Rewarding Behavior

I think it’s a general rule that over time people tend to do what they are rewarded to do, often despite finding the behavior initially repulsive. Rewards will find their own justification. So what is being rewarded today? Here’s one answer, from a Zero Hedge post to which I’ve added some snazzy interpretive graphics:Looting

What does this say for the future of society?

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You Know Things Are Messed Up…

…when you get junk mail claiming to be from Ben Bernanke (who is apparently reachable by an Aol email and an LA phone number):

From: “BEN S, BERNANKE”<info@yahoo.com>
To:
Cc:
Date: Sun, 23 Dec 2012 22:16:05 -0800
Subject: CONTRACT FUNDS – CREDITED FROM THE FEDERAL RESERVE
ATTENTION: BENEFICIARY,

CONTRACT FUNDS – CREDITED FROM THE FEDERAL RESERVE AND WORLD BANK AND IMF BOARD!

We received the instructional letter to credit $18.7 Million to your account or any means of payment of choice you want your  Fund to be remitted to you.
Your response is required to urgently enable  us get this funds to you without any further delay and you are also required to  get back to us with the process how you choose to receive your fund , because we have two way your funds can get down to you(Diplomatic Delivery, And ATM Card ) also confirm your Full Information for us to know if what we have in file is correct and to avoid delivering your fund to wrong address.

CONGRATULATION ON YOUR CONTRACT FUND.

EMAIL : ~~~@aol.com

Please be fast on this matter. Thanks and God bless you.

Regards,

BEN.S. BERNANKE
Chairman Federal Reserve Board New York.
+1213-xxx-xxxx

When the Fed Chairman is so famous that spammers are using his name that isn’t a good sign.

Power, Corruption, and Lies

After reading yet another article calling for China to embrace democracy as an antidote to their corruption woes, I decided I should throw my own shallow drivel on the subject up on the web [1]. Would-be reformers often get tangled up in good intentions and what they feel should be, while ignoring the many constraints of human nature. Any solution to the problem of corruption must take into account the answers to two questions:

1. Why do people try to buy influence?
2. What is the return on investment?

Obviously, people try to gain influence in the hope of getting officials to do something for them, or not do something against them [2]. This presupposes that the recipient has the power to effect the desired change. If there is no power to force changes there’s no point paying any amount to gain influence.

Having decided money should be directed to an official, the next question is how much, which is a function of the return on investment (ROI). ROI depends on the power an official has to force change, as well as the competition faced in buying influence. Paying $1 million for influence today isn’t much help if someone else pays $2 million tomorrow. Like any other market, if the market for influence is sufficiently large and competitive, the ROI will be lower, and bribes will generally be smaller and less consequential. Great returns on investment require the combination of enormous governmental power, a significant concentration of wealth, and barriers to entry into the bidding war. Following the 2008 financial crisis this is the situation in nearly every major industrial country and, not coincidentally, corruption has become a more pressing issue around the world.

Anything that increases government power or ROI will promote corruption and the paying of larger bribes. So how do the most common solutions stack up?

  • Making bribes or lobbying illegal  – Power is increased to the extent the laws are enforced, and increased further if they are enforced arbitrarily. ROI is increased by removing some bidders from the market. Therefore, it will be as ineffective as making drugs, sex and gambling illegal.
  • Campaign finance reform – Power is increased by a new mass of regulation and enforcement (again, more so if arbitrary). ROI is higher due to enhancing insiders and incumbents ability to stay in office despite ignoring the interests of their constituents [3].
  • Tougher enforcement – Increases power, dramatically so combined with selective enforcement. Increases ROI by decreasing the number of competing buyers..It will tend to leave only the more powerful sellers of influence in place, favoring big money buyers.
  • Increased transparency – Increases power by creating a new body of regulations to enforce. Decreases overall ROI due to increased costs of staying out of the public eye and adding a layer of palms to grease with no direct monetary benefit. Of course, the downsides can also be bypassed by paying up at the legislative level to craft a more easily evaded law.
  • Democracy – No inherent impact on power or ROI – just count the pages in the Federal Register and look at the ROI on lobbying in the US. In every democracy people will eventually try to vote themselves rich, guaranteeing other people will try to buy their way out of paying for that wealth transfer.

Human nature guarantees there will always be a steady supply of officials willing to take bribes in one form or another, so the only real solution to official corruption is on the demand side. Power is the driver of all corruption, yet limiting the power of government is rarely considered as a solution. Instead the solutions generally involve a further expansion of power with more bureaucrats to carry it out, all of whom are potential purveyors of influence.Eliminating the power of government to do anything for or against anyone is the only thing that will eliminate the demand, so unfortunately, unless people are willing to be anarchists, corruption is here to stay.

