Federalist

Let’s consider games where:

1. A very small bet can have an enormous “jackpot” payout, and
2. Every iteration of the game has a jackpot scenario.

In the case of a typical government lottery there is a winning number every draw, and a player who has chosen that number in advance will win the jackpot.  For example in “PowerBall” a player chooses 5 unique numbers between 1 and 55, and then a sixth number in the range 1-42.  The odds of winning the jackpot (which has present value of at least $8MM at all times) are 1 in 146MM (55-choose-5 times 42).

The problem with a truly random game like this is that you can play any number of times and still not win.

However quantum physics gives us a strategy that, in a sense, guarantees we will win every single time. I alluded to this in an earlier post: If we act based on the outcome of a random quantum event then there is an alternate reality in which we make each possible choice. The difference between a classical random number generator (e.g., coin-flipping) and a quantum random number generator is that the former is fundamentally deterministic. I.e., there is no reason to believe that when a coin comes up tails there is an alternate universe in which at the same moment it came up heads. In contrast, an unbiased quantum flip truly does come up both heads and tails in “alternate realities.”

I think the world would be a better place if I had a lot more money under my control. So I will select 28 random qubits and spend $1 to play PowerBall. I know that at the end of the game there exists exactly one reality in which I am an instant multimillionaire. Granted, that is one of only 146MM alternate realities. But if I don’t undertake this exercise I would expect exactly zero realities in which I am much richer next week.

If we incorporated random qubits into our large-scale activity, instead of waiting for the effects of quantum probabilities to ooze up from the atomic level, the “multiverse” would be a much more diverse place!

Many countries use a “4-state” traffic light pattern which shows a red-and-yellow signal before the light turns green again. As an efficient driver I think this is a great idea. For one thing, it gives distracted drivers in front of you extra time to notice that they will have to begin driving again soon, so that they do not waste precious seconds standing still with a green light. For another, it allows skilled drivers approaching a red light the ability to pace their deceleration so that they coast through as it turns green, instead of coming to a complete stop.

Regrettably, the United States Federal Highway Administration (FHWA) regulates traffic signals; their Manual on Uniform Traffic Control Devices (MUTCD) specifically prohibits the use of a “pre-green” signal. I contacted the FHWA to find out why and got the following explanation:

(more…)

John Bolton in this month’s Imprimis:

Under the current system, the U.S. pays 22 percent of the cost of most U.N. agencies, and 27 percent of peacekeeping costs. We are far and away the largest contributor, and every year Congress pays the bill as apportioned by the General Assembly. My revolutionary reform principle would be this: The United States should pay for what it wants and insist that it get what it pays for. This would break up the entitlement mentality at the U.N. and foster an organization that is both more transparent and more effective.

Via MarginalRevolution, Clay Shirky uses Wikipedia activity and Television viewing as metrics of humanity’s (untapped) cognitive surplus:

[I]f you take Wikipedia as a kind of unit, all of Wikipedia, the whole project–every page, every edit, every talk page, every line of code, in every language that Wikipedia exists in–that represents something like the cumulation of 100 million hours of human thought. I worked this out with Martin Wattenberg at IBM; it’s a back-of-the-envelope calculation, but it’s the right order of magnitude, about 100 million hours of thought.
And television watching? Two hundred billion hours, in the U.S. alone, every year. Put another way, now that we have a unit, that’s 2,000 Wikipedia projects a year spent watching television. … This is a pretty big surplus. People asking, “Where do they find the time?” when they’re looking at things like Wikipedia don’t understand how tiny that entire project is….

Market dislocations have resulted in a very unusual circumstance: Tax-exempt securities are presently yielding more in nominal terms than comparable taxable securities. Therefore, if you have any investments in money markets or fixed income outside of a tax-exempt account (i.e., not in an IRA or 401k), now is a good time to move it to tax-exempt investments!

Normally this situation doesn’t occur: In an efficient market investors should bid up the cost of tax-exempt securities until their after-tax yield has fallen close to the level of comparable taxable securities. However, there is no tight coupling between the supply of tax-exempt securities and the demand for them by individuals with taxable capital. I suspect that under normal circumstances speculators help to maintain the expected equilibrium between taxable and tax-exempt securities using leveraged arbitrage. But right now all of the leveraged speculators are either in distress or else chasing even better opportunities, so this arbitrage pressure seems to have evaporated.

