Go off the fiscal cliff

The US federal budget has been chronically in deficit for most of my life, not to mention most of the century.

The national debt is bouncing up against a ceiling of 16.4 trillion, compared to a 2012 GDP of around 15 trillion. Each of the 117 million American households owes about $140,000. Median household net worth was over 100,000 before the real-estate bubble burst. Now it's about $67,000.

Krugman argues that we can grow our way out of debt and that scary talk of a trillion dollar deficit is just a tactic to frighten voters into abandoning welfare and social programs. We can continue to print money, short-changing China and domestic savers.

But, debt can't increase indefinitely without landing us in the same pickle as Greece or Argentina sooner or later. And there's no way to know in advance when later becomes now.

Obama is offering $1.3 trillion in revenue increase for $930 billion in spending cuts. The republicans might haggle this ratio down a bit, before a deal is struck. A big chunk of the cuts ($400 billion) fall on health care programs. Farm subsidies take a hit ($200 billion). And "non-defense discretionary spending" gets slaughtered. This obscurely named category includes things like infrastructure, research, disaster relief, education and the environment. Neither party seems ready to cut more than $100 billion or so from defense.

The fiscal cliff splits the cuts evenly defense and domestic spending. If you prefer butter to guns, that might be a better deal than a "grand bargain".

Far from an apocalyptic event, the fiscal cliff is a good start at what we need to do anyway. It accomplishes two wise but politically impossible things - spending cuts on defense and ending the Bush tax cuts. Fixing the collateral damage is going to be a lot easier that getting either of those items a-la-cart. Don't panic! If anything worthwhile gets cut, we can always bring it back.

So, I say, Fuck it! Let's go flying off the fiscal cliff.

Three Myths about Copyright Law

Just to prove that Lawrence Lessig is right, a GOP group released a shockingly sensible memo on copyright, then retracted it due to pressure from lobbyists. Now Derek Khanna, the staffer that wrote it has been given the boot.

Khanna’s three myths

• the purpose of copyright is to compensate the creator of content
• copyright is free market capitalism at work
• the current copyright legal regime leads to the greatest innovation and productivity

To read

• The memo: Three myths about copyright law and where to start to fix it
• Crooked Timber on Lessig’s Republic, Lost
• Marginal Revolution: Don’t Mess with the Mouse
• The Case of the Vanishing Policy Memo on Slate's Moneybox

More on intellectual property

• Alex Tabarrok - Launching the Innovation Renaissance
• Making the patent system even worse: first-to-file is a gift to corporations
• Current intellectual property laws are blocking innovation

Hong Kong

I started reading Restless Empire, China and the World Since 1750 by Odd Arne Westad. Here's what he has to say about Hong Kong:

It was in Hong Kong that the colonial experience in China was formed. It was in the great harbor at the mouth of the Pearl river, that the pattern for hybrid Chinese-European societies would be set. The city facilitated British trade all over southern China, while becoming in population a Chinese city, attracting immigrants from all over the country: refugees, dissidents, entrepreneurs, and fortune hunters. In 1860, Hong Kong had a population of more than 120,000, of whom only 3,000 were non-Chinese.

Like all British colonial cities, Hong Kong was basically well-run, but somewhat shoddy at the edges, where corruption and exploitation thrived. It was a city founded on enormous paradoxes and hypocrisies. The foreign missionaries preached virtue to the Chinese where the foreign merchants kept them addicted to opium. The British preached law and order, though they had taken the territory by brute force. The Chinese came to Hong Kong to take advantage of the opportunities offered them in a city that was not theirs and bore the indignities of being second class residents in a strict racial hierarchy in order to escape a world that was crumbling around them elsewhere in China. Over time, they built their own organizations, as the Chinese diaspora did elsewhere, even though the Hong Kongers had never left their own country.

The great trading houses stood at the center of foreign commercial activity in Hong Kong. Many of these companies - Jardine, Matheson, Butterfield & Swire, Hutchinson - came out of British trade in India after the dissolution of the East India Company in 1834, and established a presence in many treaty ports in China. Still, they were nowhere more influential than in Hong Kong, where they not only ran the economy and in effect also the politics. From the beginning, these trading houses where international organizations, led by English (or in the case of Jardine's, Scots) businessmen but staffed by Chinese, Indians, Europeans, and Americans. By the late nineteenth century, they were the main mediators between Chinese and foreigners, not only in Hong Kong, but all over China, not least because of their increasing control of the Chinese banking system.

It was not just Hong Kong's economic opportunities that drew Chinese from all over but also its educational ones.

- Odd Arne Westad's Restless Empire (slightly edited)

The original charter city

In keeping with a history full of contradictions, Hong Kong serves as the model for charter cities. Proposed by economist Paul Romer, charter cities are semi-autonomous cities in rural sections of developing countries that would have some foreign supervision and, most importantly, would be founded upon a new set of rules.

This unconventional idea was considered and rejected by Madagascar and looks to be having trouble getting off the ground in Honduras. It was always going to be a tough sell - taking the good parts of colonialism. Making an end run around the entrenched interests of local elites is exactly the point, and oddly enough, said elites tend to dislike the idea.

Systems of political/economic order

I'm enjoying tying together the various strands that form the background for modern China's hyperspeed industrial revolution: Confucian order thrown up against the freewheeling and chaotic mixture of cultures and languages of trading cities; complex fluid dynamics of power and money, governments and corporations, and individuals at the margins of empires.

