The failure of supply-side social policy

The US is in the midst of two social crises. The first is an opioid epidemic that is decimating parts of rural and now urban America and the second is a surge in the number of migrants crossing the southern US border primarily from Central America. In any system that involves flow, either physical (e.g. electricity) or social (e.g. money), the amount of flow (i.e. flux) is dependent on the amount of supply (e.g. power station/federal reserve) and the amount of demand (e.g. air conditioner/disposable income). So if you want to reduce opioid consumption or illegal immigration you can either shut down the supply or reduce the demand.

During the twentieth century there was a debate over the causes of booms and busts in the economy. I am greatly simplifying the debate but on one side were the demand-side Keynesians who believed that the business cycle is mostly a result of fluctuating demand. If people suddenly decide to stop spending then businesses would lose customers, which would lead them to lay off workers, who would then have less money to spend in other businesses and thus reduce demand further and so forth, leading to a recession. On the other side there were the supply-siders who believed that the problem of economic downturns was inadequate supply, which would be solved by cutting taxes and reducing business regulations. The Great Recession of 2008 provided a partial test of both theories as the US applied a demand-side fix in the form of a stimulus while Europe went for “expansionary austerity” and cut government spending, which slashes demand. The US has now experienced over a decade of steady growth while Europe went into a double dip recession before climbing out after the policy changed. That is not to say that demand-side policies always work. The 1970’s were plagued by stagflation with high unemployment and high inflation for which the Keynesians had no fix. Former Fed Chairman Paul Volcker famously raised interest rates in 1979 to reduce the money supply. It triggered a short recession, which was followed by nearly three decades of low inflation economic growth.

In terms of social policy, the US has really only tried supply-side solutions. The drug war put a lot of petty dealers and drug users in jail but did little to halt the use of drugs. It seems to me that if we really want to solve or at least alleviate the opioid and drug crisis, we need to slash demand. Opioids are pain killers and are physically addictive. Addicted users who try to stop will experience withdrawal, which is extremely painful. If you do succeed you will no longer be physically addicted. However, you can always relapse if you use again. The current US opioid epidemic started with a change in the philosophy of pain management by the medical establishment with a concurrent development of new supposedly less addictive opioid pills. So doctors, encouraged by the pharmaceutical industry, began prescribing opioids for all manners of ailments. Most doctors were well intentioned but a handful participated in outright criminal activity and became de facto drug dealers. In any case, this led to the initial phase of the opioid epidemic. When awareness of over prescription started to enter public consciousness there was pressure to reduce the supply. Addicts then turned to illicit opioids like heroin, which started phase 2 of the epidemic. However, as this supply was targeted by drug enforcement, a new highly potent and cheaper synthetic opioid, fentanyl, emerged. This was something that was easy to produce in makeshift labs anywhere and also provided a safer business model for drug dealers. However, fentanyl is so potent that this is has led to a surge in overdose deaths. Instead of targeting supply we need to reduce demand. First we need to understand why people take them in the first place. While some drugs are taken for the experience or entertainment, opioids are mostly being used to alleviate pain and suffering. It is probably no coincidence that the places most ravaged by opioids are also those that are struggling most economically. If we want to get a handle on the opioid crisis we need to improve these areas economically. People probably also take drugs for some form of escape. This is where I think video games and virtual reality may be helpful. We can debate the merits of playing Fortnite 16 hours a day but it is surely better than taking cocaine. I think we should take using video games as a treatment for drug addiction seriously. We could and should also develop games for this purpose.

Extra border security has not stemmed illegal immigration. What does slow immigration is a downturn in the US economy, which quenches demand for low-skilled labour, or an improvement in the conditions of the originating countries, which reduces the desire to leave in the first place. The current US migrant crisis is mostly due to the abhorrent and dangerous conditions in Guatemala and Honduras. For Europe, it is problems in Africa and the Middle East. In both cases, putting up more barriers or treating the migrants inhospitably is not really doing much. It just makes the journey more perilous, which is bad for the migrant and a moral and public relations nightmare for host countries. Perhaps, we could try to stem demand by at least making it safer in the originating countries. The US could provide more aid to Latin America including stationing American troops if necessary to curb gang activity and restore civil order. This would at least help diminish those seeking asylum. Reducing economic migration is much harder since we really don’t know how to do economic development very well but more investment in source countries could help. While globalization and free trade may have hurt the US worker and contributed to the opioid epidemic by decimating manufacturing in the US, it has also brought a lot of people out of abject poverty. The growth miracles in China and the rest of Asia would not be possible without international trade and investment. Thus the two crises are not independent. More free trade could help to reduce illegal immigration but it could also lead to worsening economic conditions for some regions spurring more opioid use. There are no magic bullets but we at least need to change the strategy.

