Archive for the ‘Unintended Consequences’ Category

Just a brief post to see if we can stir up any comments.

I’ve been struck by how much of the Republican primary has centered around Mitt Romney’s tax bill (as Mike pointed out).  It is interesting to note “conservatives” turning on one another regarding someone’s taxes being too low, which goes against the de facto party line to lower taxes in general.

But it’s the specifics surrounding the 15% rate that I want to talk about.  The President mentioned it in his State of the Union, and fan Warren Buffett has trumpeted his tax rate compared to that of his secretary for the last half year.  While the morality of this gets debated, what seems to not get mentioned as much is the economics.  15% is the number used because that is the tax rate on capital gains – or investment income for those of us who have no capital gains and may not be familiar with the term.  This is not a tax on wages earned or for work done.  This is money that was invested so someone else could start a business or to buy shares in an existing business that you think has potential for growth.  So our laws have created a separate rate to encourage people to engage in this behavior – and it has done just that.

But what could happen if the rate was 30% as the President suggests?  Well, what if Mitt Romney stops investing?  Let’s imagine he was getting dividend payments equal to one million dollars, so his tax paid at 15% was $150,000.  The government would love $300,000 so they raise the rate to 30%, only Mitt decides to stop investing in equity and buys steady ole treasury bonds.  So now, the government loses out on the $150,000 they would have gotten – gets in budget trouble because they projected $300,000 and now don’t have it, and on top of that they owe Mitt millions of dollars plus interest as part of the national debt.  Plus that entrepreneur that was starting up a little search engine called Google doesn’t have the seed money he needed to buy servers and programmers and such, and so decides to return to mother Russia and we all are left trying to browse the internet on Yahoo.  I can’t find a new job because Yahoo’s results return bogus results, so we are out on the streets and homeless with our 2-year old daughter.  Shivering and hungry.

Man… can’t we just let the people have 15%.

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The revolution began in the late 1970’s but the first shot was fired in 1992 when a group of civil libertarian cryptologists, known as the Cypherpunks, started a mailing list. By 1997, there were thousands of subscribers who discussed politics, privacy, cryptography, philosophy, and wrote code. While the net was still in its infancy, these were the men and women who foresaw what was to come. They understood the battle about to be waged between privacy and secrecy. A manifesto was written in which the opening line reads:

Privacy is necessary for an open society in the electronic age. Privacy is not secrecy… An anonymous system empowers individuals to reveal their identity when desired and only when desired; this is the essence of privacy.

What the Cypherpunks saw was a world in which the technology would soon exist where every transaction, every email, every purchase could, and therefore would, be tracked by governments and corporations against the public’s will. What made the Cypherpunks so unique is that rather than resist and rebel against this technology, they openly embraced it and transformed it in a way that protected privacy and attacked government secrecy.

We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do. We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.

Up until the 1970’s, cryptology had been something only governments were involved with. But in 1975, a computer hacker named Whitfield Diffie [pictured left] came up with a new system called “public-key” cryptography. What was so revolutionary about this was that it used an asymmetric key algorithm so that the key used to encrypt a file was not the same used to decrypt it. Traditionally, if you wanted to send an encrypted text, known as “cyphertext”, you also had to send the recipient the key to decrypt it into “plaintext”. The problem was that the information would need to be sent over insecure channels and was, therefore, susceptible to interception. But public-key cryptology changed that by using two separate keys, one for encrypting and one for decrypting, one public and one private. The publicly available encrypting key is widely distributed, while the private decrypting key is known only to the recipient. Messages can be encrypted with the recipient’s public key but can only be decrypted with the corresponding private key. To put it in laymen’s terms, the strength of the key is determined by its size. The bigger the key, the harder it is to hack. While the government’s data encryption standard (DES) at the time used a symmetrical key, it was limited to only 56-bits. But Diffie’s public-key allowed for a key to be used with an unlimited size which made it nearly impossible to crack.


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Just read this report about a town in New York using Google Earth to locate homes with pools that may not be licensed:

A town on New York’s Long Island is using Google Earth to find backyard pools that don’t have the proper permits.  The town of Riverhead has used the satellite image service to find about 250 pools whose owners never filled out the required paperwork.  Violators were told to get the permits or face hefty fines. So far about $75,000 in fees has been collected.

This also reminds me of how agencies are using GPS software to track their vehicle fleet, and are finding either gross misuse that is a firing offense, or are seeing dramatic reductions in waste:

Islip saved nearly 14,000 gallons of gas over a three-month period from the previous year after GPS devices were installed. Nolan said that shows that employees know they are being watched and are no longer using Islip’s 614 official vehicles for personal business.

