There is No Sharp Transition to Personhood

The belief that fertilized eggs qualify as people reflects an intuition that there really is no clear dividing line for the concept of personhood. It is much like the paradox of the heap: if one grain at a time is removed from a pile of sand, at what point does it stop being a pile? There are many ways to approach this question, but I favor the fuzzy logic answer: that even one grain of sand has some degree of "pileness" to it, two grains have twice as much, three grains three times as much, etc. The salient point for this post is that there is no sudden transition, something many people have difficulty contemplating. So, is an egg a person? "Somewhat", while unsatisfying as an answer, is nonetheless accurate. A fertilized egg? More so. A baby? Yet more. People attempt to use the ability to survive outside a mother's body as a sharp transition, but even that is artificial: an infant is still utterly dependent on a large input of care and resources, let alone one born right at the edge of viability. More still is required for them to attain anything approaching their full potential.

The problem with extending the notion of legal personhood to ever earlier stages of human development is that it is an argument from potential. Every egg, every sperm has the potential to become a person, but a policy aimed at bringing as many to term as possible would quickly lay waste to the planet. In a world of limited resources, potential life has a finite worth, which by definition means it cannot automatically trump all other concerns. This seemingly heartless conclusion is part of our own biology: many miscarriages are induced by defects that would not be immediately fatal to the fetus but would yield young so weak as to not be worth the associated opportunity cost or risk to the mother. Exactly what the value of a potential person may be is not only beyond the scope of this post, but is arguably impossible to answer definitively owing to the subjective and deeply personal nature of the many competing factors. My goal is instead to dispel the absolute thinking that seems to frequently accompany such issues. Life may be precious, but, on this planet at least, it is far from priceless.

Anti-Surrogate Father

I've often thought that by not having children I'm making up for someone else having more than two as we hurtle towards the carrying capacity limit of the planet. Since I haven't been able to think of a way (well, a legal way at any rate) to have negative children, I can personally only make up for at most one other child being born. Being therefore a limited resource, I figure that ought to have value so perhaps I can auction the associated moral high ground off to a specific parent. The notion is quite similar to the way in which some people buy carbon credits to offset their activities. Bearing in mind that this would be the rights to an American child, the most resource intensive type in the world, I wonder how much I'd get?

Proven Social Investments Should Be Exempted From Deficit Spending Limits

If only there were a well known maxim about this...

Originally posted on my private blog on January 25th, 2009.

Politicians have an unfortunate tendency to eliminate social investments in the drive to reduce short term deficits. Whenever you have a social program (or infrastructure investment) with solid scientific evidence behind it that it will yield far more in savings or revenue growth than is spent then it should be exempted from deficit considerations. It makes no sense to build a new school and then scrimp on insulation simply because the larger overall heating cost doesn't occur on this year's balance sheet. What's worse is that the ability to make such misguided cuts allows decision makers to avoid the more difficult, legitimate ones. The standard of proof for such investments would necessarily need to be high as this should not become a form of government wagering.

GDP is a Terrible Indicator of Progress

GDP loves a toxic waste dump.

This post is an edited version of one on my private blog February 7th, 2008.

Gross Domestic Product is used as the primary measure of a country's growth. The problem is that it is simply a measure of economic activity (i.e. money changing hands) and makes no attempt to characterize that activity. For more about its shortcomings, I recommend this article from The Atlantic.

This a symptom of a practice which is commonplace in economic theory: if there is a factor that is difficult to quantify or is subjective, economists often will neglect it, thereby assigning it a value of zero. CO2 emissions are probably the best known example of that. If they had been valued fifty years ago, things would be quite different. That particular example would've required a great deal of foresight, and there were powerful special interests at work but it is still indicative of the general methodology.