AI and authoritarianism

Much of the discourse on the future of AI , such as this one, has focused on people being displaced by machines. While this is certainly a worthy concern, these analyses sometimes fall into the trap of linear thinking because the displaced workers are also customers. The revenues of companies like Google and Facebook depend almost entirely on selling advertisements to a consumer base that has disposable income to spend. What happens when this base dwindles to a tiny fraction of the world’s population? The progression forward will also most likely not be monotonic because as people initially start to be replaced by machines, those left with jobs may actually get increased compensation and thus drive more consumerism. The only thing that is certain is that the end point of a world where no one has work is one where capitalism as we know it will no longer exist.

Historian and author Yuval Harari argues that in the pre-industrial world, to have power is to have land (I would add slaves and I strongly recommend visiting the National Museum of African American History and Culture for a sobering look at how America became so powerful). In the industrial world, the power shifted to those who own the machines (although land won’t hurt) while in the post-industrial world, power falls to those with the data. Harari was extrapolating our current world where large corporations can track us continually and use machine learning to monopolize our attention and get us to do what they desire. However, data on people is only useful as long as they have resources you want. If people truly become irrelevant then their data is also irrelevant.

It’s anyone’s guess as to what will happen in the future. I proposed an optimistic scenario here but here is a darker one. Henry Ford supposedly wanted to pay his employees a decent wage because he realized that they were also the customers for his product. In the early twentieth century, the factory workers formed the core of the burgeoning middle class that would drive demand for consumer products made in the very factories where they toiled. It was in the interest of industrialists that the general populace be well educated and healthy because they were the source of their wealth. This link began to fray at the end of the twentieth century with the rise of the service economy, globalisation, and automation. After the second World War, post-secondary education became available to a much larger fraction of the population. These college educated people did not go to work on the factory floor but fed the expanding ranks of middle management and professionals. They became managers and accountants and dentists and lawyers and writers and consultants and doctors and educators and scientists and engineers and administrators. They started new businesses and new industries and helped drive the economy to greater prosperity. They formed an upper middle class that slowly separated from the working class and the rest of the middle class. They also started to become a self-sustaining entity that did not rely so much on the rest of the population. Globalisation and automation made labor plentiful and cheap so there was less of an incentive to have a healthy educated populace. The wealth of the elite no longer depended on the working class and thus their desire to invest in them declined. I agree with the thesis that the abandonment of the working class in Western liberal democracies is the main driver of the recent rise of authoritarianism and isolationism around the world.

However, authoritarian populist regimes, such as those in Venezuela and Hungary, stay in power because the disgruntled class that supports them is a larger fraction of the population than the opposing educated upper middle class that are the winners in a contemporary liberal democracy. In the US, the disgruntled class is still a minority so thus far it seems like authoritarianism will be held at bay by the majority coalition of immigrants, minorities, and costal liberals. However, this coalition could be short lived. Up to now, AI and machine learning has not been taking jobs away from the managerial and professional classes. But as I wrote about before, the people most at risk for losing jobs to machines may not be those doing jobs that are simple for humans to master but those that are difficult. It may take awhile before professionals start to be replaced but once it starts it could go swiftly. Once a machine learning algorithm is trained, it can be deployed everywhere instantly. As the ranks of the upper middle class dwindle, support for a liberal democracy could weaken and a new authoritarian regime could rise.

Ironically, a transition to a consumer authoritarianism would be smoothed and possibly quickened by a stronger welfare state. A possible jobless economy would be one where the state provides a universal basic income that is funded by taxation on existing corporations, which would then compete for those very same dollars. Basically, the future incarnations of Apple, Netflix, Facebook, Amazon, and Google would give money to an idle population and then try to win it back. Although, this is not a world I would choose to live in, it would be preferable to a socialistic model where the state would decide on what goods and services to provide. It would actually be in the interest of the corporations and their elite owners to lobby for high taxes and to not form monopolies and allow for competition to provide better goods and services. The tax rate would not matter much because in a steady state loop, any wealth inequality is stable regardless of the flux. It is definitely in their interest to keep the idle population happy.

From creativity to anxiety

When I was a child, the toy Lego was the ultimate creative experience. There were basically 4 or so different kinds of blocks from which you could connect together into whatever you could think of. Now, most Lego sets consists of a fixed number of pieces that are to be assembled into a specific object, like a fire truck. Instead of just making whatever you can think of, you now must precisely follow an instruction book with the major anxiety that a crucial piece will be missing. Creativity has been replaced by the ability to follow detailed instructions. Maybe, this makes kids look for creative outlets elsewhere, like pretend play. Maybe, they become more compliant employees. Or maybe, the world is just becoming less a imaginative and duller place.