This week I transferred all of my money-market savings to USEXX, which with a nominal yield of 2.7% gives an after-tax yield (assuming you’re in the 35% tax bracket) of 4.15%! This is at a time when the best taxable savings and money-market accounts are yielding no more than 3.2%.

(more…)

Government seems to follow any crisis with excessive attempts to regulate.  I am wary of any government interference in markets — especially in an industry like finance which has good incentives to self-regulate.  Either way, Asher Meir suggests a good analogy to guide Wall Street regulation:

There is a good reason that insurance and banks are heavily regulated. Whenever you are betting against infrequent events like floods, there is always the danger that insurers will take the money and run, and have nothing left to give customers come high water. So insurers have strict capital requirements. Some derivative strategies have similar dangers. Portfolio insurance works to insure any given investor against a market crash, but when it was adopted by huge numbers of market participants there was obviously not enough cash anywhere to indemnify the hundreds of billions of dollars of losses in the 1987 crash. We rely on banks to mediate virtually all of our financial transactions, so it is proper for regulators to ensure their soundness. Today, hedge funds supply much of the liquidity in the markets and have become in many ways bank-like entities.

Of course, hedge funds rarely trade derivatives in isolation.  Almost every transaction involves a bank-like counterparty or broker.  Brokers and exchanges are supposed to ensure that all of the contracts they trade can be fulfilled.  The last year has shown us that they don’t always do that as well as they should, so maybe more industry regulation is appropriate at the broker level.

Via MarginalRevolution, Foster & Young give a poignant example of the perils of hedge funds: Essentially, derivatives allow funds to take highly skewed bets, and the industry’s opacity and complexity can conceal these tail risks (unless they actually hit). Foster & Young point out that a malicious manager could easily exploit this situation to make a fortune with a high probability. I touched on some countermeasures that investors should use to control for this, although even the smartest and best-intentioned investors can be ambushed and ruined by unforeseen “tail events.”

WSJ reports that the cartel for academic journal publishing (led by Elsevier) seems to have pushed its market too far:

In 2006, the editorial board of the venerable mathematics journal Topology resigned en masse over the high subscription price charged by publisher Elsevier, a dominant player in the industry.

Congress has mandated that by April 7 papers arising from NIH-sponsored research — roughly 80,000 of them a year — be made freely available in the federal PubMed database, which can be read by anyone with an Internet connection.

Another blow for open access to scholarly research was struck recently by Harvard’s arts and sciences faculty, whose members voted to publish on the Internet for all to see — gratis. These professors will give Harvard world-wide nonexclusive license to their work, and the university will exercise it by posting their papers. The journals won’t have much choice if they want the work of Harvard professors. The faculty members will still publish in expensive journals, but the move to put the same materials on the Internet is a stake poised at the heart of a vampire that has been sucking dollars out of academic institutions for years through the ever-sharper bite of subscription prices.

It’s about time: It was a strange market that allowed a private company to control and profit from the copyright for academic research that is almost always funded with public money. A non-profit has stepped in to meet the need for refereed papers:

The nonprofit Public Library of Science has been in the vanguard, petitioning for change and launching scholarly publications of its own. Its journals in such fields as biology, genetics and tropical diseases are published electronically after peer review, and the contents are promptly made available at PubMed for all to see. Instead of charging subscribers, PLoS covers its costs by charging authors from $1,250 to $2,750 per article (usually paid by their institutions and reduced or waived for authors who can’t pay). One virtue of this business model is that it might discourage, however slightly, the résumé-padding practice of slicing and dicing the same findings for publication in different journals.

Environmentalists are a mercurial lot.  They support laws to compel people to recycle even when it is wasteful to do so, but raise no complaint about the other law that prohibits recycling of our most dangerous and useful recyclables: nuclear waste.  William Tucker describes this bizarre holdover from the blinkered Carter administration:

[F]ederal regulations require all radioactive byproducts of nuclear power plants to be disposed of in a nuclear waste repository. As a result, more than 98 percent of what will go into Yucca Mountain is either natural uranium or useful material. Why are we wasting so much effort on such a needless task? Because in 1977, President Carter decided to outlaw nuclear recycling. The fear then was that other countries would steal our plutonium to make nuclear bombs. (India had just purloined plutonium from a Canadian-built reactor to make its bomb.) This has turned out to be a false alarm. Countries that have built bombs have either drawn plutonium from their own reactors or—as Iran is trying to do now—enriched their own uranium. Canada, Britain, France and Russia are all recycling their nuclear fuel. France has produced 80 percent of its electricity with nuclear power for the last 25 years. It stores all its high-level “nuclear waste” in a single room at Le Havre.

