The War on Drugs as Make-Work

An argument for ending the War on Drugs is that it would undermine the drug gangs. At the moment we have a baptists and bootleggers situation, where the drug ban benefits illegal providers, because it raises the price of drugs a lot. If drugs were legal, supply would increase a lot, lowering prices. Criminal gangs don’t actually have a comparative advantage at running efficient supply chains – if they did they would be running WalMart instead – so they will be out-competed by new, legal entrants to the market. This would dramatically reduce their revenues, making joining them less attractive, and leave them with less money to spend on sinful things.

And all of this is probably true. But…

Here’s another way of looking at it. At the moment some argue the US has a zero-marginal-product-worker problem; there are people who aren’t worth hiring at any price, because you can’t trust them not to steal from you, or break things, or insult customers, or get you into legal trouble. But, like the army before them, criminal gangs can make use of such people – perhaps because criminal gangs can make use of extra-legal motivational techniques. Normally, this would be bad, if criminal gangs were hiring such people to do immoral things like theft. But at present many of them are usefully employed in the socially productive activity of consumer product distribution.

And another group of thugs, who lack skills beyond the ability to yell loudly and order people around, get make-work as DEA agents.

So actually the War on Drugs is job security for semi-criminal ZMP workers, providing them with employment and protecting them from competition. Maybe pretty rubbish protection – it leaves many of them dead or imprisoned – but other forms of ‘protection’ for low-skilled workers also have some pretty negative consequences.

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2015/01/28 Shadow FOMC statement

The members of the Shadow FOMC would like to apologize for our extended absence; we were held under house arrest by the agents of Stanley Fisher.

Release Date: January 28, 2015

For immediate release

Information received since the Shadow Federal Open Market Committee met in September suggests that economic activity has been expanding at a pretty reasonable pace.  Labor market conditions have improved further, with strong job gains and a lower unemployment rate, and the employment to population ratio has improved, albeit off a low base. The end of extended unemployment insurance seems to have significantly boosted employment; we suggest that the federal government would benefit from privatizing and making optional the remaining unemployment insurance.  On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.  Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power, though we worry they may have been caused by a fall in global aggregate demand.  Business fixed investment is advancing, though recent profitability among industrial companies has been disappointingly weak. The recovery in the housing sector remains slow. House prices remain well below the net present value of avoided future rent payments, probably due to regulation hindering the supply of mortgage financing, though recent data there has been encouraging.  Inflation has declined further below the Light Committee’s longer-run objective, as predicted by the Shadow FOMC, and they should not blame energy: while energy prices have fallen dramatically, inflation ex. shelter has been running below target for years, due to the unconsciously tight monetary policy the light committee has followed. Market-based measures of inflation expectations have declined substantially in recent months, and are now indicating that the Light Committee will miss its target for the next 10 years. We are highly disappointed that the Light Committee chose the Orwellian step of renaming them ‘inflation compensation’ instead of ‘inflation expectations’, ignoring the enormous predictive power the market gives us. Yes, survey-based measures of longer-term inflation expectations have remained stable, but who cares? These surveys have been awful forecasters in the past.

The recent rise in the value of the dollar against a trade-weighted basket of other currencies (or, indeed, virtually any other currency other than the Swiss Franc) shows the high level of global demand for the USD. Since this is a product that can be created at basically zero cost, the Shadow Committee would accommodate this demand and print some more USD.

Inconsistent with its statutory mandate, the Light FOMC is failing to foster maximum employment and price stability. Unemployment is low, so the Light Committee’s actions could be justified if it was targeting that… but it is ostensibly targeting employment instead. Employment is still pretty awful; both employment and inflation suggest the need for loser monetary policy. The Shadow Committee expects that, even with a lack of appropriate policy accommodation, economic activity will expand at a moderate pace, as free markets have a tendency to grow. As the economy is kind of like a martingale; risks to the outlook for economic activity and the labor market will always be nearly balanced.  Inflation is anticipated to decline further in the near term, and though the Committee expects inflation to rise gradually as energy is a one-time shock and the oil forward curve is very steep, we have no idea why the Lighties expect it to reach the target at any point in the foreseeable future.  The Shadow Committee continues to monitor inflation developments closely; evidently more closely than the Light FOMC!

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. However, we wish to remind people that this by no means represents a lower bound on interest rates; in the event the economy deteriorates further, we would be willing to lower interest rates further, or to deploy an array of other policy tools. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objective of a certain NPGDP level, which increases by 6% a year.  This assessment will take into account a wide range of information, including market indicators, what people say on facebook, and the behaviour of our cats.