What liberal boomers don’t get

Writer Lionel Shriver recently penned an opinion piece in the New York Times lamenting that the millennial penchant for political correctness is stifling free speech and imposing cultural conformity the way the conservatives did in the 60’s and 70’s. The opinion piece was her response to the uproar over her speech at the 2016 Brisbane Writer’s Festival instigated by a young woman named Yassmin Abdel-Magied, who walked out in the middle and then wrote a commentary about why she did so in the Guardian. You can read Shriver’s piece here, Abdel-Magied’s here, and a blog post about the talk here. The question of cultural appropriation, identity politics, and political correctness is a major theme in the current US presidential election. While there has always been conservative resentment towards political correctness there has been a recent strong liberal backlash.

The liberal resentment has been spurred mainly by two recent incidents at two elite US colleges. The first was when Yale’s Intercultural Affairs Council recommended that students not wear Hallowe’en costumes that might offend other students. Lecturer and associate master of one of Yale’s residential colleges, Erica Christakis, wrote an email questioning the need to regulate student’s clothing choices and that students should be allowed to be a little offensive. This triggered a massive reaction from the student body strongly criticizing Christakis. The second incident occurred at Bowdoin College in which there was a “tequila” themed party at a College Residence, where students wore sombreros and acted out Mexican sterotypes. Two members of the student government attended the party and this led to a movement by students to have the two impeached. Both of these incidents led to pretty uniform condemnation of the students by the main stream media. For example, see this article in the Atlantic.

The liberal backlash is based on the premise that the millennial generation (those born between 1980 and 2000) have been so coddled (by their baby boomer parents, born between 1945 and 1965, I should add) that they refuse to be exposed to any offensive speech or image. (Personal disclosure: I am technically a boomer, born in 1962, although by the time I came of age the culture wars of the 60’s had past. I’m a year younger than Douglas Coupland, who wrote the book Generation X, which was partially an anthem for neglected tail-end boomers who missed out on all the fun and excitement of the cohort a decade older. The cruel irony is that the term Generation X was later appropriated to mostly mean those born in the 70’s making us once again, an afterthought.)

My initial reaction to those incidents was to agree with the backlash but the contrast between Ms. Abdel-Magied’s thoughtful heartfelt comment and Ms. Shriver’s exasperated impatient one made me realize that I have underestimated the millennials and that they do have a point. Many liberal boomers believe that while full racial equality may not yet exist, much of the heavy lifting towards that end was done by the Civil Rights Movement of the 60’s, which they supported. What these boomers miss is that the main reason that full racial equality has not been reached is because of cultural biases and attitudes that many of them may even possess. The millennial approach may be a little heavy handed but they at least recognize the true problem and are trying to do something about it.

The plain truth is that just being black does carry an extra risk of being killed in an encounter with law enforcement. Whites and blacks still live in segregated neighborhoods. Even in the so-called liberal enclave of academia, minorities are underrepresented in high level administrative positions. There are just a handful of East Asian women full professors in Ophthalmology in all US medical schools. Hollywood executives do believe that movies cannot be successful with Asian lead actors and thus they still cast white actors for Asian roles. Asians are disadvantaged in the admissions process at elite American schools. Racial stereotypes do exist and pervade even the most self-professed liberal minds and this is a problem. This is not just a battle over free speech as liberal boomers have cast it. This is about what we need to do to make society more just and fair. Shriver thought it was ridiculous that people would be upset over wearing sombreros but it does indicate that there are those that automatically associate a Mexican drink with a Mexican stereotype. Some of these students will be future leaders and I don’t think it is too much to ask that they be aware of the inherent racial biases they may harbour.

The nature of evil

In our current angst over terrorism and extremism, I think it is important to understand the motivation of the agents behind the evil acts if we are ever to remedy the situation. The observable element of evil (actus reus) is the harm done to innocent individuals. However, in order to prevent evil acts, we must understand the motivation behind the evil (mens rea). The Radiolab podcast “The Bad Show” gives an excellent survey of the possible varieties of evil. I will categorize evil into three types, each with increasing global impact. The first is the compulsion or desire within an individual to harm another. This is what motivates serial killers like the one described in the show. Generally, such evilness will be isolated and the impact will be limited albeit grisly. The second is related to what philosopher Hannah Arendt called “The Banality of Evil.” This is an evil where the goal of the agent is not to inflict harm per se as in the first case but in the process of pursuing some other goal, there is no attempt to avoid possible harm to others. This type of sociopathic evil is much more dangerous and widespread as is most recently seen in Volkswagen’s fraudulent attempt to pass emission standards. Although there are sociopathic individuals that really have no concern for others, I think many perpetrators in this category are swayed by cultural norms or pressures to conform. The third type of evil is when the perpetrator believes the act is not evil at all but a means to a just and noble end. This is the most pernicious form of evil because when it is done by “your side” it is not considered evil. For example, the dropping of atomic bombs on Japan was considered to be a necessary sacrifice of a few hundred thousand lives to end WWII and save many more lives.

