Sunday, December 18, 2011

Why Rawls trips and falls

John Rawls is a famous philosopher who argued for welfare capitalism as the ideal form of government through the use of his philosophical tool: the veil of ignorance. He contends that if we are behind a veil of ignorance and had absolutely no idea what our lot would be in life when we were setting up society, then we would set it up in such a way in which inequality would only be tolerated as long as it improves the lot of the worst off among us.

Far from being a call for welfare state capitalism, the Rawlsian veil of ignorance makes one of the most compelling cases for laissez faire capitalism possible. First of all, when one is behind the veil of ignorance, one would have absolutely no issue with increased wealth inequality as long as the poor are not worse off. This can be explained with another metaphor (a meta-metaphor, if you will). Imagine you are in a casino with two games. One game you flip a coin and if heads you make a dollar and if tails you make 10 dollars. In the other game, if you get heads you still make a dollar, but if you get tails, you make 100 dollars. There is no question that one would obviously rather play the game with the higher payout. There is an argument to be had for the first game, if in the second game the alternative to the 100 dollars was only 10 cents however, risk aversion aside, one is always willing to accept the game with the higher Bayesian payout.

Beyond the fact that those behind the veil of ignorance would rationally choose to accept a higher payout, the second and most damning attack on the Rawlsian welfare state is the existence of inter-temporal life. What I mean by this is that behind the veil of ignorance, one does not know where one would fall in time either. This means that decisions behind the veil of ignorance ought not increase the welfare of those who are alive now at the expense of those who will be alive in the future.

This has dire implications when looking at the effects of taxing capital. A Rawlsian who argues for a progressive income tax would have to grapple with considering what the other uses of that income might have been. For if people are better investors than the government, a tax on income will result in a decrease in the growth rate of the economy. A man with billions of dollars can invest more than a man with millions of dollars, and the main consideration about investment is that investment compounds. The marginal dollar invested today is worth an infinite amount of utility in the indefinite future in comparison to a dollar consumed today. Given that humanity will probably not last eternally, we could simply assume a very high value for the dollar invested. A truly Rawlsian state would have taxes minimized to the point where it maximizes the return on investment of the dollar.

This would in turn fall right in line with a flat minimal consumption tax, and a minimal state that encourages investment through a strict enforcement of property rights and proscriptions against fraud. Well what you know, Rawls was a libertarian after all!

Friday, November 25, 2011

Endowed by Our Creator

On most issues I lean libertarian. I believe that the job of our government is to protect our liberties.

What I have trouble grappling with is how my non-theistic friends can justify their libertarianism. This country was founded on the belief that we are endowed by our Creator with certain inalienable rights, and on that basis we give our consent to the government to enforce these innate rights. On a non-theistic paradigm, there is no external grantor of inalienable rights. Judge Andrew Napolitano delineates both a secular as well as a theistic argument for the natural rights that rest at the heart of libertarianism :

I find his argument from theism to be compelling, but I cannot see the rationality behind his secular argument. He argues that:

"I own my own body. I own what my body produces. I own the ideas that come out of it. I own what I produce with the sweat of my brow. I own the thoughts that I express. I own the property and wealth that I accumulate."
On first blush this makes sense. If indeed I naturally own my body and its effects, then I can contend that on that grounds, government has a responsibility to protect me from abuses from others. Therein lies the implicit assumption that people do own their body and effects. A theistic libertarian believes that inalienable rights are granted by God. I contend that there is no extra-governmental basis for these rights on atheism.

What is needed in order to argue for self-ownership is a distinction between humans and other living things. Some attempt to make that distinction under atheism, and I will address that later, but let's look at some of the absurdities that arise when one believes in property rights and yet has no basis for a distinction between humans and other living beings.

We rob a cow of its self-ownership when we cut it into prime rib. We rob a bee of what its body produces when we take its honey. We rob a whale of the ideas that come out of it when we use the design of its fins for windmills without paying royalties. All of these absurdities make life impossible for a libertarian. In fact, even a raw food diet would literally rob plants of the fruits of their labor.

Some non-theistic libertarians recognize this reductio ad aburdum and resolve it by pointing out differences between humans and other living things. These quasi-escape hatches fall under three (non-exhaustive) categories: an appeal to reason, an appeal to the entity's respect for rights, and an appeal to voluntary trade.

An Appeal to Reason
One argument often used to escape the absurdity of a bushes property rights to its berries is that in order for a living being to have property rights, it must be able to reason. I am not sure how this distinction is enough to justify recognizing people's rights without recognizing the rights of other living things, but even if it is, such a justification is insufficient to justify property rights for all humans. A comatose man has no ability to reason, or at the very least, his ability to reason is as apparent as that of a plant. If one's rights are based on one's ability to reason, then a comatose man does not have property rights. That means that if you are a little short on cash, the ring on the finger of a comatose man who does not have a will is yours for the taking. Or better yet, if you are one of the man's children and want to speed up the execution of his will, smothering him would not be a violation of the man's right to life. Clearly, the ability to reason is not a necessary feature of having property rights.