There are many parallels with the war on drugs – making illegal voluntary exchanges between willing buyers and sellers – so collateral damage minimization through legalization is probably the most compelling alternative for corruption as well. Giving everyone access to the influence market would at least level the field somewhat – particularly with pooling of resources, and diminish power and the need to influence to a degree, as well as remove a host of unintended consequences.

Hey, I never claimed to have a popular solution.

_________________

[1] Most of the wealth accumulated by high officials in the Communist Party is the natural result of running a system designed to loot the rest of society and is more an agency issue than corruption per se. Political systems are designed so that the rulers get rich, regardless of what they call the system of government they run. Here I’m concerned with the corruption of others trying to influence government officials.

[2] Therefore major regulatory initiatives come out of the woodwork in advance of election campaigns, compelling campaign contributions aimed at altering the regulatory trajectory in favor of the contributor.

[3] Most implementations of campaign finance reform also provide a ready-made Nixonian enemies list of people who contributed to opposition parties.

Income Inequality, Quadrillionaires, Success, and Failure

There has been a lot written about Gini coefficients, income inequality, the 1%, and potential negative effects on society from overly concentrated wealth. Looking at income distribution in the US does show there is cause for concern. From a 2007 Treasury study, Income Mobility in the U.S. from 1996 to 2005:

U.S. Census data, for example, show that the share of household income of the top 20 percent of households increased from 44.1 percent in 1980 to 50.4 percent by 2005, with the share of the bottom 20 percent decreasing from 4.2 percent to 3.4 percent. Similarly, Piketty and Saez (1998, 2007) find that the share of income of the top 10 percent of taxpayers increased from31.7 percent in 1960 to44.3 percent in 2005, while the share of the top 1 percent increased from 8.4 percent to 17.4 percent.

There has clearly been a significant shift, especially for the infamous 1%. But if wealth guarantees its own perpetuation, then where are all the quadrillionaires? Through the magic of compounding, any family with even a small nest egg a thousand years ago should by now own the world many times over. Yet those people don’t exist, and many of the richest people on earth didn’t inherit their wealth.

If all else is held constant it’s a mathematical certainty that the rich will always get richer. Once a person has money to invest that person will make more than the person whose salary is identical but who has no savings. Those returns from saving and investing can then compound and, given enough time, one person becomes a millionaire while the other remains a working stiff with nothing to show for it.

Yet in the real world things always change. Holding onto wealth, especially for generations, requires making a large number of good decisions in uncertain conditions. Wars, confiscations, banking and currency crises come with alarming frequency, and not always to those other countries. But even without those dramatic factors money can easily be lost. Does anyone really think Paris Hilton’s money will still be in the family two generations from now? Not likely when even next year seems a bit of a stretch. In a free market wealth is only retained by deploying it in ways that satisfy other people enough that they are willing to part with their hard-earned cash. Doing otherwise costs money, sometimes catastrophic amounts.

The same Treasury department study looked at the changing composition of different income groups in the US. The results show a surprising amount of movement between income levels across the spectrum. The key findings:

  • There is considerable income mobility of individuals in the U.S. economy over the 1996 through 2005 period. More than half of taxpayers (56 percent by one measure and 55 percent by another measure) moved to a different income quintile between 1996 and 2005. About half (58 percent by one measure and 45 percent by another measure) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.
  • The composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005
  • The degree of relative income mobility among income groups over the 1996 to 2005 period is very similar to that over the prior decade (1987 to 1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility has neither increased nor decreased over the past 20 years.

With that amount of reshuffling it’s not hard to make a case that the worries about income inequality are overblown (see U.S. Income Inequality: It’s Not So Bad). Individual incomes are quite variable over time so no one is necessarily stuck at any level. The numbers at the individual level are more a reason to celebrate and aspire than to seek redistributive solutions.

So is it case closed, nothing to worry about? Not quite. If it were indeed a free market and both the overall distribution and the individual movements within it were entirely the result of math and each individual’s choices and actions, then there would be nothing to worry about. If people were tired of Zuckerberg being a billionaire they could all quit Facebook tomorrow and the problem would be solved in a few days. Unfortunately, in the last two decades that sort of event has all too often not been allowed to happen.

A cornucopia of interventions have been deployed to enforce the status quo and prevent wealth from moving from the incompetent to those that best serve the desires of the populace. Bailouts, trade barriers, subsidies, tax breaks, regulatory burdens, government contracts, enforcing patents and IP, selective enforcement of laws, and a plethora of other corporate welfare all create an uneven playing field and prevent capital from being redeployed to its most productive use. Inflation transfers wealth to those who first receive the new money and credit and takes it from those last in line, often retirees and those with low incomes.The recurring crises that result from credit expansion inflict the most harm on those without the income or means to escape the effects.