I think it is important to understand that the current wave of terrorism and unrest in the Middle East is motivated by the third type. Young people are joining ISIS not because they particularly enjoy inflicting harm on others or they don’t care how their actions affect others, but because they are rallying to a cause they believe to be right and important. Many if not most suicide bombers come from middle class families and many are women. They are not merely motivated by a promise of a better afterlife or by a dire economic situation as I once believed. They are doing this because they believe in the cause and the feeling that they are part of something bigger than themselves. The same unwavering belief and hubris that led people to Australia fifty thousand years ago is probably what motivates ISIS today. They are not nihilists as many in the west believe. They have an entirely different value system and they view the west as being as evil as the west sees them. Until we fully acknowledge this we will not be able to end it.

Phasers on stun

The recent controversy over police shootings of unarmed citizens has again stirred up the debate over gun control. However, Shashaank Vattikuti points out that there is another option and that is for the police to carry nonlethal weapons like phasers with a stun option. Although, an effective long range nonlethal weapon currently does not exist (tasers just don’t cut it), a billionaire like Mark Zuckerberg, Peter Thiel, or Elon Musk could start a company to develop one. New York Times columnist Joe Nocera has suggested that Michael Bloomberg buy a gun company. There are so many guns already in existence that barring an unlikely confiscation scheme there is probably no way to get rid of them. The only way to reduce gun violence at this point is for a superior technology to make them obsolete. Hobbyists and collectors would still own guns, just as there are sword collectors, but those who own guns for protection would probably slowly switch over. However, the presence of a nonlethal option could lead to more people shooting each other so strong laws regarding their use would need to accompany their introduction.

 

 

 

 

Probability of gun death

The tragedy in Oregon has reignited the gun debate. Gun control advocates argue that fewer guns mean fewer deaths while gun supporters argue that if citizens were armed then shooters could be stopped through vigilante action. These arguments can be quantified in a simple model of the probability of gun death, p_d:

p_d = p_gp_u(1-p_gp_v) + p_gp_a

where p_g is the probability of having a gun, p_u is the probability of being a criminal or  mentally unstable enough to become a shooter, p_v is the probability of effective vigilante action, and p_a is the probability of accidental death or suicide.  The probability of being killed by a gun is given by the probability of someone having a gun times the probability that they are unstable enough to use it. This is reduced by the probability of a potential victim having a gun times the probability of acting effectively to stop the shooter. Finally, there is also a probability of dying through an accident.

The first derivative of p_d with respect to p_g is p_u - 2 p_u p_g p_v + p_a and the second derivative is negative. Thus, the minimum of p_d cannot be in the interior 0 < p_g < 1 and must be at the boundary. Given that p_d = 0 when p_g=0 and p_d = p_u(1-p_v) + p_a when p_g = 1, the absolute minimum is found when no one has a gun. Even if vigilante action was 100% effective, there would still be gun deaths due to accidents. Now, some would argue that zero guns is not possible so we can examine if it is better to have fewer guns or more guns. p_d is maximal at p_g = (p_u + p_a)/(2p_u p_v). Thus, unless p_v is greater than one half then even in the absence of accidents there is no situation where increasing the number of guns makes us safer. The bottom line is that if we want to reduce gun deaths we should either reduce the number of guns or make sure everyone is armed and has military training.

 

 

 

Terry Tao in the Times

There is a nice profile of mathematician Terence Tao in the New York Times magazine this week. Tao is astonishing in his breadth and depth. He could probably master any subject in any field if he just put his mind to it. The article plays up his “normality” in contrast to the stereotype of the eccentric asocial mathematician like Gauss, John Nash or Grigory Perelman, who proved the Poincare Conjecture. However, in my experience, most mathematicians, even the very best, are reasonably normal and sociable. My guess is that the rate of personality disorder among mathematicians is no higher than the general populace. It is perhaps true that mathematicians are more introverted and absent minded than average but rarely to a pathological degree. I think the myth persists because of a few very prominent examples but also that mathematics is a pursuit where having a personality disorder is not a major handicap. One could probably not be a great lawyer, physician or statesman if they were socially abnormal. Thus, if the rate of historically great eccentric mathematicians is high compared to other fields, it is because the sample is biased.