We regret that the Light Committee completed the taper of its bond holdings, though we believe that resuming the program now could be destabilizing and reduce the credibility of the Bed. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.  This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and NPGDP of 6 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Shadow Committee views as more consistent with the fundamental level of human time preference, which implies long-run real rates of around 3-4%. Over the longer term, the Shadow remains concerned about value drift resulting in a future devoid of moral significance.

Voting for the SFOMC monetary policy action were: everyone, because I rule with an Iron Fist.

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?

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.

2014 Shadow FOMC Statement

Firstly I would like to thank the FOMC for allowing the creation of the Shadow FOMC. In these times of controversial monetary policy, it seems only prudent to have a loyal opposition. And with the increased importance of the Shadow Banking System, whose ranks have been swelled by refugees fleeing the forces of Genghis Frank and Khan Dodd, it is vital that said loyal opposition should be a Shadow FOMC.

We intend to issue quarterly statements, coinciding with the releases of the Light FOMC .

Release Date: September 19, 2014.

For immediate release.

Information received since the Shadow Federal Open Market Committee last met, which was never, suggest that the early universe rapidly expanded due to cosmic inflation. However, the expansion was disjointed due to quantum fluctuations. The effects of these imbalances continue to have a major effect on the universe, as they are the cause of all variation, including galaxies, planets, and the fractional reserve banking system. More recently, fear of another kind of inflation lead to mistakenly tight monetary policy during 2008, a key cause of the recession, from which the economy has now partially recovered.  Private Sector GDP is running at a trend rate almost as high as during the Clinton and Bush II bull years, though many analysts miss this due to a mistaken focus on total NGDP, which includes government spending at cost. Industrial production rose. The S&P500, which appeared on the verge of mass bankruptcy, is now at record levels, seeing a 30% rise in 2013. Unemployment, painfully high for a very long time, has started to accelerate downwards. Employment figures, however, have been very disappointing; partly because of demographics, many of the unemployed have simply given up looking for a job. Only recently have we seen the employment/population ratio begin to rise.

More recently, since the Light FOMC met in July incremental data suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the employment rate has only improved slightly and wage inflation is muted, suggesting there remains significant underutilization of labor resources. The minimum wage continues to distort labor markets, suggesting a need for higher inflation to reduce its effects. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Restrained fiscal policy is encouraging true economic growth, although it is confusing accountants who mistakenly assume government spending is by definition useful activity. 10-year breakevens have recently fallen back to 2%, and 5-year breakevens are below 1.7%, slightly below the Light Committee’s longer-run objective. The US government has not issued NGDP-linked bonds, so we lack market implied growth figures, but trailing Nominal Private Sector GDP (NPGDP) growth has been trending around 5%, almost at our 6% target – and substantially closer than the irrelevant NGDP, which is closer to 4%.

If it was acting consistently with its somewhat misguided statutory mandate, the Light FOMC would not have initiated tapering, as low employment and low inflation both suggest a need for lose monetary policy. The Shadow Committee agrees that, with current mediocre policy, economic activity will expand at a moderate pace. The Light Committee thinks that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year, which is very strange, given that breakevens have fallen since then. Maybe the Light Committee could not afford a Bloomberg terminal.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions, but that this does not excuse irresponsible monetary policy. In light of the hugely reduction in the employment/population ratio since 2006, but improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to maintain the pace of its asset purchases. In October, the Shadow Committee will continue to add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month. Both Light and Shadow Committees are maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that NPGDP, over time, is at the rate most consistent with the Shadow Committee’s mandate.

The Committee will monitor incoming information on economic and financial developments in coming months as closely as it can be bothered, and will continue its purchases of Treasury and agency mortgage-backed securities, until the outlook for the labor market has improved substantially in a context of NPGDP growth. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and the Committee’s optimistic hope of NPGDP moving back toward its longer-run objective, the Shadow Committee will end its current program of asset purchases at sometime in early 2015. However, asset purchases are not on a preset course, and the Shadow Committee’s decisions about their pace will remain contingent on the Shadow Committee’s outlook for the labor market and broader economy, as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Shadow Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate, and suggests that the Light Committee might like undertake one, rather than merely talking about it. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 6% NPGDP growth. This assessment will take into account a wide range of information, including market indicators, what witty people say in our twitter feed, and patterns we see in clouds. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected NPGDP growth continues to run below the Committee’s 6 percent longer-run goal, and provided that longer-term NPGDP expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and NPGDP of 6 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Shadow Committee views as more consitant with the fundamental level of human time preference, which implies long-run real rates of around 3-4%. Over the longer term, the Shadow remains concerned not only about technological stagnation but also about the risks from Superintelligent Artificial Intelligence.