I find this very funny, partly because of the “privacy concerns” that immediately get brought up.  But the fact is, that the behavior is wrong and people are being caught doing something illegal, or against regulation, and yet they will sue and complain about privacy concerns.  I definitely am not in favor of my life being tracked and detailed… but I also tend to think that if I am doing something wrong that is my fault, not the person who found me out.  So while I would like to have small and limited government, I’ve also never had a problem with wire-tapping or vehicle searches and such – because, if you’ve got nothing to hide then what’s the problem?  The CIA or whoever can listen to as many of my cellphone conversations as they like… they just might be bored is all.

I’m not trying to come across as perfect here by any means.  If my work computer were monitored, or my daily schedule recorded there would certainly be mismanagement or misuse revealed… or lots and lots of fantasy football at least.  But that again is my issue I would have to worry about.  I certainly don’t wish to create laws where a private company or government agency isn’t able to keep their employees or citizens accountable.

That said… I would much rather that the pool regulations didn’t exist in the first place.

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Just a few things popping through my mind last couple of days.

  • Been seeing a lot of UAW workers striking on Cherry Ave. near my house.  Can’t help but see it as bad form to be striking while so many are without jobs and hungry for work.
  • The other day on my way home there was a major backlog on the 405 North.  When I finally reached the problem I discovered (as is not uncommon) that the issue was on the other side of the freeway where two firetrucks and paramedics were working on something… no problem on the northbound.  And I thought that maybe this phenomenon could be analogous of the difference between theory and practice.  In theory the northbound side should have been flowing as smooth as normal, but in practice the rubber-neckers had created a domino effect that slowed things to a stop.  Need to remember that whenever I (or an idealist from the other side) propose some fix for the woes of our society.
  • Also seen on the freeway… a truck covered in Oregon stickers, U of O, Ducks, etc. but with California plates.  If you love Oregon so much, why are you here?  I always hate it when people are proudly celebrating some other location, rather than the one they are in.  Either keep it to yourself, or move back.
  • Finally… forgot to update you on a Chelsea-related post.  We did win the Premier League title, AND then went on to win the FA Cup for the so called domestic double.  Thanks for all your best wishes, I know you were all rooting for them as well.

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I am absolutely seething about the oil leak in the Gulf. I don’t know if the gravity of this situation has sunk in with people. I also don’t have the time right now to research and explain the ecological consequences, but I would assume that I’m addressing a smart enough audience that I don’t need to. It’s bad, and it’s going to be bad for a long long time. This spill is much larger that the Exxon Valdez spill, and it has occurred in a much more ecologically sensitive area. The Exxon Valdez spill reaked havoc on the environment for more than 20 years, and some would argue that it still affects that region. Enough said.

So, I’m heartbroken by this, but I’m also mad. I’m mad partly because of the amount of times I’ve listened to politicians (mostly on the right but not always) who claim that drilling in ecologically sensitive areas is environmentally safe. Can we please throw out that argument? It’s not safe. It’s risky. I believe that drilling compromises an environment even without a disaster like this, but I don’t expect common ground on that. Can we all just agree that there is a significant risk that goes along with drilling especially in challenging areas?

Can we all also agree that although accidents may not happen often, when they do happen they are devastating not only to the environment but also to the communities that surround it? This spill isn’t only going to obliterate an ecosystem, which I’m sure I care a bit more about than some of my friends on the right, but it’s also going to obliterate many coastal industries.

Now here’s the part that I’m most mad about. At some point, someone passed a law that the oil companies would be liable for only 75 million dollars in the event of a disaster. I haven’t researched this law, so I don’t know if it’s conservative or liberal politicians to blame. I’m sure it was pushed for by the oil lobbies, and I can safely guess that it was considered pro-business. I’ve heard an opinion that through a combination of laws the company could end up being liable for as much as 3 billion but it would take years of litigation to get that much out of them, and it’s not likely ever to happen. The total clean up from this is right now estimated at 20 billion.

First off, how pro-business is this law when one company can literally wipe out business for several industries and not be completely liable to them? How fiscally conservative is such a law when it places the burden of at least 17 billion dollars of clean up on the government?

Here’s the common ground I want. Can we agree that when an oil company drills, they should accept complete liability for the consequences of any mistakes they make. The only limit to their liability should come from legitimacy of the claims against them, not based on a dollar amount. Such a policy would make them think twice before drilling in questionable areas and taking short cuts along the way. Can we agree to that?