An Appeal to an Entity's Respect for Rights
Another argument that is used to exit the rights of plants, is the claim that an entity is only entitled to rights, if it respects the rights of others. This argument has its basis in the justification for criminal prosecution which allows the state to take away the rights of a criminal provided that the criminal took away the rights of someone else. While I would agree that an entity's respect for the rights of others works as a method of determining when someone who has rights loses them, it is insufficient as a means of determining who has these rights to start with. There are plenty of entities that do not harm the rights of others and yet cannot have property rights themselves. When a plant homesteads the sun and produces sugar, it does no harm to me. Choosing to violate the right of a plant to accumulate "property" i.e. sugar by consuming it is simply an exercise in arbitrary "species-ism" since the plant does not infringe upon your own property rights. Under this theory, all farmers are as much slavers in this century as they were in the 18th century. So it seems that the ability to respect property rights brings up another dead end for the non-theist.

An Appeal to Voluntary Trade
The third argument rests upon the belief that an animal's ability to voluntarily trade justifies its own rights. This falls victim to the same weakness that first of the three arguments fell to. A coma would prevent someone from being able to voluntarily trade. Not only does appealing to voluntary trade underprotect the rights of  people who cannot voluntarily trade, but it also does overprotect the rights of animals. Studies have shown that monkeys can voluntarily trade. One can also make a case that many symbiotic relationships are examples of voluntary trade among animals. On a more fundamental level, all cells within any multicellular organism engage in uncompelled trade with other cells. There is no case to be made for the ability to trade voluntarily being the basis of rights.

In short: I find disbelief in a deity to be incompatible with the core libertarian belief that people have rights and government is instituted to protect them.

Friday, November 18, 2011

100% of the 1%

Dear Occupiers,

I know that most of you have the best of intentions. You, like most Americans, want America to be the best it can be, but the policies you are advocating for are not practical solutions to the problems of the nation, but rather problems in and of themselves. Allow me to explain.

Many of you on the left are advocating for increasing the marginal income tax rate on millionaires to fix the budget shortfall. This policy is not being marketed in the moralistic terms that underlie it, but rather as a practical solution to solving the massive public debt on the shoulders of Uncle Sam. If indeed taxing the "1%" would solve the national debt, then I would take no issue with marketing the tax hike in practical terms, however a spike in taxes for millionaires would do no such thing.

Let's say for a second that millionaires will not respond to incentives by taking their money to a more tax friendly country, or by decreasing the amount of money that they risk on venture capital firms because the payoff won't be big enough. Let's say, that you can somehow brainwash millionaires not to change their behavior in response to incentives. Now let's increase taxes on millionaires to 100%. I know of at least a couple of people who would get a rush of moral self-righteousness just from that last sentence. Now the IRS reports that millionaires reported a total income of $727 billion. That means that if we arrest all the millionaires, and force them to work at the same rate they were working at otherwise, while stopping them from consuming a penny of what they produce, then we get $727 billion. The federal government will spend about $3.6 trillion this year (a rate of $300 billion per month). That means that all the money you have taken from the enslaved millionaires will keep the government running for 2 months. Give yourself a pat on the back.

Clearly this is ridiculously unpractical and fails to take into account that the proverbial 1% can respond to incentives. One may even go far so far as to say that they would be more capable to relocate than others.

What is underlying a proposal to increase taxes on the 1% is not practical thought but rather irrational rage. The relatively minor sum of petty cash that the federal government could extract from millionaires will not solve the national debt, and would more likely harm the economy, by greatly shrinking VC funds and driving their investment outside of the nation and into more friendly tax environments. In a sense, taxing the "1%" is the equivalent of divesting from the future.

If you are interested in proposing serious solutions to the nation's economic financial problems, show the math, but if what you are proposing is driven by moral outrage, then come out and say it.

Your friend in the crusade against crony capitalism

John Wahba

Tuesday, November 15, 2011

The Economic Doomsday Device

In the movie Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb, the Soviets take mutual assured destruction to the logical extreme by creating a device, that would destroy the world if a nuclear device was ever detonated. The producer of the movie, obviously wanted to parody the notion of mutually assured destruction, but there are applications of this principle that could be applied to our financial institutions.

The principle long term problem with this nation's economy is that large financial institutions (hereafter sloppily referred to as banks) are operating with an implicit subsidy from the federal government. They know that if they bet with the system, the federal government will simply bail them out. The government cannot credibly threaten to let too-big-too-fail banks fail. Whatever law that the Senate or Congress pass, absent an amendment, could be easily reversed in the case of political expedience. The reason for this, is that the banks have a first mover advantage in this game of Chicken.
Here is a matrix that describes the potential payouts for the market given a collapse

 Government let's banks fail
 Government bails out banks
Banks take high risk
 5, -3
Banks take rational risk
 1, -1
 2 , -2

As you can tell, the banks would clearly prefer to be in the right half of the matrix. They have the first mover advantage in this game, since they can take high risk and essentially force the government's hand in a bailout. If the government could somehow take the first mover advantage from the banks, and credibly threaten to let banks fail, then they would not take systemic risks in the first place. As mentioned earlier, no legislation can credibly threaten to let the banks fail, as it could be overturned by a scared Congress.

