradle to Grave), the Friendmans argue against social security (setting the foundation for “privatize social security”) as a bureaucratic, unsustainable gift to the rich. They suggest a “negative income tax” (i.e., wage subsidy) as a better way to help poor people. This proposal has been adopted in the U.S., although its recipients are vilified by the Right (and thus attacked by IRS agents asking for masses of paperwork), and the system is also far too bureaucratic in comparison to a universal basic income — an idea that I support and the Friedmans would not due to its potential to tax the productive to reward the lazy. The rest of the chapter complains that government transfer programs are wasteful (due to paperwork and bureaucratic salaries), which may be true to some degree for some programs (regulations written by industry to mess up health care, to give one example) but not for all programs (the IRS and Social Security Administration have tiny budgets relative to the funds they handle). In the end, I think that the Friedmans would regret the extent to which their ideas have been used as dogma by Republicans who cut taxes for the rich while leaving the poor to “bootstrap themselves off the floor, climbing via crumbs scattered by 1 percenters.” 

(In the US, “1 percenters” make more than $420k per year. Worldwide, 1 percenters make more than $32k and/or has a net worth of more than $770k. Scope matters. These figures are also dramatically larger than they were in the 1970s, when the rich paid more tax.)

Chapter 5 (Created Equal) argues for equality of opportunity rather than outcome. In the process, it rails against wealth and income taxes as unfair and harmful to voluntary efforts of the rich to help the poor. Although this perspective is (again) attractive in a world of rights, obligation and community, it’s a recipe for disaster in the present world of “I’ve got mine, fuck you.” It’s for this reason that I favor wealth (property) taxes devoted to funding goods available to all citizens, i.e., education, healthcare and/or basic income. It’s only when you have the basic opportunity to get an education or be healthy that you can thrive.

In Chapter 6 (What’s Wrong with Our Schools?), the Friedmans document the shift from choices among private providers to monopolization of “free” education by the State, which not only pursues its own goals (e.g., obedient citizens) but also spends far more on administrators than on students. They suggest giving educational vouchers to parents who can choose where to send their children (I recently learned this system is used successfully in the Netherlands and Chile; it’s also used, not without controversy, in the US). When it comes to higher education, the Friedmans are against subsidies, since most of the gains go to middle and upper-class students. They suggest that poorer students can afford school by “selling equity” in their future rather than taking (if they can get them) unaffordable loans. This podcast reviews a recent implementation of this system. As someone in “education,” I agree with their critiques and their solutions. I also agree that systems of “grading teachers” are probably worse than systems of parental choice.

In Chapter 7 (Who Protects the Consumer?) the Friedmans complain that government regulations result in lower economic growth and excess spending on bureaucracies that serve themselves or special interests. They then make the error of assuming that governments that make shoddy products (“private goods”) will also make shoddy regulations (“public goods”), which betrays an (intentional?) misunderstanding of the different natures of those goods. Later in the chapter, they are more open to “regulation via prices” (i.e., polluters pay carbon or effluent taxes) but still betray a bias or myopia (Page 215: “One source of atmospheric pollution is the carbon dioxide we all exhale. We could stop that very simply. But the cost would clearly exceed the gain.”) that supports my worry that they have missed an important element of “freedom to choose,” i.e., the freedom from polluted air, water or land that endanger our health or lifestyle. Whereas I agree 100 percent with many of their concerns on government overreach, I think their dismissal of regulations has given too much ammunition to ideologues (Trump, Julian Simon, Walter Block et al.) who think markets can supply public goods or protect common-pooled goods. They cannot.

In Chapter 8 (Who Protects the Worker?), the Friedmans argue against minimum wages, unions, etc., calling instead for more competition between employers. These positions made sense (they came at the end of what is now seen as the high-point in worker wages), but not in a world where industry concentration (thus market power to push down wages) are high and the 1 percenters suck money out of everyone’s pocket via corrupt legislation. I’m sure that the Friedmans would oppose this situation, but they seem to overlook its potential.

