What if Regulation was a Finite Resource?

Alternative Title: Conservation of Regulation

Think of the fuels that have provided the energy for human civilization so far – coal, oil, gas. They existed for thousands of years, largely inert. A small part of them (mainly coal) was used by humans for forges and the like. But then we discovered them during the industrial revolution. We put them to good use, but there’s only a limited supply.

What if regulation was the same? There’s only a finite amount available. For most of history, this existed in a largely inert fashion, regulating the atmosphere, evolution, and so on. A small part of it was used by humans to regulate their habits and bowl movements.

But then during the industrial revolution regulation was discovered by socialists and paternalists. They started using it on a massive scale, trying to regulate all of society.

Unfortunately, there’s only a finite amount of regulation available. We’ve been using so much over the last few hundred years that there’s not enough to regulate the climate – hence climate change. It caused a breakdown in virtue when people’s ability to regulate their habits was reduced. It also caused the obesity crisis because we can no longer regulate our bowl movements properly.

Now, leading scientists are warning about an even greater threat: we might be using up so much regulation that the earth’s orbit will cease to be regular. This will have dramatic consequences, ranging from disruptions to the seasons and day-and-night cycle, to the earth crashing into the sun.

Leading scientists say we need to rapidly reduce our regulation consumption if this is to be avoided. They recommend bring our regulation uses back down to 1990s levels by 2020, and 1900 levels by 2050, and 1700 levels by 2100. Unfortunately, it may already be too late to avoid changing the day-and-night cycle by 1-2 hours, in an effect scientists have dubbed ‘daylight savings time’.

Economists are divided on the best way to respond to the crisis. Some favor a regulation tax, where anyone who implemented or enforced a regulation would have to pay a tax equal to the negative externality they caused. Others suggest a cap-and-trade system, whereby rich countries would be able to buy regulation credits from poor countries. Some politicians prefer a command-and-control approach, where they would pass regulations limiting the use of regulations in industry.

Some progress has been made – most countries have signed up to the Hong Kong Protocol, promising to reduce their regulation levels. The US risks becoming an international pariah by refusing to sign; the Obama administration defended its intransigence:

Hong Kong is, in many ways, unrealistic. Many states do not want to meet their Hong Kong targets. The targets themselves were arbitrary and not based upon political science. For America, complying with those mandates would have a positive economic impact, with increased hiring by small businesses and price decreases for consumers. And when you evaluate all these flaws, most reasonable people will understand that it’s not sound public policy.

But you too can make a difference! There are many easy steps you can take. Maybe turn off your thermostat – doesn’t the earth need that regulation more than your central heating? Write to politicians expressing your concern. Join a local libertarian group.

Remember, preventing the world crashing into the sun is more important than regulating your heartbeat, so ask yourself: do I really need a pace-maker?

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Let he who is without Science Denial cast the first stone

The Washington Post recently ran an article on how political affiliation and level of religious belief affect support for, or suspicion of, the scientific consensus on various subjects. In it they refer to research by Dale Kahan to argue/imply that opposition to science is primarily driven by conservative ideology.

For example, they have these three very attractive charts, showing that the difference between people of high and low religiosity is small compared to the difference between conservatives and liberals when it comes to global warming,

GlobalWarming

evolution,

.
Evolution

and Stem Cell research:
StemCell

However, as so often happens, their article on causes of political bias ends up displaying some pretty impressive political bias. Unsurprisingly, this bias tends to be flattering towards those who share their political beliefs, and damning of those who don’t.

Firstly, look at those charts again. When looking at on the left-right axis, your eye is naturally drawn to compare the two extremes – to compare the most right wing to the most left wing (especially as the line is monotonic). You note the large difference in height between the leftmost data points and the rightmost, compare it to the relatively small difference between the high and low religiosity lines. The former difference is bigger than the latter difference, so political opinions must be more important than religious ones.