Implicit bias

The most dangerous form of bias is when you are unaware of it. Most people are not overtly racist but many have implicit biases that can affect their decisions.  In this week’s New York Times, Claudia Dreifus has a conversation with Stanford psychologist Jennifer Eberhardt, who has been studying implicit biases in people experimentally.  Among her many eye opening studies, she has found that convicted criminals whose faces people deem more “black” are more likely to be executed than those that are not. Chris Mooney has a longer article on the same topic in Mother Jones.  I highly recommend reading both articles.

Race against the machine

One of my favourite museums is the National Palace Museum (Gu Gong) in Taipei, Taiwan. It houses part of the Chinese imperial collection, which was taken to Taiwan in 1948 during the Chinese civil war by Chiang Kai-shek. Beijing has its own version but Chiang took the good stuff. He wasn’t much of a leader or military mind but he did know good art. When I view the incredible objects in that museum and others, I am somewhat saddened that the skill and know-how required to make such beautiful things either no longer exists or is rapidly vanishing. This loss of skill is apparent just walking around American cities much less those of Europe and Asia. The stone masons that carved the wonderful details on the Wrigley Building in Chicago are all gone, which brings me to this moving story about passing the exceedingly stringent test to be a London cabbie (story here).

In order to be an official London black cab driver, you must know how to get between any two points in London in as efficient a manner as possible. Aspiring cabbies often take years to attain the mastery required to pass their test. Neural imaging has found that their hippocampus, where memories are thought to be formed, is larger than normal and it even gets larger as they study. The man profiled in the story quit his job and studied full-time for three years to pass! They’ll ride around London on a scooter memorizing every possible landmark that a person may ask to be dropped off at. Currently, cabbies can outperform GPS and Google Maps (I’ve been led astray many a time by Google Maps) but it’s only a matter of time. I hope that the cabbie tradition lives on after that day just as I hope that stone masons make a comeback.

Incompetence is the norm

People have been justly anguished by the recent gross mishandling of the Ebola patients in Texas and Spain and the risible lapse in security at the White House. The conventional wisdom is that these demonstrations of incompetence are a recent phenomenon signifying a breakdown in governmental competence. However, I think that incompetence has always been the norm; any semblance of competence in the past is due mostly to luck and the fact that people do not exploit incompetent governance because of a general tendency towards docile cooperativity (as well as incompetence of bad actors). In many ways, it is quite amazing at how reliably citizens of the US and other OECD members respect traffic laws, pay their bills and service their debts on time. This is a huge boon to an economy since excessive resources do not need to be spent on enforcing rules. This does not hold in some if not many developing nations where corruption is a major problem (c.f. this op-ed in the Times today). In fact, it is still an evolutionary puzzle as to why agents cooperate for the benefit of the group even though it is an advantage for an individual to defect. Cooperativity is also not likely to be all genetic since immigrants tend to follow the social norm of their adopted country, although there could be a self-selection effect here. However, the social pressure to cooperate could evaporate quickly if there is the perception of the lack of enforcement as evidenced by looting following natural disasters or the abundance of insider trading in the finance industry. Perhaps, as suggested by the work of Karl Sigmund and other evolutionary theorists, cooperativity is a transient phenomenon and will eventually be replaced by the evolutionarily more stable state of noncooperativity. In that sense, perceived incompetence could be rising but not because we are less able but because we are less cooperative.

The ultimate pathogen vector

If civilization succumbs to a deadly pandemic, we will all know what the vector was. Every physician, nurse, dentist, hygienist, and health care worker is bound to check their smartphone sometime during the day before, during, or after seeing a patient and they are not sterilizing it afterwards.  The fully hands free smartphone could be the most important invention of the 21st century.

Happiness and divisive inhibition

The Wait But Why blog has an amusing post on why Generation Y yuppies (GYPSYS) are unhappy, which I found through the blog of Michigan economist  Miles Kimball. In short, it is because their expectations exceed reality and they are entitled. What caught my eye was that they defined happiness as “Reality-Expectations”. The key point being that this is a subtractive expression. My college friend Peter Lee, now Professor and Director of the University Manchester X-Ray imaging facility, used to define happiness as “desires fulfilled beyond expectations”. I always interpreted this as a divisive quantity, meaning “Reality/Expectations”.

Now, the definition does have implications if we actually try to use it as a model for how happiness would change with some quantity like money. For example, consider the model where reality and expectations are both proportional to money. Then happiness = a*money – b*money. As long as b is less than a, then money always buys happiness, but if a is less than b then more money brings more unhappiness. However, if we consider the divisive model of happiness then happiness = a*money/ b*money = a/b and happiness doesn’t depend on money at all.