In Chapter 9 (The Cure for Inflation), the Friedmans revisit the topics of Chapter 3 and make the observation that governments cause inflation by creating too much money to spend and then benefit when the spending reduces the (book) value of the resulting debts. I wholeheartedly agree, which is one reason why I think that Bitcoin (for all its “interesting” market dynamics) has made the case for an asset with a known, steady and slow issue of new supply. A swap of central banks for “automatic money printing” algorithms might leave fewer tools for “managing” the economy, but fewer tools means that the consequences of their use will be easier to observe and thus their use more careful.

The book ends with Chapter 10 (The Tide is Turning), which accurately reflects the momentum of the late 1970s, when the book was written. In this chapter, they collect thoughts on government over-reach and capture by special interests, highlight attempts to bring more innovation and competition to markets affecting our lives, and even provide pro-forma constitutional amendments on free trade, sound money, and so on. The chapter is inspiring, and definitely had an impact on policy debates in the US and other countries. 

Sadly, the Friendmans, in their opposition to government incompetence, gave too many reasons to oppose government per se. Although I hate the expression “smart government,” I do think there’s a need for the right kind of government and governance at the appropriate level. If I was writing a epilogue for this book (hopefully shorter than this review!), I’d mention that government programs should focus on protecting the collective goods we share and providing the public goods that benefit all of us. My metric would thus focus on subsidies that go to everyone (e.g., children, the sick and the old) rather than special interests (farmers, bankers, the 1 percent) that suck the wealth of the majority. Besides that, I agree on their emphasis on markets, competition and choice over regulation and bureaucracy, but I’d be more cautious about throwing out the baby with the bathwater. (Listen to this recent VOX podcast for a discussion on balancing the roles of the State and Market in making a just but productive society.)

Overall, I recommend this book, one-handedly, to anyone who wants to think about the role of government, the rights and responsibilities of the individual, and how ideology can open our eyes — and sometimes blind us.

Here are all my reviews.

Review: Dredge Drain Reclaim

Johan van Veen began this book [free download] — subtitled “The Art of a Nation” — during World War II. He “found the time” because the Nazi occupiers of the Netherlands had forbidden most Dutch from maintaining the dikes and water works that kept the nation from sinking underwater. It was thus lucky for the Dutch that the Germans lost the war, otherwise they might have had to retreat from rising water that would have taken about half their land, their most important cities, and a majority of their civilization!

In the postwar years, Veen was able to finish the book and add more information, so I read the fifth edition of 1962, which was published after Veen’s 1959 death. 

I found this to be a fascinating read due to its historical detail and wealth of data but also due to Veen’s obvious passion for engineering and water management. This passion was also backed by decades of experience, as Veen was the chief engineer of Rijkswaterstaat (the Dutch government’s body in charge of national water management) and — due to his prescient and insistent warnings about weak and under-maintained dikes — the chief designer of the Delta Works project that began in 1954, right after the tragic storm of 1 Feb 1953 that broke dikes, flooded 1,300km of land and killed over 1,800 Dutch. Veen had warned of such a risk in an earlier version of this book, and he set out immediately to recover, repair and build out defenses that would prevent the same tragedy from happening again. (No such floods have come to pass, but climate change will bring new and unusual challenges.)

The book is divided into four chapters. In the first, Veen sets the scene by reviewing the fascinating culture and history of the “free people” who chose to live at the mercy of the sea rather than pay taxes to live on the lord’s land. I recognized quite some dimensions of Dutch character, as well as learning more about the history that distinguished its regions (in Friesland they began by piling up mud above high tide; in Brabant they dared to block rivers, died by the tens of thousands when dikes broke, and then went out in the world to share sell their dike-building expertise). This chapter (called “Spade work” but more properly drain)  explains why the Dutch take maintenance so seriously (to my great joy) — they have centuries of experience in those everyday tasks and numerous examples of what happens to those who do not keep their dikes strong and drains clear. (Veen confirms that the Dutch did indeed kill those unwilling to do the work needed to protect the community. My favorite (!) punishment was when the resister was skewered with a post and then buried, alive, in the dike that he failed to maintain.) In these early days, the Dutch needed to work with water that was too powerful for mere men. This necessity created men of art, skill and patience enough to build up an area over decades. I was surprised (and then not) to read of the many Dutch working abroad: The Erie canal was financed by the Dutch; its locks were built by Dutch engineers. This section finishes with descriptions of the great leaders who led the Dutch to claim so much of their land from the sea, and plea to ignore short-term profit and loss in favor of the long-term returns to the nation of new land. (Veen’s “think of the children” perspective is easier to understand as claim that a government with a low discount rate can build mega projects. That’s true, but it can also result in white elephants.)