All interventions in some way choose winners and losers based on something other than the voluntary choices of individuals about how to spend their money. This isn’t just immoral (as argued here regarding price stability), and not just about the risks from creating moral hazards, but about forcibly altering the structure of society in ways that benefit only a favored few. If the finger of blame for inequality in the US is to be pointed anywhere, it should be pointed there. Increasing standards of living and a free society require allowing failure just as much as success.

There’s No Magic Pixie Dust

One thing that seems to keep getting lost in all of the Eurozone bailout/default talk is that losses are the destruction of capital, of part of the productive capacity of society. Accounting rules can be changed, bailouts can be arranged, and free money can be dropped from the sky, but sooner or later someone somewhere is going to take that hit.

All government and central bank actions under discussion are nothing but trade-switching schemes. A coerced version of musical chairs with bureaucrats determining the losers, while the total wealth of society remains diminished. The prevailing assumption seems to be that by passing these trade-switching transactions through the halls of power, a magic pixie dust is applied which causes that problem to disappear. The negative effects aren’t immediately apparent in the statistics, speeches are given, the economy is saved. Hooray!

Unfortunately there is no magic pixie dust. Losses have an unavoidable impact. Increasing prosperity isn’t due to a historical imperative, but from the ability of human ingenuity to outpace the capital consumption of successive rounds of government waste, bubble blowing and socialized losses. Though in the very long-term human ingenuity has always prevailed, there is nothing to prevent destruction from taking the lead for centuries at a time.

This doesn’t mean markets can’t rally for long periods before succumbing to the death by a thousand cuts. The amazing resilience of human ingenuity can overcome great odds and mask the effects of incredible amounts of stupidity. Ever greater amounts of credit will be required to keep the bubbles expanding, with decreasing results each time, but since the purported resolutions of the resulting banking crises are all in some way infusions into the financial markets, they naturally tend to rally to some degree.

Is the leader board for the race between ingenuity and destruction about to change? There’s no way to be sure. However, when central banks all over the world are pushing uppers through garden hose IV tubes and the patient still can’t get out of bed, it’s likely not a good omen.

Another Stab At Beijing Residential Vacancies

After the previously released Beijing housing vacancy numbers caused a lot of internet chatter, The Powers That Be in Beijing apparently felt the need to use the press to do some damage control (see here 北京警方:空置房概念基于电子地图 与房地产无关 and here  中国网事)房产空置率到底有多高?——“北京空置房屋381.2万户”引网络热议, via Sinocism.com). Combining the data from various articles I think there is now enough information to come up with a more reliable estimate for Beijing residential vacancies.

The previously reported vacancy numbers were based on their Orwellian mapping project, which this article, The Beijing Police Have an Electronic Map That Shows Where You Live, says is 87.7% complete. To date 4.269 million housing units have been assigned to people in the mapping project. Assuming a constant assignment rate the remaining 12.3% of the survey should reduce vacancies by ~600K, and the previous 3.812 million vacancies becomes ~3.2 million.

Since it’s now said there are 13.205 million existing housing units, the vacancy rate can be calculated as 3.2/13.205 = 24.2%. Still quite high, but certainly more believable. Then there is commercial…

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**One of the above articles claims 28.9% vacancies but uses the earlier [unadjusted] vacancy number of 3.812 million.

Rebranding Group Selection

Nice post over on Falkenblog, Evolutionary Self Interest is Relative, which links to an excellent video on misunderstandings about the current iteration of group selection.

The video make it quite clear that much of the debate over group selection, like many other arguments, boils down to semantics. Both sides are essentially in agreement but due to terminology are unable to recognize it. Obviously some rebranding is in order. Multilevel selection is a far less loaded term, even if it sounds too much like multilevel marketing to be appealing to me.

The discussion of isolation and the success of psychopathic males among water striders leads to an obvious parallel with closed and restricted borders in human society. The option to flee is limited so the success of antisocial behaviors is enhanced. It’s hard not to think of N. Korea in that regard, but any border restrictions will have similar effects. The rising xenophobia in China is a very worrisome sign, as well as the increasing US measures against expatriation and immigration.

There is also an excellent point made about the size of the pie when talking about relative fitness that applies equally well to economics and economic policy. People prefer to be a destitute king of shit mountain rather than a wealthy poor person just because they have more than the next guy. Redistribution is based on the idea that the pie won’t change size, yet there is no basis for this assumption, and unfortunately, absent inter-group competition, little evolutionary reason for it to matter until extinction.

The video is about an hour long but worth the time for the human implications alone.