Author Archives: Texan99

About Texan99

I'm from Texas, and there are at least 98 others just like me.


A couple of old Coyote Blogs from the good old days before Hope and Change.  First, how progressives are conservative:

. . . I must say that on a number of issues, particularly related to civil liberties and social issues, I call progressives my allies.  On social issues, progressives, like I do, generally support an individual’s right to make decisions for themselves, as long as those decisions don’t harm others.


However, when we move to fields such as commerce, progressives stop trusting individual decision-making.  Progressives who support the right to a person making unfettered choices in sexual partners don’t trust people to make their own choice on seat belt use.  Progressives who support the right of fifteen year old girls to make decisions about abortion without parental notification do not trust these same girls later in life to make their own investment choices with their Social Security funds.  And, Progressives who support the right of third worlders to strap on a backpack of TNT and explode themselves in the public market don’t trust these same third worlders to make the right decision in choosing to work in the local Nike shoe plant.


Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism.   Ironically, though progressives want to posture as being “dynamic,” the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms. Progressives want comfort and certainty.  They want to lock things down the way they are.  They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Second, why the labor theory of value is lunacy.

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As I’ve often argued here and in the comments at House of Eratosthenes, one of the weakest points in the anthropogenic global warming argument is the heavy reliance on positive feedback assumptions.  CO2 is a weak greenhouse gas, and can be projected to cause rapid, catastrophic warming only if we assume that it will increase water vapor, which is turn is a much stronger greenhouse gas.  The problem is that there is little evidence that the positive feedback mechanism exists, and even some reason to suppose that the feedback may be negative.

New evidence from NASA’s water vapor project highlights the uncertainty:

Climate models predict upper atmosphere moistening which triples the greenhouse effect from man-made carbon dioxide emissions.  The new satellite data from the NASA water vapor project shows declining upper atmosphere water vapor during the period 1988 to 2001. . . .  The cooling effect of the water vapor changes on OLR [outgoing longwave radiation] is 16 times greater than the warming effect of CO2 during the 1990 to 2001 period.  Radiosonde data shows that upper atmosphere water vapor declines with warming. . . .  Both satellite data and radiosonde data confirm the absence of any tropical upper atmosphere temperature amplification, contrary to IPCC theory.  Four independent data sets demonstrate that the IPCC theory is wrong.  CO2 does not cause significant global warming.

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Never mind the AGW, here’s the real problem

We’re going to have to start setting money aside for this right now.  Fortunately, it will have a long time to accumulate interest, so we’ll have some real resources at our commend when crunch time comes.

I hope no one’s going to doubt the word of these Higgs-Boson people.  They’re real scientists, not like those dumb engineers, what do they know.  I don’t want to hear any complaints about the BBC reporter, either.  He’s just trying to make things vivid for us, because what we need is a clarion call to action.

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Rules of thumb and unreliable models

We were discussing below the scourge of U.C.H.  I am referring, of course, to the unintentionally humorous criticism by Dan Kahan of the “unreliable cognitive heuristics” of the unwashed masses.  We just cannot get them to take our word for stuff any more.  They keep relying on their guts to decide whether we’re crying wolf and trying to dazzle them with B.S.  Where’s the trust?

What’s funny is the idea that your average smart Yalie uses something better than rules of thumb to weigh essentially unquantifiable risks for political purposes.  If you’re of a rigorous turn of mind, you can get a pretty good handle on risks in repetitive situations that are susceptible to statistical analysis.  You can’t get anything like a rigorous handle on risks from models of the behavior of chaotic systems that have never met the gold standard of predictions confirmed by observations (and no fair back-fitting with previously unidentified critical factors).  The best anyone could ever get out of an emerging science of prediction is a gut feel, an instinct for where to focus future research.