Chapter 2 describes the surprising appeal of dredging, which never struck me as either fun or exciting. To make a long (hundreds of years!) story short, let me assure you that dredges are very exciting for the Dutch, as they — first in horse-driven and then in steam-driven form — made the difference between Amsterdam being a port at the center of an empire and a muddy estuary. Dredging was even more important to Rotterdam, as it allowed the Dutch to build canals and clear rivers to create the capacity that resulted in the largest and busiest port in the world (until Asian ports took over in 2004). 

Chapter 3 “Master of the floods” is actually about land reclamation, which has produced a sizable share of the Netherlands. Here, Veen is in his most excited state, describing the great reclamation of the Zuiderzee. The fact that event did not pass (only one-quarter of the area was reclaimed, most obviously in Almere) makes this chapter interesting, as it reflects both the optimism of an engineer-unchained as well as capturing the boldness of “future” that characterised the post-War generation. The chapter is full of details on the science of land/water interactions, and histories of the efforts to persuade citizens to “invest in the future.” The engineering required to dredge new land into existence was extreme, risky and world-famous. The Dutch are still leaders in explaining how to master (or fight) nature. 

The final chapter is Veen’s argument in favor of the Delta Works, which would cost a fortune but reduce the risk of floods such as that of 1953 by reducing the Netherlands’ linear risk via massive sluices and dams designed to keep the North Sea under control. In this chapter Veen, posing as the guest author “Dr. Cassandra,” argues for the Delta Works. To justify “invest in the future,” we are reminded of the old proverb “economy is   good, except for making dams and dikes.” This is Veen’s argument for ignoring benefit-cost analysis and just building the Delta Works. Luckily for us, he was right, if only in underestimating the value of saving his country from drowning.

I recommend this book on one-hand for its fascinating history and insights into the nation’s character, accomplishments, and power in managing water.

Thanks to PH for sending me this book!

Here are all my reviews.

Jive Talking launches

I started thinking about doing a podcast last year because I wanted to find a new way of learning, catching up with people in my network, and bringing new ideas to people. I still like blogging (and will continue to write here), but podcasting provides a different perspective, most obviously because it allows conversation.

I “soft launched” Jive Talking about one month ago with five interviews. In the past few weeks, I have had time to fix up the Soundcloud page hosting the podcast* and put a bit more time into improving “production quality.” I still have a long way to go before I am happy with these details (listen to my intro!), but they are not as important as the conversations, which are unscripted and free to flow wherever we wonder (and wander). I am not alone in liking this element to podcasting:

One of the things that’s so cool about the new media technology is that people want . . . They just want direct communication. They don’t like high-level production values, all to people on YouTube, and they’re very savvy media consumers. A highly produced television show just looks like a lie. If you’ve got something to say, they just want you to sit down and say it. They don’t even want you to edit it so that it’s smoother because that just looks like you’re spinning the content, and you probably are.

My one-handed conclusion is that you’re not going to learn anything until you try something new, so here goes! Please listen to a few episodes, tell me what you think, and/or suggest new guests (including you!)

01 // What do we mean by water privatization?
02 // Monja Esterhuizen on losing less water in South Africa
03 // Delton Chen on incentivizing carbon mitigation
04 // Marina Della Giusta on #metoo, teaching economics, and careers for millennials
05 // Walter E. Block on pollution, regulation, and libertarian ideals
06 // Michelle Wilbur on small-scale renewables, oil and living in Alaska

* Jive Talking is now syndicated via Stitcher. I’ll get Apple iTunes and Google Play links soon!

We understand money pretty good.