… or so the chart leads us to believe. However, this is hugely deceptive. As you can see, there are 5 tick marks on the horizontal axis, the measure was created from questions using 5 and 7 options, and there are a very large number of little vertical lines. This means they’re using a relatively fine measure of political ideology: they differentiate moderate conservatives from ordinary conservatives from highly conservative people. By doing this, they increase how extreme the extremes are, which increases that vertical difference our eye is naturally drawn to. With religion, however, they only admit of two categories, high and low. Perhaps if they had disambiguated more, so the categories ranged from “More religious than the Hasidim” to “More atheist than Dawkins”, we would have seen more spread between those two lines. As it is, the charts suppress these differences, reducing the apparent effect of religiosity.

That’s not the only problem with the article. The climate change and evolution questions seem pretty good, but the stem cell question does not show what they think it does.

“All in all, do you favor or oppose federal funding for embryonic stem cell research”

Now, in general opposing research for science does seem like prima facie evidence that you’re in some sense anti-science. But not here! There are two other factors at play which conflate the issue.

The first is that this is as much a moral issue as a scientific one. Thinking that stem cell research is immoral doesn’t necessarily mean you disagree with any of the scientific findings, due to the is-ought gap. In the same way that opposing nazi research on cancer (which used a variety of immoral techniques) doesn’t mean you think their conclusions were factually wrong, you can think stem cell research is morally wrong but the conclusions factually correct. Or, to use a clarifying contemporary example, suppose the question instead asked,

“All in all, do you favor or oppose federal funding for methods of treating homosexuality”

My intuition, which I suspect you share, is that the line would slope in the opposite direction – lefties would be more opposed than righties. This isn’t necessarily be because they are anti-science – maybe they simply think we are better off not knowing how to treat homosexuality, or better off not even thinking about the possibility. This moral belief doesn’t, however, mean they disagree with conservatives and scientists on any factual issue.

But there is another, even bigger, problem with this question. It doesn’t just ask about the morality of stem cell research – it asks about federal funding for that research. Conservatives are well known for opposing federal funding of things in general. Yet this research suggests that consistently applying the conservative rule “oppose federal funding of things in general” is suddenly evidence of being anti-science. You would be branded anti-science by this question even if your thought process was

“I think the federal government is very bad at research – it will be inefficiently run, overly politicized, and poorly directed – so I don’t want it to mess up stem cell research. Stem cell research is far too useful and exciting to trust to the government.”

Yet surely such a person should be considered pro-science, not anti-science!

Indeed, it seems that overlooking this issue, and conflating opposition to the state with opposition to science, is a clear sign of political bias on the part of the author. They choose a question which almost by design proved conservatives were anti-science, not by actually measuring the truth, but by simply re-defining opposition to science to include the political opinions they oppose. David Friedman once wrote about something similar – a study which, while claiming to prove that right-wing people were authoritarians, really just defined authoritarianism as ‘respects right-wing authorities’.

Ok, so their choice of data visualization technique was perhaps misleading, and the stem cell funding question was awful. But the other two questions look pretty solid, right?

Perhaps not. It’s well known – or at least widely believed – that conservatives disproportionately disbelieve in evolution and global warming. So if you wanted to prove that conservatives were anti-science, you’d pick those two questions, confident that your prejudices would be confirmed.

Yet there is much more to science than evolution and global warming. There many issues where there’s a scientific consensus at least as strong as that on global warming, yet some people still disagree. For example,

  1. Astrology is nonsense
  2. Lasers are **not** condensed sound waves
  3. The earth orbits the sun

In fact, I would say that science is far more unequivocal on these issues than on global warming – probably around as certain as that evolution is true.

Yet on all these issues, Republicans are more likely to hold the scientific view that Democrats. And there are many more similar examples. If I wanted to make the same charts, but make Democrats look bad, I could easily “prove” that Democrats are morons who believe the sun orbits the earth.

The Washington Post article does contains a homage to data:

But why opine on all this an un-grounded way — we need data.

Unfortunately we need more than data – we also need rigorous statistical techniques.

It would be unfair to blame the original researcher. In his article, he also includes a chart on nuclear power, where conservatives have the more scientific view. Mysteriously, the chart that was flattering to conservatives doesn’t make it into the Washington Post article. Ironically, it turns out the Washington Post article was right – politics really is the mindkiller. It’s just hard to spot when you’re the one getting killed.