Instead of profitable recycling, the U.S. government has spent $4 billion over 25 years studying and preparing a long-term waste storage site at Yucca Mountain.  Costs to actually store nuclear waste there would run into tens of billions of dollars.

As if the FDA’s regulation of pharmaceuticals weren’t damaging enough, we now have the Department of Justice’s Drug Enforcement Agency trying to expand the War on Drugs to involve more chemicals with bona fide medical uses.  (Where are all the voices who lamented the expansion of the War on Terror from Afghanistan to Iraq?)  WSJ has a number of good letters today explaining why the whole War on Drugs is a vain endeavor.  Suggests Joe Reimers:

The so-called war on drugs of today is very similar to Prohibition of the 1920s-’30s. It has built multi-billion dollar criminal empires, made criminals of people who would otherwise be little more than dead-beat losers at worst, and corrupted large chunks of government and law enforcement in various places around the world, including here in the U.S.

Why not legalize drug possession/use (as long as it’s not associated with another crime or DUI) for adults, while at the same time eliminating any legal barriers to discrimination against users by any entity, public or private, for any reason, or for no reason at all. This would remove the drug problem from the criminal justice system and address it by societal discrimination.

There is absolutely no reason for you to spend your time, talent, and money in politics except for this:  If you do not, laws will be written and regulations enforced by folks with little or no interest in your well-being.

Michael Rothfeld explains both why politicians so rarely accomplish what we think they should and why special interests can obtain so much power in our current government.  He suggests that broad elections in our two-party system are practically decided by only 3% of the population.  Hence special interests that are willing to vote their issue are enough to make politicians — normally reticent to do anything that could draw criticism — act in the special interest.

When you drive from Delaware into New Jersey, you don’t really see any differences.  If you move from New Jersey to Delaware you don’t experience a significant decline in government services.  But New Jersey has among the highest tax burdens in the nation, while next-door Delware has among the lowest.

If higher taxes aren’t buying better government services, then what do high-tax governments like New Jersey do with all of their extra tax revenue?  Apparently the answer is that they buy votes.  More specifically, public union votes:

Public workers and teachers can retire at age 55 after 25 years with a pension of 60% of salary — indexed to inflation. Police and firefighters can retire at 65% of salary at any age after 25 years of service and 70% after 30 years.

Not that we should be surprised at American democracies degenerating into this sort of patronage government.  But isn’t it depressing to think of all those public resources going to bankroll lives of leisure for union members instead of something virtuous?

With Kosovo declaring its independence it’s a good time to ponder the perennial movements for secession around the world.  How can a government legitimately bind those who have not given their consent to be governed? A good friend recently pointed me to Lysander Spooner’s 1867 essay, “No Treason” — required reading for all discussion of natural law and just government.

Spooner’s thesis is that we are not traitors for refusing to submit to a government to which we did not pledge allegiance, or with which we have no contract. He argues at length that our natural rights to life, liberty, and property cannot be infringed by a government unless we have individually and explicitly agreed to join it. I.e., “We the People” cannot claim the consent of those who do not affirmatively sign on to that Body Politic, nor can it exercise just dominion over those who do not participate.

[T]he whole Revolution turned upon, asserted, and, in theory, established, the right of each and every man, at his discretion, to release himself from the support of the government under which he had lived. And this principle was asserted, not as a right peculiar to themselves, or to that time, or as applicable only to the government then existing; but as a universal right of all men, at all times, and under all circumstances.

One essential of a free government is that it rest wholly on voluntary support. And one certain proof that a government is not free, is that it coerces more or less persons to support it, against their will. All governments, the worst on earth, and the most tyrannical on earth, are free governments to that portion of the people who voluntarily support them. And all governments though the best on earth in other respects — are nevertheless tyrannies to that portion of the people — whether few or many — who are compelled to support them against their will.