Voting for the FOMC monetary policy action were: everyone, because of the Aumann Agreement Theorem.

Average Utilitarianism and Agriculture

This post makes an argument that, if you believe A, you have some reason to believe B. I don’t believe A, but hopefully I have done a good job of mentally modelling the concerns of those who do. Please note that “but A is false” is not a valid response to this post (ex falso quodlibet notwithstanding).

On Agricultural Matters

Suppose you are an average utilitarian, who only cares about the average level of human happiness.1 Suppose further that all crops (wheat, rice, soybeans etc.) are used for human consumption – there are no ethanol or biodiesel industries, for example.

In the short-run, the supply of crops is mainly dependant on the weather. 2014 is looking like a good year for the US crop, as was 2013, while 2012 was bad. US corn production was 29% higher in 2013 than 2012, which was itself 13% lower than 2011. Short-term variations in crop supply are mainly due to weather, but the long run average volume comes down to the acreage planted and the amount farmers invest in raising yields (tractors, GM seeds, fertilisers, etc).

In order to prevent occasional famines, where insufficient crops are produced to feed people, you need to make sure farmers plant and invest enough to ensure that even in bad weather years, there will be enough harvested to feed everyone. Unfortunately this means that in most years, where the weather is not awful, there will be significantly more harvested than is required. Demand for bread is quite inelastic: we need a certain amount to live, but we’re not interested in eating very much more than that. So in years of good harvests, supply would massively exceed demand, and the price of crops would plummet to a low level, as happened this year. As most years do not have exceptionally bad weather, in most years prices will be very low – which will not encourage farmers to plant enough. As such, farmers are likely to under-plant so as to keep expected (average) profitability reasonable, which will ensure famines in years with bad harvests.

One solution is to stockpile grains between years. This is so straightforward it doesn’t warrant further comment.

Another is to make the demand for crops more elastic, so that even in good harvest years there will be sufficient demand. Setting aside moral qualms, in theory the government could do this, for example by buying excess crops to turn into ethanol. However, it is important not to confuse the omniscient, benevolent government planner of economists’ models with actually existing governments. The real-world implementations of such policies, like the US ethanol mandate or the Common Agricultural Policy, have been awful.

Fortuitously, there is a natural mechanism in place that makes the demand for crops elastic; meat consumption. As meat is a luxury on the margin (though some level of consumption seems to have substantial health benefits), demand for meat is significantly more sensitive to price than food in general. And it requires a large amount of grain to make a relatively small amount of meat. So farmers plant and invest enough to supply the demand from both humans and cattle herds in good times; then in years of exceptionally bad harvests, the price of grain rises, so animal husbandry is no longer economic. Farmers slaughter their herds, and the grain they were consuming is now available for human consumption. Even better, there is a short-term massive supply of beef, which can also help make up for the poor harvest. (I guess this is basically a way of storing grain inside cows.)

This reasoning is significantly more persuasive to average utilitarians than total utilitarians. By supporting agricultural investment this system helps prevents famines, which presumably lower average happiness. But it keeps the overall human population lower than it could be. In years of good harvest, the grain that is slowly wasting in storage, or being turned to Ethanol, or being fed to livestock, could instead by directly feeding people, and supporting a higher population, albeit one prone to periodic famines. The total utilitarian would also have to take into account how much pleasure people get from meat consumption, how much displeasure is caused by famines, and how many additional people could be supported on a more vegetarian diet.


  1. I think this is a silly view: it might commit your ethics to massive dependence on unknowable alien populations; it might require you to murder millions or billions of people for being insufficiently happy; it might force you to create really miserable people to ‘dilute’ the effect of sufficiently many even more unhappy people. And perhaps we should be concerned about the welfare of animals too. But suppose. 

RCT as I say, not as I do

Randomized Controlled Trials (RCTs) are the gold standard in policy evaluation.

Say you’re investigating a third world development policy, like building schools, or installing water pumps, or distributing malaria-resistant bednets. A random sample of the villages in an area are selected to receive the policy. The other villages form the control group, and receive no special treatment. Metrics on various desiderata are recorded for each village, like income, lifespan and school attendance. By comparing these outcomes between villages with and without the intervention, we can judge whether it made a statistically significant difference.

RCTs give us strong evidence of a causal link between the intervention and the result – we assume there were no other systematic differences between the treatment and control villages, so we have good grounds for thinking the differences in outcome were due to the intervention.