However, the main reason I bring this up is because it is analogous to the two possible ways to model inhibition (or adaptation) in neuroscience. The neurons in the brain generally interact with each other through two types of synapses – excitatory and inhibitory. Excitatory synapses generally depolarize a neuron and make its potential get closer to threshold whereas inhibitory neurons hyperpolarize the neuron and make it farther from threshold (although there are ways this can be violated). For neurons receiving stationary asynchronous inputs, we can consider the firing rate to be some function of the excitatory E and inhibitory I inputs. In subtractive inhibition, the firing rate would have the abstract form f(E-I) whereas for divisive inhibition it would have the form f(E)/(I+C), where f is some thresholded gain function (i.e. zero below threshold, positive above threshold) and C is a constant to prevent the firing rate from reaching infinity. There are some critical differences between subtractive and divisive inhibition. Divisive inhibition works by reducing the gain of the neuron, i.e. it makes the slope of the gain function shallower while subtractive inhibition makes the threshold effectively higher. These properties have great computational significance, which I will get into in a future post.

TB, streptomycin, and who gets credit

The Science Show did a feature story recently about the discovery of streptomycin,  the first antibiotic to treat tuberculosis, which had killed 2 billion people in the 18th and 19th centuries. Streptomycin was discovered by graduate student Albert Schatz in 1943, who worked in the lab of Professor Selman Waksman at Rutgers. Waksman was the sole winner of the 1952 Nobel Prize for this work. The story is narrated by the author of the book Experiment Eleven, who paints Waksman as the villain and Schatz as the victim. Evidently, Waksman convinced Schatz to sign away his patent rights to Rutgers but secretly negotiated a deal to obtain 20% of the royalties. When Schatz discovered this, he sued Waksman and obtained a settlement. However, this turned the scientific community against him and he forced him out of microbiology into science education. To me, this is just more evidence that prizes and patents are incentives for malfeasance.

The problem with democracy

Winston Churchill once said that “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” The current effectiveness of the US government does make one wonder if that is even true. The principle behind democracy is essentially utilitarian – a majority or at least a plurality decides on the course of the state. However, implicit in this assumption is that the utility function for individuals match their participation function.

For example, consider environmental regulation. The utility function for the amount of allowable emissions of some harmful pollutant like mercury for most people will be downward sloping – most people would increase their utility the less the pollutant is emitted. However, for a small minority of polluters it will be upward sloping with a much steeper slope. Let’s say that the sum of the utility gained for the bulk of the population for strong regulation is greater than that gained by the few polluters for weak regulation. If the democratic voice one has in affecting policy is proportional to the summed utility then the smaller gain for the many will outweigh the larger gain to the few. Unfortunately, this is not usually case. More often, the translation of utility to legislation and regulation is not proportional but passes through a very nonlinear participation function with a sharp threshold. The bulk of the population is below the threshold so they provide little or no voice on the issue. The minority utility is above the threshold and provides a very loud voice which dominates the result. Our laws are thus systematically biased to protecting the interests of special interest groups.

The way out of this trap is to either align everyone’s utility functions or to linearize the participation functions. We could try to use regulation to dampen the effectiveness of minority participation functions or use public information campaigns to change utility functions or increase the participation functions of the silent majority. Variations of these methods have been tried with varying degrees of success. Then there is always the old install a benevolent dictator who respects the views of the majority. That one really doesn’t have a good track record though.

Failure at all scales

The premise of most political systems since the enlightenment is that the individual is a rational actor. The classical liberal (now called libertarian) tradition believes that social and economic ills are due to excessive government regulation and intervention. If the individuals are left to participate unfettered in a free market then these problems will disappear.  Conversely, the traditional Marxist/Leninist left posits that the capitalistic system is inherently unfair and can only be cured by replacing it with a centrally planned economy. However, the lesson of the twentieth century is that there is irrationality, incompetence, and corruption at all levels, from individuals to societies. We thus need regulations, laws and a government that take into account of the fact that we are fallible at all scales, including the regulations, laws and the government.