His reasoning suggests a test for legitimate government: Can it survive if individuals have an ability to secede, or if it cannot coerce people to join? Clearly our present government would collapse if individuals were allowed to secede. However I believe our federal government as constituted could survive. Our goal, then, should be to return to a government that people would voluntarily join.

(more…)

You can buy insurance against various misfortunes that might befall you.  You can also play our “jackpot justice” system and try to cash in on someone else’s insurance.  The problem with the latter option is that it is fraught with moral hazards.

Corey Cohen offers an excellent solution that extends a proven concept:

Title insurance is little more then a mandated malpractice policy for lawyers that is purchased, in most cases in its entirety, by the homeowner. If a “title defect” occurs, the title insurance completely indemnifies the lawyer who performed the contracted service. In those states that don’t require title insurance, a form must be completed that releases the lawyer from responsibility for forged or poorly performed searches. Either way, the potential injured party, the borrower, is responsible for the cost.

I don’t understand why other providers of goods and services aren’t allowed to mandate upfront indemnification. I’m sure that if given the chance, large retailers like Wal-Mart, which face expensive lawsuits related to in-store injuries, would love a chance for “pay-as-you-go” legal coverage. They could collect a dollar at the door from customers to cover any injury that might occur in the store, or have them sign a waiver releasing the corporation from any injuries that occur from things other then falling prices.

As an emergency physician I would welcome the ability to request payment for individual indemnification on a patient-to-patient basis like the government-mandated, consumer-purchased “malpractice” policy that protects my brethren in the legal profession.

I.e., at least make customers pay for their lottery ticket if they want the right to sue.  And give people like me who don’t want to pay these jackpots a chance to opt out.

Why would a reasonable patriot applaud citizens who avoid paying their “fair share” of taxes?  Because taxes are the fuel that enables government to overstep its constitutional bounds and encroach upon our life and liberty.

I just stumbled upon this report of a remarkable triumph over the IRS last July.  The substance of the case seemed to revolve around the definition of personal wages, and the government’s right to tax those.  The defendant in the case, Tom Cryer, noted to the WorldNetDaily reporter:

The IRS lets Wal-Mart sell a trillion dollars worth of goods, but they can back out their cost of goods [before being taxed.]  The IRS considers, in the case of a Wal-Mart wage earner, 100 percent of what he takes in is profit.

Indeed, one feature of the tax code that has always bothered me is the fact that businesses, investors — even gamblers – can deduct their expenses for producing income, but individuals cannot.  In principle everything that preserves your capacity to work for income — food, shelter, medicine, and even recreation — should be deductible from your wages before taxation.

There are many individuals and groups protesting taxes out there.  WeThePeople is another one on which I found another fascinating report of IRS defeat — in this case by a clever businessman who paid wages in precious coins circulated by the U.S. Mint that carry a face value far lower than the metal’s market value.

It doesn’t take much research into tax protesters to get the impression that they are all nutjobs.  Or at least that they all have very bad website design skills.  Nevertheless, the fact that a lot of nutjobs advocate similar positions doesn’t necessarily make a position illegitimate.

The IRS has gotten so tired of hearing the same arguments against its authority that it has even compiled an official list of “frivolous arguments,” along with rebuttals and the promise of stiff fines for people who continue to try them.  In the case of Tom Cryer:

He said throughout his battle, he’s offered at every turn to pay taxes if the IRS could show him the authorization, and that never has happened. “The Criminal Investigation Division and Department of Justice both responded only with ‘your position is frivolous.’ I had never stated a position, so how could they know whether it was frivolous?” he said. “Imagine my sending you a bill for $1,000 and when you call me and ask what the bill was for I simply said, ‘that position is frivolous, just write the check and send it in.’”

Opponents of our natural rights to self defense often try to convolute the semantics of the second amendment to the Constitution, which states, “A well regulated militia being necessary to the security of a free State, the right of the People to keep and bear arms shall not be infringed.”

For example, Erwin Chemerisnky argues that “The language of the Second Amendment is a puzzle,” citing its reference both to a “right of the people” to arms, and its reference to the necessity of a well-regulated militia.

David Hardy offers the most lucid explication I have yet seen:

The wording becomes utterly clear once we realize that, at the time, “militia” meant the entire male citizenry, bearing their own arms, and “well-regulated” meant “orderly” (Samuel Johnson’s dictionary treated the two as synonyms, and many writers referred to a well-regulated gentleman, or well-regulated tastes). “Orderly, armed, citizens being necessary to a free state, the right of the people to keep and bear arms” makes perfect sense.