So, what to do about this? Well, I propose that we admit that economics is, as a general rule, a gross parody of the real complexities that underlie society and we apply high level goal-driven restrictions based on probability to attempt to value intangibles. For example, we can't tell how bad CO2 emissions might be, but it's got to be more than zero, so give it an actual cost now and refine it later. Cancer research is intrinsically more valuable than beanie baby manufacture, so bias things so as to favor such more worthy pursuits. Fast food is unhealthy, so penalize its consumption (or reward the consumption of healthier alternatives). Exercise is lacking, so enact incentives to encourage it. For the free market to have a prayer of working well, it needs to know what direction a positive outcome lies in. This new approach would benefit even the wealthy among us as improvements in the standard of living resulting from technological improvements will always outstrip the short-term increases obtained by amassing more wealth.

I would also propose a new economic progress indicator: the number of hours a week that an average citizen must work to provide a set standard of living (subject to environmental concerns, health impacts, and other constraints) for himself and one child. The goal should be to reduce this number over time. It could include, if desired, bureaucratic barriers that force people to work longer than they need too and of course the standard of living should be updated with time to reflect advances in technology. This is merely a yardstick; someone could always work more than they needed to in order to purchase luxuries. There are other proposed progress indicators, but by making free time the parameter to be maximized it sidesteps the need to assign it an explicit value.

Cryogenic Suspension in Return for Organs

I think a logical incentive for organ donation is that one's head be cryogenically preserved and a guarantee given that the donor will be revived when (and if) the technology becomes viable. This system doesn't have some of the moral concerns of cash payments and the demand for organs is so high and the supply so low that it should be very cost effective. Even if it became so popular that supplies of organs were to somehow become plentiful (a doubtful prospect owing to the low utility of older organs or those of sick donors), cryogenics is a technology that could benefit enormously from the economies of scale that would be created from widespread use, lowering its cost substantially. Additionally, as only heads would be preserved, a smaller amount of resources would be required than for an entire body.

Economics Among Monkeys: Much Ado About Little

I just listened to a Planet Money podcast about research into monkeys obeying economic principles in the wild. The summary is this: low rank monkeys are groomed less than high ranked ones. Researchers trained a low status female to open a special box that contained apple slices and since she had this new skill, the amount of grooming she received went up to that of high status members. Then another monkey was trained to do the same thing and both of the trained females' status met at a midpoint almost exactly halfway in between, just as basic microeconomics would suggest. This was hailed as a big deal because even without formalized systems the results were decidedly economic in nature. Unfortunately I see this as seriously underwhelming. Think about a monkey's motivations this way: I come across a monkey who can do something for me and I want to get on their good side so I groom them. Since there's only so much effort I'm willing to put into grooming, I must naturally split it among all the individuals I want things from. Spread that basic effect across a larger number of members and it will tend to average out to a 50/50 split if two skilled monkeys are present. This takes no deep understanding of any economic mechanisms (not to belittle the intellect of the primates concerned) and is pretty hard to be impressed by as it takes no long term planning or nuanced decision making. The result falls into the realm of the extremely obvious.

Should Financial Reform Have Come First?

The Obama administration has attempted to use the financial crisis as leverage towards tackling health care reform, but it's possible that financial reform should've come first. With the economy improving a lot of the impetus for reform is already waning and a recovery of some kind was not entirely unexpected. Additionally, all the expenditure on bailouts has made the discussion of further public funding of any large initiative more difficult. Health care under the current system is only going to get worse, so time isn't a factor on that score. These factors seem to indicate that regulatory reform should've preceded health care and we're already seeing a considerable retreat on my areas of reform. Perhaps the Obama administration was counting on continued high unemployment (as it's a lagging indicator) to keep up voter outrage and maintain pressure on legislators. Since large deficits and an aversion to spending will persist for some time, it may have been seen that there was no benefit to waiting on health care reform and capitalizing on honeymoon period popularity was the best strategy. I find myself extremely skeptical that their decision was the correct one.