This is a marked improvement over typical methods of evaluation. One such method is simply to not investigate results at all, because it seems obvious that the intervention is beneficial. But people’s intuitions are not very good at judging which interventions work. When Michael Kremer and Rachel Glennerster did a series of education RCTs in Kenya, all their best ideas turned out to be totally ineffective – plausible ideas like providing textbooks or teachers to schools had little impact. The one thing that did make a difference – deworming the children of intestinal worms – was not something you’d necessarily have expected to have the biggest impact on education. Our intuitions are not magic – there’s no clear reason to expect our to have evolved good intuitions into the effectiveness of developmental policies.

A common alternative is to give everyone the intervention, and see if outcomes improve. This doesn’t work either – outcomes might have improved for other reasons. Or, if outcomes deteriorated, maybe they would have been even worse without the intervention. Without RCTs, it’s very difficult to tell. Another alternative to RCTs is to compare outcomes for villages which had schools in the first place to those which didn’t, before you intervene at all, and see if the former have better outcomes. But then you can’t tell if there was a third factor that causes both schools and outcomes – maybe the richer villages could afford to build more schools.

The other main use of RCTs is in pharmaceuticals – companies that develop a new drug have to go through years of testing where they randomly assign the drug to some patients but not others, so we can be reasonably confident that the drug both achieves its aims and doesn’t cause harmful side effects.

One of the major criticisms of RCTs is that they are unfair, because you’re denying the benefits of the intervention to those in the control group. You could have given vaccinations to everyone, but instead you only gave them to half the people, thereby depriving the second half of the benefits. That’s horrible, so you should give everyone the treatment instead. This is a reasonably intelligent discussion of the issue.

But this is probably a mistake. Leaving aside the issue that it’s more expensive to give everyone the treatment than a subset (though RCTs do cost money to run), it’s a very static analysis. Perhaps in the short term giving everyone the best we have might produce the best expected results. But in the long term, we need to experiment to learn more about what works best. It is far better to apply the scientific method now and invest in knowledge that will be useful later than to cease progress on the issue.

Indeed, without doing so we could have little confidence that our actions were actually doing any good at all! Many interventions received huge amounts of funding, only for us to realize, years later, that they weren’t really achieving much. For example, for a while PlayPumps – children’s roundabouts that pumped drinking water – were all the rage, and millions of dollars raised, before people realized that they were expensive and inefficient. Worse, they didn’t even work as roundabouts, as the energy taken out of the system to pump the water meant they were no fun to play with.

Another excellent example of the importance of RCTs is Diacidem. Founded in 1965 by Lyndon Diacidem, it now spends $415 million a year, largely funded by the US government, on a variety of healthcare projects in the third world, where it deliberately targets the very poorest people. Given that total US foreign aid spending on healthcare is around $1,318 million, this is a very substantial program.

Diacidem have done RCTs. They did one with 3,958 people from 1974 to 1982, where they randomly treated some people but not others. The long time horizon and large sample size makes this an especially good study.

Unfortunately, they failed to find any improvement on nearly all of the metrics they used, and as they used a 5% confidence interval, you’d expect one to appear significant just by chance.

 “for the average participant, any true differences would be clinically and socially negligible… for the five general health measures, we could detect no significant positive effect… among participants who were judged to be at elevated risk [the intervention] has no detectable effect.

Even for those with low income and initial ill health, surely the easiest to help, they didn’t find any improvements in physical functioning, mental health, or their other metrics.

They did a second study in 2008, with 12,229 people, and the results were similar. People in the treatment groups got diagnosed and treated a lot more, but their actual health outcomes didn’t seem to improve at all. Perhaps most damningly,

“We did not detect a significant difference in the quality of life related to physical health or in self-reported levels of pain or happiness.”

Given that these two studies gave such negative results, you would expect there to be a lot more research on the effectiveness of Diacidem – if not simply closing it down. When there are highly cost-effective charities than can save lives with more funding, it is wrong to waste money on charities that don’t seem to really achieve anything instead. But there seems to be no will at all to do any further study. People like to feel like they’re doing good, and don’t like to have their charity criticized. Diacidem is political popular, so it’s probably here to stay.

Sound bad?

Unfortunately, things are far worse than that. Diacidem does not actually cost $415 million a year – in 2012, they spent over $415 billion, over 300 times as much as the US spends on healthcare aid. It wasn’t founded by Lyndon Diacidem, but by Lyndon Johnson (among others) Nor does it target the very poorest people in the third world – it targets people who are much better off than the average person in the third world.

The RCTs mentioned above are the RAND healthcare experiment and the Oregon healthcare experiment, with some good discussion here and here.

Oh, and it’s not actually called Diacidem – it’s called Medicaid.