I’ve always nodded my head at the truth in Upton Sinclair’s insight that “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” but I recently realized its importance in the quest for sustainability.

It’s clear that many people who make their living from “freeing carbon” (oil workers, loggers, car makers, beef producers, etc.) are not interested in ideas about limiting carbon (and equivalents). As a result, we’re getting climate change and damages of $100 for each $1 these “vested interests” earn.

So now I realize the sad possibility that many of these vested interests — had they saved some of their “carbon windfall” — would be ok with a decarbonising world. That would be because their savings gave them other options for earning, and enjoying, their lives.

Compare Norway and Alberta (or Alaska). Norway saved and invested lots of its oil money, so it now has $1 trillion, or about $185k per citizen. Alberta and Alaska, I know, have saved a lot less. This difference in savings is important because savings make it easier to cope with risk. Norwegians would not be so worried if the “oil carbon was turned off.” Alaskans, Albertans, and the residents of most oil- carbon-exporting countries (including the US) would be terrified, because they make their living from freeing carbon.

It is thus that I arrive at my over-simplified, one-handed conclusion: If we’re going to turn off the  carbon, then we need to “take care” of those who profit from it. The simplest way to do this is pay them off. The easiest way to raise the funds to pay them off is to tax carbon. I would make the tax “dynamic” such that the burden fell for those who ran from carbon while it rose on those who strolled in the same general direction. 

It’s not about the planet, the future or technology. It’s about money.

The air we breathe

I grew up in San Francisco and Los Angeles in the 1970s, when gasoline was leaded (thus damaging brains and increasing crime), and pollution from cars and industry much worse than it is today. (Read about changes in LA from the 70s, improvements for kids since the 90s, SF’s improvements since the 60s, and the recent dangers of inhaling smoke from wildfires.)

As a water economist, I am well aware of the advantages of clean water, which gives me a similar respect for clean air. The problem is that it’s hard to see air or water pollution, which is why I support visualizing technology. 

In the case of water, we’re still waiting, but the technology* for measuring, viewing and recording air quality is improving rapidly, which makes it more likely that average people will change their habits and push for policy changes that can be seen on their devices. (Here’s a great podcast on how residents of a poor area near San Francisco dramatically improved their air quality. Pollution in London’s Tube is 30x street levels, so maybe it’s time to bike?)

Delivery scooter in Bangkok market alley

With that preamble out of the way, let me tell you about the Air Tricorder (!) I bought for €70 in Chiang Mai, Thailand.

As you can see, it’s a plastic box with fans and sensors inside that gives real time measures of the Air Quality Index (AQI) that combines measures for PM2.5, PM10 and NOx. (This video shows how quality changes as a freight train rolls through Utrecht’s central station.) The drawbacks of the Tricorder is that it does not record geo-tagged data, which means that you need to stop often and manually correlate location and time with the AQI.**

What I found to be very interesting was how AQI would change in various places, sometimes counterintuitively.

First is the fact that AQI in an alley may be lower than on a busy street, either because scooters drive in the alleys or people are cooking over charcoal (!!) in the alley. (The Tricorder doesn’t go above 500, which is labeled “ludicrous.) Those cooking habits — along with burning wood in the fireplace or smoking indoors — explain why indoor air pollution is linked to 4,000 deaths per day, worldwide.

Hazardous air INSIDE the theatre?

Second, polluted air doesn’t just “stay outside,” and it can even be worse than outside if inside air is not circulated or filtered (see photo). China’s leaders know this, which is why they have dozens of machines scrubbing the air of their homes and workplaces in polluted Beijing.*** 

Third, the majority of pollution comes from bad practices (burning coal) but also old, outdated and poorly maintained machines and factories. Various countries regulate this issue by banning certain practices or older models of cars, scooters, trucks and so forth, but poor/corrupt countries do not have or enforce these rules, which means that their citizens die younger and children suffer brain damage. Is that policy pro-poor? Probably not, given that their richer neighbors use more energy and travel more

My one-handed conclusion is that you should check your personal air quality and speak out for policies and practices that will improve it.