Executive Pay is a Multi-Part Issue

There are several problems with executive pay as it currently exists:

1) Too great as a percentage of company expenditures
2) Rewards short term risk taking
3) Punishes failure unreasonably

I would argue that the first isn't a subject of typical financial regulation, despite the fact that it gets the most popular press. It's mostly a question of competition and efficiency, which I think should be addressed in another manner (bigger post to come, I promise). Linking pay to long term performance is discussed somewhat, and while there are a variety of mechanisms to achieve this, the important feature is that a sufficiently large percentage of compensation is to linked short term performance, which allows fraud and risky behaviour to prosper. The third issue receives the least attention and relates to the ubiquitous practice of "one strike and your out" seen throughout most of the financial industry. While many attempt to defend this approach as a feature of a true meritocracy, it ignores the effect of chance. Investing is far from an exact science and luck undoubtedly plays a huge part in success. By overemphasizing any mistake whatsoever, the reward incentives are skewed in an nonconstructive and possibly risky manner.

Consumer Level Competition Fixation

Economists and policy makers often seem to be unaware that competition can occur at a level other than with the end consumer. The economic idealization that market decisions are made by perfectly informed and rational actors cannot be translated to the real world in many cases. I just heard a ludicrous example today when an economist called for all patients to directly control the money spent on their health care, so they could make their own decisions and put price and quality pressure on the industry. Having a populace that's largely ignorant make the majority of their medical spending decisions is a recipe for conditions to go untreated and worsen (and frequently balloon in cost). Competition between medical institutions themselves is a much more appropriate arena for competition to occur. Just to choose one simple way this could work is that a medical company could be given a premium to keep patients healthy (adjusted perhaps by pre-existing condition). Anything they spend less than that premium, they get to keep, and over time the premiums could be reduced, using data on the actual costs as a reference. The way we handle financial products currently is another example of unrealistic ideas of end user competition being the deciding factor and is something I've blogged about previously.

Financial "Prescriptions"

The recently enacted consumer protections for financial products seek to outlaw deceptive or difficult to understand investment vehicles, but they have drawn criticism for limiting the choices available to more sophisticated investors. One common analogy used in reporting the restrictions is to liken them to prescription drug controls. If we extend that analogy, I think that there should be three classes of investment products: simple, transparent ones (over the counter), controlled ones requiring a certified financial advisor's written approval (prescription), and those that are simply outlawed (snake oil). Having an inbetween classification would help ease the difficult decisions as to what is and isn't acceptable and still gives companies an incentive to simplify products as the need to seek financial advice constitutes a barrier to entry. I see it as an attempt at demand side financial reform, rather than supply side, which usually gets the most scrutiny. Had such a system existed prior to the housing boom, not many sub prime mortgages would have been sold.

Microsecond Trades = Insanity Indicator

There is extreme competition to execute stock trades in less and less time. The small changes in value that can occur while an order is pending can add up to serious money. This has become an arms race because as the ability to cram more trades into less time increases, the amount of fluctuation that can occur over brief periods becomes greater. Execution times on the order of microseconds are now possible, with no sign that further decreases aren't on the way. Ignoring for the moment the unfair competitive edge such systems give the large institutions that can afford them, I see the entire drive as proof positive that our speculation markets are insane. There is no way to interpret buying and selling that holds times that tiny as being anything in the slightest bit constructive, caring at all about the development of companies, products, or technology. It is gambling (at best, insider trading at worst) in its most naked form and should be eliminated. Not only should quick turnaround on stock be discouraged, but the trades themselves should be randomized and delayed in order to make extremely time sensitive trading impossible. I would like to see minimum delays of a least a day or two, with a random component of the same order. Another possibility is that orders are sold off across an interval so that the sale price is effectively time averaged. Many will complain that limiting transaction speed will reduce liquidity, but how is that beneficial in this instance? Because it allows more people to make extremely speculative and fundamentally unproductive exchanges faster?

Speculation Proponents

I came across this very interesting article about how former IBM CEO Louis Gerstner suggests that short-term investment gains should be taxed at 80%. I have long opposed short term speculation so his comments just about had me jumping up and down. He admits that there would be a great deal of opposition to such a proposal since profits for many are tied to the volume of transactions. That got me thinking about all the groups that have a direct vested interest in maintaining the status quo:

1) The gamblers. People actively involved in speculation who feel they can strike it rich. It has been well established that playing the lottery in a serious manner is ridiculous, but lots of people still do so. Speculation is a lot less obviously a bad idea.