Markets are not perfect and often fail but they are clearly superior to central planning for the distribution of most resources (particularly consumer goods). However, they need to be monitored and regulated. When markets fail, government should intervene. Even the staunchest libertarian would support laws that prevent the elimination of your competitors by violence. Organized crime and drug cartels are an example of how businesses would run in the absence of laws. However, regulations and laws should have built-in sunset clauses that force them to be reviewed after a finite length of time. In some cases, a freer market makes sense. I believe that the government is bad in picking winners so if we want to promote alternative energy, we shouldn’t be helping nascent green industries but rather tax fossil fuel use and let the market decide what is best. Making cars more fuel-efficient may not lead to less energy use but just encourage people to drive more. If we want to save energy, we should make energy more expensive. We should also make regulations as universal and simple as possible to minimize  regulatory capture. I think means testing for social services like medicare is a bad idea because it will just encourage people to find clever ways to circumvent it. The same probably goes for need-based welfare. We should just give everyone a minimum income and let everyone keep any income above it. This would then provide a safety net but not a disincentive to work. Some people will choose to live on this minimum income but as I argued here, I think they should be allowed to. If we want to address wealth inequality then we should probably tax wealth directly rather than income. We want to encourage people to make as much money as possible but then spend it to keep the wealth circulating. By the same reasoning, I don’t like a consumption tax. Our economy is based on consumer spending so we don’t want to discourage that (unless it is for other reasons than economic).

People do not suddenly become selfless and rational when the political system changes but systems can mitigate the effects of their irrational and selfish tendencies. As the work of Kahneman, Tversky, Ariely, and others have shown, rational and scientific thinking does not come naturally to people. Having the market decide what is the most effective medical treatment is not a good idea. A perfect example is in a recent Econtalk podcast with libertarian leaning economist John Cochrane on healthcare. Cochrane suggested that instead of seeing a doctor first, he should just be allowed to buy antibiotics for his children whenever they had an earache. The most laughable part was his idea that we have rules against self-administering of drugs to protect uneducated people. Actually, the rules are to protect highly educated people like him who think that expertise in one area transfers to another. The last thing we want is for even more antibiotic use and more antibiotic resistant bacterial strains. I definitely do not want to live in a society where I have to wait for the market to penalize companies that provide unsafe food or build unsafe buildings. It doesn’t help me if my house collapses in an earthquake because the builder used inferior materials. Sure they may go out of business but I’m already dead.

There is no single perfect system or set of rules that one should always follow. We should design laws, regulations, and governments that are adaptable and adjust according to need. The US Constitution has been amended 27 times. The last time was in 1992, which just changed the rules on salaries for elected officials. The 26th amendment in 1971 made 18 the universal threshold age for voting. We are thus due for another amendment and I think the 2nd amendment, which guarantees the right to bear arms, is a place to start. We could make it more explicit what types of arms are protected and what types can be regulated by local laws. If we want to reduce gun violence then gun regulation makes sense. People will do things they later regret. If one is in the heat of an argument and there is a gun available then it could be used inadvertently. It takes a lot of training and skill to use a gun effectively. Accidents will happen. In the case of guns, failure often leads to death. I would prefer to live in a society where guns are scarce rather than one where everyone carries a weapon like the old wild west.

A new strategy for the iterated prisoner’s dilemma game

The game theory world was stunned recently when Bill Press and Freeman Dyson found a new strategy to the iterated prisoner’s dilemma (IPD) game. They show how you can extort an opponent such that the only way they can maximize their payoff is to give you an even higher payoff. The paper, published in PNAS (link here) with a commentary (link here), is so clever and brilliant that I thought it would be worthwhile to write a pedagogical summary for those that are unfamiliar with some of the methods and concepts they use. This paper shows how knowing a little bit of linear algebra can go a really long way to exploring deep ideas.

In the classic prisoner’s dilemma, two prisoner’s are interrogated separately. They have two choices. If they both stay silent (cooperate) they get each get a year in prison. If one confesses (defects) while the other stays silent then the defector is released while the cooperator gets 5 years.  If both defect then they both get 3 years in prison. Hence, even though the highest utility for both of them is to both cooperate, the only logical thing to do is to defect. You can watch this played out on the British television show Golden Balls (see example here). Usually the payout is expressed as a reward so if they both cooperate they both get 3 points, if one defects and the other cooperates then the defector gets 5 points and the cooperator gets zero,  and if they both defect they both get 1  point each. Thus, the combined reward is higher if they both cooperate but since they can’t trust their opponent it is only logical to defect and get at least 1 point.

The prisoner’s dilema changes if you play the game repeatedly because you can now adjust to your opponent and it is not immediately obvious what the best strategy is. Robert Axelrod brought the IPD to public attention when he organized a tournament three decades ago. The results are published in his 1984 book The Evolution of Cooperation.  I first learned about the results in Douglas Hofstader’s Metamagical Themas column in Scientific American in the early 1980s. Axelrod invited a number of game theorists to submit strategies to play IPD and the winner submitted by Anatol Rappaport was called tit-for-tat, where you always cooperate first and then do whatever your opponent does.  Since this was a cooperative strategy with retribution, people have been using this example of how cooperation could evolve ever since those results. Press and Dyson now show that you can win by being nasty. Details of the calculations are below the fold.