* Note that I am talking about mobile or personal devices. You can easily get quality measurements from fixed stations (US or EU), but that information is less personal (and thus less actionable) because it’s not about you here and now.

** I was super excited to buy a Flow device that would send real time data to my smart phone, but the €180 device bricked itself when I tried to share it with my GF’s phone. (Flow was funded in late 2018 via Kickstarter.) Two weeks later, I am still waiting for a solution. Their tech support seems to be struggling. I’ll update this post if get a working device (or my money back).

***  This famous twitter account, set up by the US Dept of State in 2008 — back when we were great — forced Chinese leaders to engage with the problem.

Addendum (28 Feb): Living with Bangkok’s dirty air

What do central banks do?

Marcello asks:

What are the pros and cons of the fed raising the interest rates? How does it help control inflation?

I’ll begin by describing the main goals of financial regulation and central banks before turning to the relationship between inflation and interest rates and the Federal Reserve’s tasks.

In theory, financial regulation, like any regulation, is meant to improve market efficiency and reduce systemic risk. In most cases, this means promoting transparency, spreading accurate information promptly, and preventing fraud and mistakes that put the entire system at risk. In reality, these goals tend to be ignored by politicians who want big banks (“national champions”) or benefit from bribes and (retirement) jobs at banks that they allow to make excess profits by taking risks at taxpayers expense (“privatize the gains, socialize the losses”) or growing “too big to fail.” In the US, the biggest problems arise from dividing regulation among so many government agencies that it’s ineffective and the ongoing subsidies to FannieMae and FreddieMac, the private-profit, government-guaranteed mortgage buyers at the central of the Financial Crisis of 2007-12.

Central banks sometimes regulate banks (and other non-bank financial firms), but they are always in charge of managing the money supply with the goal of “keeping inflation under control,” which has been codified as “near 2 percent” for historical reasons.

The connection between inflation and interest rates is tricky, so let me say a bit more about inflation, interest rates and the money supply.

First, there are two types of inflation. “Supply-push” inflation reflects the supply of money. As a simple example, start with a money supply of 100 and 100 units of goods sold at an average price of 1.00. In this case, the price index is 100 because the average basket of goods costs 100 units of money. If money supply doubles (everyone has $2 for every $1 in their pockets), but there are still 100 units of good, then the price index doubles to 200, meaning that inflation is 100 percent. (The most familiar price index — the Consumer Price Index, or CPI — is often used to measure inflation.) Supply-push inflation is present in Venezuela because the government is printing money — and lying about it with the hope that citizens will not notice — while the supply of goods is falling (big topic for another post).

“Demand-pull” inflation results when people devote more of their spending to some goods and thus less to other goods. In most cases, this inflation is normal and benign, because it increases profits in that sector and thus attracts more supply (resources arrive from shrinking sectors), but various political-economic distortions might lead to harmful sorts of demand side inflation in, for example, higher education, medical care and housing in the US. I could write a whole book on these issues, but I’ll give you the simple example of housing markets where demand is strong (people are moving to the area or buying larger houses because they are wealthier) but building regulations restrict demand.

Interest rates can be used to raise and lower inflation by making money “more expensive.” If inflation is high, then an increase in interest rates means that it’s better to save rather than spend money because you can make more money by leaving the money in the bank or investments. This reduction in the “velocity of money” means that they are fewer people chasing the same number of goods, so prices of those goods slow or stop rising.

Interest rates are often set in markets for money based on the demand of a country’s currency vis-a-vis other countries or the money supply set by central banks. It is for these reasons that interest rates depend on exchange rates, banking reserve requirements, open market operations (buying and selling bonds) and many other factors that are hard to understand, let alone manage. It’s this complexity that lies at the heart of debates over the role of central banks. Some people think that central bankers are geniuses that manage our collective prosperity. I am with the other people who think that humans introduce more noise and prefer that a bot increase the supply of money at a known rate and leaves the market to sort out the other factors. (Bitcoin was released 10 years ago based on that exact logic. If you’ve followed its price gyrations, then you know that other factors affect its demand and thus its price!)