That's where my economic doomsday device comes in. The United States Federal government should create a derivative that pays out a sum of gold to the buyer of this derivative if the US Federal government bails out a financial institution. One would of course have to go through the trouble of delineating what constitutes a bail out, but once you have that, you could then turn around and sell these derivatives that payout gold from the US gold reserve in the event of a bailout. If the US government were to sell enough of these strange financial instruments, to the point where a bailout would essentially lead to bankruptcy of the federal government, then the government will have credibly threatened to let the banks fail, and will have taken away the first mover advantage from the banks. It may also need to be administered by a third party which would posses the gold reserve for the duration of the contract in order to avoid the legislature simply changing the terms of the contract unilaterally. Below is the revised matrix, given the economic doomsday device.

 Government let's banks fail
 Government bails out banks
Banks take high risk
Banks take rational risk
 1, -1
 2 , DEATH

As you can tell in the above matrix, by changing the payoffs government faces, banks realize that a bailout is impossible and take rational risk.
Yes, this is absolutely crazy. It is so crazy it just might work. 

Depute – to appoint, entrust
Desultory – loose, rambling

Thursday, November 10, 2011

Letter from Bizzarro America

So I went into my room one day, and I found on my desk an envelope that seemed out of place. I opened it and here is what it said:

Greetings John, 
We here in Bizzaro America have managed to create a wormhole to America. Perhaps I should explain myself. During the 2008 presidential elections, a group of scientists, realizing the inevitability of an Obama presidency wanted to know if the election of McCain would change America in any substantial way. So they created an alternate America apart from America. I don't want to get technical as to how they pulled it off, but I simply want to relay some of the policies that President McCain instituted.
McCain, being the slightly off-color conservative that he is, went forward with the auto and bank bailouts. He also upheld the timetable set by Bush in Iraq, while keeping a residual military force to protect the embassy. The president also used drones to take out Al-Awlaki, an American citizen without trial.  He also took out Osama Bin Laden, but that mission didn't receive much coverage. I wonder if they found any actionable intelligence in the compound that Osama was in. Palestine made a bid for statehood, but McCain sided with Israel, making him unpopular among other world leaders. It seems as though really, McCain's presidency was a simple continuation of the Bush policies with a few exceptions. Obama's campaign message was right. There was no real substantive difference between the two presidential administration. 
I am certain that Obama was a radical departure from Bush in international and domestic affairs. I am willing to bet that he passed expansive health care reform over the objections of the unions and without the individual mandate he derided during the campaign. Sometimes I wish I was in your world. Go ahead and write a letter to me detailing the differences between between the Obama presidency and the McCain presidency I described and place it in this envelope before tomorrow. 
Best of Luck,
Bizzaro John 
I sent back a blank sheet of paper...

scintillate-Emit flashes of light; sparkle.
ovis - Latin for sheep.

Thursday, November 3, 2011

Buying power

I asked the following question on my Facebook:
"To all my Occupy-friendly friends, would you rather have less buying power and less income inequality, or more buying power and more income inequality?"
It was meant to be a rhetorical question that might moderate some of the anti-income inequality sentiments ravaging my news feed. After all, if we all had the buying power of billionaires, who would care about income inequality? What was meant to be a rhetorical question was responded to by a stubborn egalitarian who said he would prefer less buying power and less income inequality. I was floored. I needed to double check that he knew what he was saying so I reasked the question in a different way:
You would rather be able to afford fewer goods and services as long as more people would be able to afford fewer goods and services?
 When he responded yes, I half believed that he was trolling me. Such a belief if actually held would prefer Soviet Russia over the US. I fear that the fact that people live in their academic bubble (the respondent was a student) precludes them from seriously considering the implications of what they are saying. I seriously hope that the respondent was not serious, for if he was, either he will be in for a rude awakening when he begins working, or America is about to meet the most idealistically self-destructive generation it has ever had.

Ignoble – mean, base
Ignominious – shameful, degrading

Monday, October 24, 2011

Student Loan Derivatives

What this nation needs is financial innovation in the realm of student loans. Milton Friedman described a simple contract whereby students would receive tuition aid from an investment fund in exchange for a portion of their salary over the immediately following 10 years. In a sense, a fund would be taking a risk in investing in people the same way it does when looking for an entrepreneur to invest in.

If implemented, such a system of human capital contracts will revolutionize education and provide information to students. Percentage of income collected could be based upon a combination of degree attained, major chosen, and expected performance in the job market. For instance, a driven student who is deciding between going into gender studies or engineering will be instantly hit with the expected earnings of each degree simply by looking at the percentage of income that they would have to give up in each case. People who are not as driven will find that they would be required to pay a higher percentage of their income and may consider doing something more socially productive such as a trade school.

Such a system would be a far better alternative to the status quo. As it currently stands, a student loan is federally guaranteed and non-dischargable in the case of bankruptcy. By removing federal subsidies from student loans, students will become more productive, more likely to graduate promptly and more knowledgeable about the costs and benefits of each major. It would also save students from the crushing debt that they face when they graduate.

propitiate- to conciliate; to appease

pulchritudinous- beautiful