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What’s your likelihood?

Different internal Bayesian likelihood functions may be why we disagree. The recent shooting tragedies in Colorado and Wisconsin have set off a new round of arguments about gun control. Following the debate has made me realize that the reason the two sides can’t agree (and why different sides of almost every controversial issue can’t agree) is that their likelihood functions are completely different. The optimal way to make inferences about the world is to use Bayesian inference and there is some evidence that we are close to optimal in some circumstances. Nontechnically, Bayesian inference is a way to update  the strength of your belief in something (i.e. probability) given new data. What you do is to combine your prior probability with the likelihood of the data given your internal model of the issue (and then normalize to get a posterior probability). For a more technical treatment of Bayesian inference, see here. I posted previously (see here) that I thought that drastic differences in prior probabilities is why people don’t seem to update their beliefs when faced with overwhelming evidence to the contrary.  However, I’m starting to realize that the main reason might be that they have completely different models of the world, which in technical terms is their likelihood function.

Consider the issue of gun control.  The anti-gun control side argue that “guns don’t kill people, people kill people’ and that restricting access to guns won’t prevent determined malcontents from coming up with some means to kill. The pro-gun control side argues that the amount of gun violence is inversely proportional to the ease of access to guns. After all, you would be hard pressed to kill twenty people in a movie theatre with a sword. The difference in these two viewpoints can be summarized by their models of the world.  The anti-gun control people believe that the distribution of the will of people who would commit violence looks like this

where the horizontal line represents a level of gun restriction.  In this world view, no amount of gun restriction would prevent these people from undertaking their nefarious designs.  On the other hand, the pro-gun control side believes that the same distribution looks like this

in which case, the higher you set the barrier the fewer the number of crimes committed. Given these two views of the world, it is clear why new episodes of gun violence like the recent ones in Colorado and Wisconsin do not change people’s minds. What you would need to do is to teach a new likelihood function to the other side and that may take decades if at all.

 

 

Financial Fraud and incentives

I highly recommend this EconTalk podcast on financial fraud with William Black.  It gives a great summary of how financial fraud is perpetrated.  It also clearly highlights the difference in opinions on the cause of the recent financial crisis.    What most people seem to agree on is that the financial crisis was caused by a system wide Ponzi scheme.  Lots of mortgages were issued (some were liar loans where the recipients clearly were not qualified, while some were just risky); these loans were then packaged into mortgage-backed securities (e.g. CDOs) by investment banks who them sold them to other banks and institutional investors like hedge funds and pension funds.  As long as housing prices increased, everyone made money.  Homeowners didn’t care if they couldn’t pay back the loan because they could always sell the house.  The mortgage lenders didn’t care if the loans go bad because they didn’t hold the loans and made money off of the fees. Like a classic Ponzi scheme, when the bubble burst everyone lost money, except for those who got out early.

The motivation for the mortgage lenders seem quite straightforward.  They were making money on fees and the more mortgages the more fees.  When they ran out of legitimate people to lend to, they just lent to riskier and riskier people.  The homeowners were simply caught in the bubble mania at the time.  I remember people telling me I was an idiot for not buying and that house prices never go down. The question at dispute is what were the incentives for the investment banks and institutional investors to go along with this scheme. Why were they fueling the bubble? Libertarians like Russ Roberts, the host of EconTalk, believes that they didn’t care if the bubble burst because they knew they would be bailed out by the government.  To him, the moral hazard due to government intervention was the culprit.   The pro-regulators, like Black, believe that this was a regulatory failure in that the incentives were to commit and reward fraud.  The institutional investors simply didn’t do the due diligence that they should have because the money was rolling in.  He cites the example of Enron, where incredible profits were booked through accounting fraud, which not only didn’t raise alarm to investors, but only attracted more money leading to  more incentives to perpetuate the fraud.  He also says that thousands of people were prosecuted for fraud in the eighties after the Savings and Loans crisis but no one has been prosecuted this time around. He believes that unless we criminalize financial fraud, this will only continue.  The third view, shared by people like Steve Hsu and Felix Salmon, was that the crisis was mostly due to incompetence (Steve calls this bounded cognition).  The investment banks had too much confidence or didn’t fully understand the risks in their financial instruments. They thought they could beat the system. The fourth possibility is that people knew it was a Ponzi scheme but either felt trapped and couldn’t act or thought they could get out in time. It was a pure market failure in that the rational course of action led to a less efficient outcome for everyone.