Also note that interest rates vary by maturity (e.g., interest rates on overnight deposits vs 30-year loans) because varying “time preferences” lead to different aggregate demand functions.

This summary should give you a (vague) idea of how regulations are supposed stabilize prices and markets, but a brief look at the macroeconomic performance of 200+ countries will tell you that politics, regulations and cross-border operations combine in unpredictable ways to produce systems that fail often, systems that fail when shocked and systems that affect others due to their size or reliability (i.e., the US, EU, China and Japan).

It’s my opinion that the greatest threat to financial and non-financial markets arise from political interference (e.g., India, Turkey, China, UK, Italy and the US in recent months). In many cases these are caused by populists who think that markets can be manipulated to suit their superstitions. They are sometimes right in the short run but always wrong in the medium (1-2 years) and long run. (I think that bitcoin and other “trustless” currencies might gain value in the near future as people lose faith in populist shenanigans.)

Finally, let me note that the US Fedeal Reserve in unusual in its dual mission of simultaneously keeping maximizing employment and preventing inflation. Although its hard to optimize on two margins, it’s even harder to pursue these goals because increases in employment eventually lead to increases in wages (as the supply of workers falls short of demand), which leads to demand-side inflation and thus the need to increase interest rates, which will cool the economy and thus dampen demand for workers.

So what are the pros and cons of increasing interest rates? A reduction in economic activity and job losses (cons) but a decrease in prices and inflation (pros).

My one-handed conclusion is that markets are hard to “manage,” and thus should be regulated in a slow, incremental and transparent way. Most economists understand this. Few politicians do.

Forgetting things past

Under the GDPR, EU residents have gained several important rights over their data. (Privacy laws are weak in the US and non-existent in China.) 
One of them is the “right to be forgotten,” which tries to balance the right to privacy against the public’s need to know history. 
This post is not about these rights, but the actions that we can take to improve our remembrance of things past, i.e., removing details that might have been interesting for a few days or months but no longer matter to us.
As examples, consider emails you wrote to someone you no longer date, silly photos of events long ago, or tweets in reply to a once-urgent-but-now-forgotten conversation.
The main idea of deleting, cleaning or summarizing your past is not to whitewash it but to align with our natural tendency (or ability) to forget events (both good and bad) over time. This tendency is very useful, but it loses its power if our digital detritus is saved and shown to us (or others) when we (they) are looking for something else.
Even worse, the rise of artificial intelligence means that companies that are storing our data on various clouds (dropbox, iCloud, google drive, etc.) are increasingly likely to mine those data to build algorithms that they will use to make money.
Thus, in the past few years, I have:

(Note that I have kept copies of all these deleted items on a back-up hard drive — just in case — but I kinda doubt I’ll ever look at that stuff. Years ago, I threw away the negatives from a few thousand rolls of film I shot while traveling for five years. I’ve not missed them. I still have most of my travel diaries from that period, but I have no temptation to read the detailed scribbles of my 25-year-old self.)

My one-handed conclusion is that you should take control of your digital memory, first to protect yourself from the bots and second to free your memory to keep what’s really important. This control takes more effort than letting things pile up, but the resulting privacy and calm should make the effort worthwhile.

America’s Pravda

When I visited my father a few weeks ago in California, I was forced to listen to Fox “News” for more than the 12 seconds that I can usually stand. What struck me then was its relentless devotion to all things Trump and obsession with tiny slights that served Republican talking points (like four days of discussion of Jim Acosta’s refusal to give up the mike while asking Trump questions at the press conference). 

What I didn’t realize is how far Fox has strayed from any objective definition of news-reporting or journalism. As this VOX video shows — with clips of Fox personalities — the channel has basically morphed into a full time propaganda machine for the Republican Party. Yes, that may be profitable, but it’s also horrible to see tactics borrowed from Orwell’s Ministry of Truth and the Soviet Union’s Russia’s Pravda (un-ironically meaning “truth”) in the US. 

Watch the video and tell me that you’re ok with that. (If you are, then I have a few dictators whose prisons you’d enjoy.)

My one-handed conclusion is that a few too many Americans seem to prefer delusion to truth and tribal loyalties to national strength. Sad.