Indeed, the U.S. Code still preserves this original definition of “the militia”:

The militia of the United States consists of all able-bodied males at least 17 years of age and, except as provided in section 313 of title 32, under 45 years of age who are, or who have made a declaration of intention to become, citizens of the United States and of female citizens of the United States who are members of the National Guard.

(more…)

Labor unions are often justified as analogs to corporations. Whereas corporations concentrate capital to produce profit for shareholders, unions concentrate labor to produce benefits for their members. But profit and labor benefits are not necessarily analogous. Under the constraints of our current regulatory regime profit is an absolute good. Are unions, as currently allowed, net producers of anything good?

For-profit corporations selfishly seek to maximize the profits of their shareholders. But our government does not allow them to profit through anticompetitive or destructive practices. Under these conditions shareholders benefit from profits, but every market participant also potentially benefits because the very fact that a corporation is earning a profit indicates that it is providing useful goods and services at competitive prices. Profit-seeking in this regime is thus absolutely constructive behavior.

Unions likewise exist to selfishly maximize the benefits of their “shareholders” (members). But is that a net social good? In a theoretical framework selfish actors may all be equally virtuous. However the reality of our regulatory regime for organized labor has turned unions into nothing more than rent-seeking organizations. I.e., unions exist only to exploit regulatory advantages at the expense of others. They do not produce anything good for anyone other than their members. This is not unjustifiable per se — after all, corporations explicitly exist only to produce profit for their shareholders. The fact that profit in a free market has positive externalities is ancillary to their purpose. Thus we can’t fault unions for acting selfishly anymore than we can fault individuals or corporations for acting selfishly. The problem is that our government has accorded unions unilateral privileges to capture rents. In contrast to corporations, whose destructive tendencies (e.g., abusive monopolies or cartels) are restrained by regulation, government has turned organized labor law into a license to engage in destructive behavior. As a result destructive behavior is all we get from unions.

We must disabuse ourselves of the notion that legally-advantaged unions have any redeeming characteristics. A union in theory should enjoy the same rights as a corporation. I.e., it should be allowed to act collectively on behalf of its members. However, it should not be allowed to secure and abuse a position of monopoly power.

The unions we face today are always monopolies or cartels. None seems more privileged than public school teacher unions. Consider these characteristics: (more…)

Is Bill Gates discovering that even a charitable fund of $70 billion can’t put a dent in a world of government interference?  We don’t need a “revision” of capitalism to improve the lot of poor countries.  We could start with a more faithful implementation of capitalism: One in which developed countries do not erect tariffs against the export goods of poor countries, and one in which the foreign policy of developed countries does not prop up political regimes that obstruct market forces.  The last thing we need is more government meddling with incentives and policies that inevitably derail the beneficent forces of capitalism.

Our government has all the moral authority of a gang of bandits.  They produce nothing, yet every year they storm into the estates of the productive and take whatever they see fit.  Their authority stems not from just principles but rather from their numbers and the coercive force they wield.

Imagine you build up a productive estate for yourself and your family.  Every year the bandits come and tax you whatever amount they want.  If you protest, they point out that this is only fair — after all, brigandry is hard work, and they protect you from other bandits!  But that’s not all: A lot of the gangsters are sick, elderly, or lazy, and it would be inhumane for you to not share your abundance with those.  Furthermore, you’re welcome to join the mob, where you will have a voice just like every other bandit.  And after they’ve tallied up the plunder they give a little bit back to you and call it your “fair share” of your estate.  Heck, some people get back more than is taken from them.  So you see, it is all perfectly legitimate.

One year they notice the plunder getting a little light.  Their leaders begin to passionately address this shortfall.  They sit around your table, eating your food, and talking of ways to employ your assets to “stimulate” further production for them to plunder.  Your initial optimism wanes as you realize that they have no intention of taking less from you.  Instead they promise to take even more from you next year, and in the meantime they will borrow against that, add it to this year’s plunder, and somehow decide that this constitutes a “rebate.”

But don’t worry, this is all perfectly sound.  After all, some of that rebate might make its way back to you!

Alex Tabarrok addresses the “law” of unintended consequences, and references a great article by Dubner and Levitt that summarizes three salient examples.