China promises to pollute as much as possible

Obama has just signed a climate change deal with China. Essentially,

  • The US agrees to cut its emissions by 30% by 2030 from the 2005 baseline.
  • China agrees to have its emissions peak in 2030, and to have 20% of energy come from non-fossil fuels.

The US target is basically just what the EPA is mandating anyway under the Clean Air Act. US emissions have fallen substantially since 2005, largely because unconventional natural gas has lead to massive coal-to-gas switching, which is a much cleaner fuel. There would be even more switching if states didn’t impose such restrictions on fracking. Ironically, many environmentalists oppose the technologies that have done the most to reduce US emissions: nuclear and fracking.

But what’s strange here is the Chinese side of the deal. This seems spectacularly badly designed. It’s basically a cap on all post-2030 emissions at the 2030 level. Which means they’re incentivised to pollute as much as possible in 2030, to give themselves a more generous cap. It literally encourages them to stockpile coal so they can burn many years worth of production in 2030. No need to build coal plants – you don’t need to generate electricity with this burning – this is just pollution for the sake of pollution.

Now, probably China won’t just pile up resources and destroy them for the sake of destruction. But there are many more subtle ways they could take advantage of this, like bringing forward any planned coal plants, so ones scheduled to start in 2031 instead start in 2029, or delaying the implementation of emissions-reducing technologies till 2031.

Given the potential for this agreement to be actively harmful, maybe we should be grateful it’s probably purely symbolic.

The Future of Socialism is Privatizing the Atmosphere

Scott recently wrote a quite interesting review of John Roemer’s ‘Future for Socialism’. It sounds rather like Schumpeter’s Capitalism, Socialism and Democracy. Funnily enough his vision for socialism also reminds me of Margaret Thatcher’s plan for property-owning democracy. I haven’t read the underling book, so I can’t comment on that, but I can talk about Scott’s writing. More importantly, it provides an excellent excuse to talk about how to save the environment by privatizing the atmosphere.

Central planning could never work, so a socialist economy doesn’t need it. Bosses and managers seem to be doing a good job keeping their firms profitable, so they can all keep their jobs under socialism. Everyone has different skills, so clearly in a truly socialist system they deserve different wages, in fact whatever wage the market will bear.

…you give everyone an equal amount of these stocks. When the corporations make money, they pay them out in the form of stock dividends, which go to the people/stockholders. So every year I get a check in the mail representing my one-three-hundred-millionth-part share of all the profits made by all the corporations in the United States.

We’ll assume that when Scott says ‘Stock Dividend’, he actually means ‘non-stock dividend.’ A stock dividend is when a company gives extra shares to its existing shareholders. This increases the number of shares outstanding, but has no real economic impact. What Scott presumably means is ‘cash dividend’, which is when a company gives cash to all its shareholders.

However, this immediately opens up a problem with the next part.

Roemer proposes a law that stocks cannot be sold for money, only coupons and other stocks. Every citizen is given an equal number of coupons at birth, trades them for stocks later on, and then trades those stocks for other stocks. This allows smart citizens to invest wisely, and allows a sort of “stock market” that sends the correct signals (this business’s stock price is decreasing so maybe they’re doing something wrong) but doesn’t allow stock accumulation by wealthy capitalists.

While I applaud Roemer’s attempt to make use of the valuable signals sent by prices, his plan for preventing people from selling their shares won’t work. If such a policy was instigated, there would probably be strong demand from people for a way to turn their shares into cash. They’d even be willing to accept a discount for the sake of the liquidity cash offers. So some companies would sell all their assets and pay out all the money as one massive liquidation dividend. By announcing this in advance, the company would basically become a way to turn your shares into cash – just swap your other shares for its shares, and then wait for the single massive dividend.

In this system, businesses would raise funds not by selling stock but by seeking loans from banks.