2) The upper end of the bell curve. People who managed to make a bundle playing the markets. Of course they admire the system that made them wealthy, and they have the political contributions to make their voices heard. Overexposure of their successes fuels the hopes of group #1.

3) Inside traders. Speculation serves as a fantastic cover for the use of illegal information.

4) The infrastructure. All the businesses who support the speculative markets, from the trading companies, to the rating agencies, to the financial news services. The house always wins.

What If Striking a Balance with Traditional Regulation Isn't Possible?

This is a combination and extension of posts on my private blog from February 16th and April 9th, 2009.

A common concern in devising financial regulation is that you want to make it comprehensive enough to cover future instruments that may be developed and to eliminate loopholes, while not destroying the opportunity for innovation. By grouping financial instruments by similarity of principles you can make some broad generalizations, but since investors are extremely adept at exploiting loopholes, I think this approach is doomed. Clamp down to cover all contingencies and you stifle innovation, ease up and the loopholes undermine your original intent. Since it's so difficult, I decided to explore the situation where one assumes that it is in fact impossible and then see where that led in devising a regulatory framework. What follows is one possible approach.

Those mechanisms that have a proven track record and are well understood can have tailor made controls, but I'm constrained by my working premise from specifying controls on less well established financial instruments. That being the case, I have no choice but to concentrate on limiting their potential for damage. One way to do that is to require that unregulated investments be backstopped by holdings in the regulated sphere. This is similar in spirit to the capital requirements imposed on banks now and guarantees that even if things blow up the bulk of the market will not be crippled. Completely exempting some instruments from oversight may seem extreme, but remember the working premise is that this is effectively what occurs anyway via loopholes. Over time new innovations that are fully explored and have well developed track records can have appropriate regulation crafted for them, not only removing the backstopping requirement, but allowing them to backstop other unproven investments.

The incentives for firms is changed under this arrangement. Rather than trying to come up with opaque ways around existing regulations, there is benefit to providing a clear theoretical explanation and real world data for new inventions in order to expedite their regulation and official sanction. Obviously companies could attempt to evade the backstopping requirement by hiding economic activity, but since that's theoretically a way to evade any system of regulation I'm not going to explore it specifically.

There is a practical advantage to having a specific ratio of regulated to unregulated assets as it's an easily manipulated parameter that can be changed with market conditions. Compare this to the current system: having congress change whole regulation systems in very specific and involved ways. Usually, small changes are introduced as complete overhauls are too difficult to achieve, leading to a patchwork of complicated laws that are onerous to comply with, have unintended consequences, and leave plenty of loopholes. If the Fed were in control of the ratio (perhaps within certain limits without congressional authorization), it could provide another powerful tool for fine tuning regulatory requirements as well as adapting to changes in the economic situation.

Opposing Goals as a Method of Regulation

The rating agencies that failed so spectacularly during the recent housing boom have a serious conflict of interest problem: if they don't rate bonds highly, the bond owners will take their business elsewhere. Since they're funded by the companies whose products they rate, this is a serious problem. There are many proposed ways to address this, such as changing who funds them or basing rewards on prediction accuracy, but I was also thinking that requiring them to offer another service that creates a bias in the opposite direction could also work. If a rating agency were required to offer insurance on a product based on their own rating, then they'd have a powerful financial stake in its accuracy. Of course they'd need to have enough capital requirements to ensure their insurance was viable, and the two competing areas of business need to be roughly matched in value. This is fundamentally different than having third party insurance entities, because the rating agency has complete knowledge of the internal mechanisms used to arrive at their ratings. I feel a fundamental overall of the entire system is more appropriate, but still found this idea rather intriguing.

I couldn't think of a good picture to accompany this. Any suggestions?