The frumping of Trump

Trump is an egotistic windbag, and his lying incompetence is catching up with him.*

This retired military officer calls his “march to the border” a political stunt that risks the military’s integrity and loyalty to the Constitution.

The Trump administration tried to bury a new, massive report by 13 US government agencies  on the current and future damages from climate disruption by releasing it on Black Friday (when most Americans are shopping or recovering from overeating on Thanksgiving). Trump thinks that cold weather “disproves” climate disruption (like he thinks that people like him rather than his money), but this report buries his ignorance under 1,600 pages of science and data. Go read it — and then get angry that America’s “leader” cares more about golf than defending the country.**

My one-handed conclusion is that the best defense against lying deception is truth, facts and protest. Have you called your representative lately?

* I’m usually polite about leaders, but Trump is such a failure that I cannot see any redeeming qualities or mitigating actions. One reader of my newsletter was not happy with my criticism:

I suggested that the Swordmaiden unsubscribe as she (like her hero Trump) does not seem to engage in critical thinking. Related: Russia (as a dictatorship) benefits from confusion and disinformation, much as the U.S. (as a democracy) suffers. Support truth.

[I just did by subscribing to the New York Times (over 3 million digital subscribers), Atlantic and Guardian (they just hit 1 million subscribers). Good journalism needs your support.]

** Speaking of not caring about people, I’m pleased to see the wheels falling off Facebook, as Zuckerberg’s business model of using your data against you and hiring sockpuppets to attack his critics (via… yes, “fake news”) backfires. I hope that the UK’s seizure of internal memos reveals more Facebook manipulation, if only to force people to recognize it. The result? “Zuckerberg’s could be the first in history to collapse simply because its citizens logged out.

Everyone is trading your data

I went to dinner with some friends in San Francisco about a week ago. In the process, I learned a little more about how our data are tracked, traded and used to solicit our time and money.

The key is that my friends used “car share” services to get to and from the restaurant. (In the past, we might have walked to a local restaurant, but “cheap and seamless” makes it very easy to “tap the app” and get a ride.)

At one point in the past, I had Uber on my phone, but I had never used Lyft deleted Lyft’s app off my phone months ago. so imagine my surprise when I got this email the next day: 

So there are two possible reasons why I got this email from out of the blue the Borg:

  1. Some remnant of the deleted Lyft App on my phone was tracking where I was going and matched my physical presence to that of the Lyft driver.
  2. My location was matched with a Lyft driver, which then triggered an “account update” email to me that I had never signed up for.

I think that #2 is more likely, but both options are bad in the sense that they reveal the degree to which Americans (without knowing it) and Chinese (often knowing it, but not caring) are being tracked in their daily movements. (Tracking is probably also happening in the EU, but  GDPR makes that harder as well as illegal.)

How pervasive is this loss of privacy and gain in stalking? Read this article outlining how our data are collected, traded, aggregated and used to advertise to us. Then read this one on how “restaurant waiting list” apps are being used to record what we eat (digital menus), with who (location data!), and for how much (credit card bills). Finally, read this industry profile* of how a “decentralized internet” will weaken aggregation services and  platforms such as Google, Facebook and Amazon that track our browsing, logins, friends, finances and so on.**

My one-handed conclusion is that companies and governments are collecting far more data on your location, friends, activities and (probably) thoughts than you will ever suspect. The panopticon is now.

Postscript: Just a few days ago, I bought a swimsuit in a used-clothing store in Southern California. When I wanted to pay, the cashier asked me for my mobile phone number. “Why? You want to call me in the Netherlands?” “No, don’t worry,” he said. So I guess that the NSA, Facebook and Amazon are going to have to wait a bit longer to know what color swim trunks I wear.

* If you want to give them your identity; for some reason, I read it without signing up.

** I was annoyed to hear Mark Zuckerberg say “Now we’re going to change Facebook’s whole mission, as a company, in order to focus on [more community and connection]” as that’s a lie. Facebook, like Google, is an advertising company that makes 90+ percent of its revenues from advertisers who pay for access to your personal and “community” data.