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I have added a new category to CAI’s “cloud” of topics that are search-able on the right side of the blog here.  It is labeled Unintended Consequences.  I have written a post specifically about this before, and mentioned it at other times, but I realize that I notice this pattern quite often and so thought I would try and point it out more.  Sometimes it can be positive or fortuitous consequences… but more frequently it seems to be negative repercussions brought on by glowing intentions.

In that effort I point you to this article from WaPo about how foreign aid in Haiti has made their devastation from the earthquake even more acute.  They import over 50% of their food, including 80% of their most-eaten staple rice.  The unintended consequences are two-fold as far as I can see:

  1. Because of historical and current aid their local economy has not grown as it should.  Their president recently requested less aid so that local producers can start to contribute to the recovery of the country.  So as a consequence of continually supporting a country through aid efforts it wass possible to actually undermine the growth and stability they need to no function efficiently as a country..
  2. As the Washington Post article describes, subsidies from our government to our local farmers makes the rice we export cheaper than the Haitian-grown variety.  We push for lower tariffs in their country, while using subsidies in our own to gain a market advantage, all in the name of free trade.

What seems as beneficent global aid in one instance, and separately as a boon to our local farmers in the form of subsidies… can be linked to increased depression in a third-world country.  Certainly Haiti’s woes are not limited to these agents, but this tragedy is serving to bring to light the inequities these specific policies may have contributed to.

It is too trite to recite the adage of what road good intentions pave.

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Have you ever talked with people about fair trade, the idea of branding certain commodities that have passed muster as delivering a fair and decent price to its third-world producers?  I have, and they are usually boisterously supportive of it, or at least passively not opposed to it on the grounds of why not?  I remember being a part of a discussion at a class at my church where a woman was espousing her belief in fair trade and what it does… and when I proposed some critiques of it, was looked at as if the Holy Spirit had just left my soul or something.  But I am more and more convinced of the bad economics of fair trade, and see its support as more to assuage peoples consciences more than assuage third-world poverty.  Cardus, a Christian think tank in Canada (yikes! – just kidding), has an article by Robert Joustra that briefly discusses some of the implications of the “Hollywood campaigns” that raise awareness of fair trade, but not enlightenment on fair trade.

Fair trade offers farmers (coffee and tea are the most traded) a higher price than the true market rate.  This defacto subsidy causes problems when it encourages farmers to stay in business, when perhaps they shouldn’t.  The article quotes Paul Collier:

The price premium in fair trade products is a form of charitable transfer… the problem with it, as compared to just giving people the aid in other ways, is that it encourages recipients to stay doing what they are doing. The fair trade brand exists because the global market somehow masks the true cost of production—which is to say the people who do the actual production do not receive the appropriate dividends. This is, in short, unprofitable work, and subsidizing unprofitable and undiversified economies is the surest recipe for ensuring that those economies remain dependent on that subsidy.

Collier is hard on fair trade, but is a huge proponent of third-world aid in general, which is a topic that the article addresses as well.  There is a great Munk Debate that the article links to (Be It Resolved: Foreign Aid Does More Harm Than Good) that I highly recommend you check out.  It features Collier and Hernando de Soto (whom I am very fond of) alongside two other colleagues as they debate the above resolution.  It is heady stuff and it serves as a reminder of a view of mine – that our emotions and feelings many times cause us to pursue policies that are destructive.  If you are a continued reader you may have seen me write many times before about the unintended consequences of certain policies.  That is why I continue to try and support as free a market as possible, with as few distortions, subsidies, tariffs, etc. as possible.

Well I believe fair trade is an unnecessary distortion.  We want to feel good about buying a product that may pay a farmer in South America more money for his work, but don’t consider that maybe that forces another farmer out of work, or keeps that farmer sowing a particular crop when maybe he or she shouldn’t.  We must always try and look at the big picture of our actions.  As Joustra says:

There is a danger in religious circles that as our consciences are reawakened, our intellects are not always so equally roused. These practices of fair trade and foreign aid have come under considerable attack in the last few years, mitigating the enthusiasm of fair trade and foreign aid advocates but also—importantly—pointing to a principle of social and cultural change that is much in need of recovery. Foreign affairs do not need Band-aids hastily slapped on by fringe grassroots populists, but long-term substantive critiques of the global social and political architecture.

I look forward to hearing any thoughts.  Like I said, I am more and more convinced that fair trade is not a valid solution, but I may be wrong.

coffee farmer

Happy... at others expense?

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