This is where it really gets crazy. Earlier on Scott said that companies would pay out all their profits as dividends. So they can’t issue new equity, and they can’t retain the profits they’ve earned: companies would eventually become 100% debt financed. As soon as they hit the slightest downturn, without a buffer of equity to absorb losses, they would all go bankrupt. And bring the banks down with them. Then you have zero companies, shareholders would envy those who got their money out before the end, and the living would envy the dead.

So perhaps we’ll lighten the requirement that companies have to pay out all their profits. Companies that routinely raise new equity will be in trouble, like tech companies, but lets assume they solve that problem. Utilities also rely on continued equity issuance, so we won’t be able to charge our devises anyway.

More seriously, this would present massive problems for new companies. Or rather, it would prevent there being any new companies. The way you found a company is by investing some money and becoming the owner of a startup – effectively, the startup sells stock to you. Without this, there’s no way to found a new company. So we have a finite number of companies, that occasionally go bankrupt, take each other over, or liquidate themselves. These companies own all the factors of production, leading to a less and less competitive economy, dominated by a couple of few firms, with absolutely no fear of new entrants shaking up their cosy oligopolies.

So there are some problems with Roemer’s ideas. In fairness to Scott, he spots a lot of other problems himself, and he doesn’t even have an economics background. In fairness to Roemer, perhaps Scott misrepresented him. Lets just say that Roemer-as-paraphrased-by-Scott’s plan has some serious disadvantages.

However, it did make me think of an interesting idea I had a while ago. Here is an way of using joint-stock corporations to solve collective action problems.

How to solve the problem of pollution by privatizing the atmosphere.

At the moment, people are incentivized to over-pollute. If my factory releases dangerous emissions, I get much of the benefit, in the form of profits from selling my product (along with my customers, employees, suppliers etc.) I pay only a fraction of the costs though – most of the pollution effects other people. Since I gain much of the benefit, and little of the cost, I tend to pollute too much.

The problem here is one of negative externalities. Equivalently, it the tragedy of the commons. And what is the solution to the tragedy of the commons? Privatization. If one person owns the field, they have the right incentive to preserve its value.

Similarly, we could privatize the atmosphere. People who wanted to use the air (say, by breathing, or burning fuel) would be charged a fee. This would cause them to internalize the external cost, and restore efficiency to the market for pollution.

Of course, this would be rather difficult to administer. How are we going to charge people for breathing? Do people get charged more for having bigger lungs? If people fall behind on their payments, do we cut off their oxygen? Doing so would plausibly count as theft, as currently they enjoy use-rights to the air.

Fortunately, this can easily be solved. Simply give everyone shares in AeroCorp. Because AeroCorp gets most of its money from coal plants and gasoline companies, it pays a dividend each year well in excess of the breathing price. So everyone’s breaths are just netted against the dividend, and they never have to send any money to AeroCorp. Because polluters now have to pay AeroCorp to emit pollutants, they’re less keen to do so, and the negative externality problem is solved.

We could even have a dual share class system. Every human is given a single A-share at birth. These are non-transferable, dilution-protected, and their purpose is to ensure that everyone can afford to breathe. We also have B-shares. These have the same voting and dividend rights as A-shares, but are transferable and dilutable. These are initially auctioned off in a standard IPO. They money raised will be used to fund AeroCorp’s operating expenses. Trading in these shares would ensure price discovery, efficient capital allocation and allow secondary issuance.

There some problems with this system. For example, the firm would be a monopolist, so would tend to charge polluters too high a fee. As such, society would actually end up underpolluting.

Additionally, we need to ensure the two share classes don’t take advantage of one another. There are probably more A-shares than B-shares, but B-shares will be more closely attended to.

One strategy B-shareholders could use would be to have AeroCorp buyback stock. Ordinarily this would be fine – it would raise the value of A-shares. However, in this instance we’re relying on the dividends paid to B-shares to cover the oxygen charge.

A strategy A-shareholders could use would be to insist on new equity issuance, diluting B-shareholders, then paying out the funds raised as a dividend, thereby benefitting themselves.

These two problems could be solved in an attractively symmetrical fashion by giving the B-shares a veto over buybacks and giving the A-shares a veto over new equity issuance.