Colonialism is the story of one system for marshaling resources overtaking another, by being more efficient, flexible, scalable, brutal or ruthless. This process seems like a general theme in history:

mercantile > nationalist > feudal > tribal

Maybe, I haven't got the categories quite right. Does capitalism belong there to the left of mercantilism? Judging by Barnett's systems view of the world, you could argue that the age of the mercantile system is not really over, yet.

Persuasion, Initiative, Freedom, Desire

Econ 101 leaves out persuasion. What fraction of business (/politics) is persuasion? ... It's rare for people to initiate their own dreams or be 100% originators of their goals or preferences. ... Which presents a problem for the Edgeworth-box story of lonely individuals trading with each other. ... pleasure and preference themselves are malleable and being moulded by others all the time. ... Even besides "marketing types" ... plenty of people reflexively enforce social norms and expectations.

The story of Don Draper and the Lucky Strikes makes us individuals out not as free-willed inventors of ourselves, util-seekers and comandantes of our own pocketbooks--but as dull voids with no idea what to do with the incomprehensible freedom we enjoy in a society where incomes so far exceed subsistence. ... It puts us as templates onto which meme-smiths paint their work, searching for 1 that will stick and replicate itself.

...the suggestions of what to do with freedom--trips to India, faling madly in love, "On The Road" type life--aren't original ideas, those come from stories which we have no better idea than to live out.

It's somewhere in that spirit, I think, that persuasion in the workplace, in the store, on the TV, can be modelled. And without an effective theory of persuasion I don't see how economic theory can take an honest accounting of choice, preference, or "optimum".

Isomorphismes, see things differently

Building reliable systems out of unreliable parts

The following rant was inspired by listening Econ Talk Garett Jones on Fisher, Debt, and Deflation while running.

There's a certain type of fundamentalism around the belief that government is necessarily dysfunctional. Reasoning that government is likely to spend and regulate unwisely, adherents advocate spending cuts and limitations on regulatory authority. The failures of defunded and hamstrung agencies then serve as further proof that the public sector can do little right. If further proof is needed, it's easy to find examples of state sponsored screw-ups.

These same individuals are often more credulous about the competence and probity of corporations. This faith seems undiminished by mountains of evidence in the events of recent years that it is misplaced. Businesses leveraged themselves to the hilt, made and traded risky loans with abandon, and felt almost obliged to keep dancing while the music kept playing.

It should be clear to all that an economic crisis of the magnitude of the great recession that began in 2008 couldn't have happened without substantial errors in both public policy and business decision making. Such as:

• too much leverage
• complexity and absence of regulation of derivatives
• lax regulation of the traditional parts of the financial sector
• perverse short-term incentives, moral hazard and lack of accountability on the part of the financial sector, especially investment banks
• moral hazard and lack of accountability in government sponsored entities like Fanny Mae.
• outright corruption (for example in loan origination) and regulatory agency shopping
• policy encouraging home-ownership for high credit risk buyers.

Economists debate the degree to which stickiness of prices and wages magnify short-term blow-ups. One extra difficulty of a real-estate driven recession is that long-term contracts like mortgages are about as sticky as it gets.

Economic adjustment happens at different rates - from the millisecond response times of high-velocity algorithmic traders to the months it takes to sell a house or mop up after a bankruptcy. These mismatched rates present opportunities for arbitrage, but if they become severe enough, they can break established systems. Examples include collapses in overnight interbank lending during recent crises and the flash-crash of May of 2010.

Corporations are powerful engines of wealth creation. Countries without governments are not nice places. Both are flawed, but we'll have to stick with them, at least until we find better alternatives.

But, organizations built of humans are bound to be flawed, because they're built of flawed parts. History can be viewed as a series of attempts at engineering reliable systems from unreliable parts, with varying levels of success.

The political and economic dimensions of organizations, public or private, are inextricable. The rats are always trying to find a way in.

Matthias Seifarth

Looting

In a great little interview on the Renegade Economist Talkshow, Tim O' Reilly mentions a 1993 paper by George Akerlof and Paul Romer called Looting: The Economic Underworld of Bankruptcy for Profit. The central idea is that there's a difference between creating wealth and extracting wealth from the economy.

The paper was the subject of a write-up in the NYTimes: The Looting of America’s Coffers.

Inequality and Democratic Responsiveness

There has never been a democratic society in which citizens' influence over government policy was unrelated to their financial resources. In this sense, the difference between democracy and plutocracy is one of degree. But by this same token, a government that is democratic in form but is in practice only responsive to its most affluent citizens is a democracy in name only.

Most Americans think that public officials don't care much about the preferences of "people like me." Sadly, the results presented above suggest they may be right. Whether or not elected officials and other decision makers "care" about middle-class Americans, influence over actual policy outcomes appears to be reserved almost exclusively for those at the top of the income distribution.

Inequality and Democratic Responsiveness:
Who Gets What They Want from Government?
Martin Gilens
Politics Department, Princeton University

Years ago, I came across a paper about welfare. Written in the context of the Clinton era welfare reforms, the paper acknowledged the perverse incentives and dependency that accompany welfare for the low end of the income distribution. It went on to talk about welfare for the wealthy. This, it explained, is much more pernicious, in that the wealthy have greater means to influence policy, influence they use to divert further resources to themselves.

Every now and then, I try to find that piece again because it really helped open my eyes. The quotation above was the closest I could come, this time.