Richard Feynman analyzed the failure of the Challenger shuttle.  He found that people were sharpening their pencils to an absurd degree and fooling themselves into thinking they had pinpointed risk out to a number of decimal points.  In fact, they were piling probability assumption on probability assumption, when no single assumption had a solid empirical basis:

It appears that there are enormous differences of opinion as to the probability of a failure with loss of vehicle and of human life.  The estimates range from roughly 1 in 100 to 1 in 100,000.  The higher figures come from the working engineers, and the very low figures from management.  What are the causes and consequences of this lack of agreement?  Since 1 part in 100,000 would imply that one could put a Shuttle up each day for 300 years expecting to lose only one, we could properly ask “What is the cause of management’s fantastic faith in the machinery?”

. . .

There is nothing much so wrong with this as believing the answer!  Uncertainties appear everywhere. . . .When using a mathematical model careful attention must be given to uncertainties in the model.

. . .

There was no way, without full understanding, that one could have confidence that conditions the next time might not produce erosion three times more severe than the time before.  Nevertheless, officials fooled themselves into thinking they had such understanding and confidence, in spite of the peculiar variations from case to case.  A mathematical model was made to calculate erosion.  This was a model based not on physical understanding but on empirical curve fitting.”

He concluded with one of my favorite statements, a truly reliable rule of thumb:  “For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.”

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Losing the jackpot

The conventional liberal wisdom is that the capitalist system has to be tightly controlled by a benevolent state in order to prevent the rich from getting richer and the poor from being trapped in poverty.  And yet, anyone reading this post already is more than familiar with evidence that the strongest indicator of poverty is the failure to follow a couple of basic rules:  don’t have children until you’re married, and don’t marry until you finish high school.   Most of the other things you’ll need to do will follow naturally from those humble beginnings.

Oh, but people cry, how can you understand how difficult it is for someone starting from nothing, you heartless silver-spoon types?  I think a more interesting question is how difficult it is even for someone starting with quite a lot, if he doesn’t first absorb some basic precepts for maintaining prosperity.  A case in point is NFL players who hit the jackpot.  An ESPN documentary called “Broke!” found that an astonishing 78% of NFL players go into bankruptcy within two years of retirement.  It’s not a question of never being able to earn enough money to get your head above water, quit living hand-to-mouth, and accumulate some capital for investment.  It’s more a question of learning to live within an income — any income — while taking fully into account what expenses you’re facing now and will likely face in the future.  NFL players are an exaggerated example because the money-spigot starts and stops so abruptly relatively early in life.  Few NFL stars find a lucrative second career.  But the income from their first careers is enough to support any family in security for life, with the most modest attention to simple principles.

(I encountered something new in the article:  “jock taxes.”  These are “stop-and-frisk” state income taxes levied against non-resident professionals who earn well-publicized salaries while traveling around the country.  Even if they live in states without an income tax, like Texas, they may find themselves paying as much as half a million a year in income taxes to various states where their games are scheduled.  While not an athlete, I ran into something like this years ago when I was a partner in an enterprise with offices in New York, and had to pay New York City and state income taxes that would curl your hair.  New York owes me big time.)

Immigrants from entrepreneurial cultures arrive here penniless and build good futures within one generation.  Lucky SOBs from non-entrepreneurial cultures win the lottery and still go broke in a matter of months.  Capitalism and the free market are not the culprit in poverty.  Nor is denial of access to a “good education” the issue, unless we are to imagine that American colleges routinely graduate young people with a grasp of basic economics.

There is no income, private or national, that will cover an infinite wish-list.  When budgets don’t balance, financial systems collapse, whether we’re looking at individuals or great nations.

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He’s from Yale, he must be smart

Dan Kahan of the Cultural Cognitive Project at Yale is getting very meta about the proper evidence-based approach to persuading the public that AGW-ist scientists’ conclusions are evidence-based:

Scientists and science communicators have appropriately turned to the science of science communication for guidance in overcoming public conflict over climate change.  The value of the knowledge that this science can impart, however, depends on it being used scientifically.  It is a mistake to believe that either social scientists or science communicators can intuit effective communication strategies by simply consulting compendiums of psychological mechanisms.  Social scientists have used empirical methods to identify which of the myriad mechanisms that could plausibly be responsible for public conflict over climate change actually are.  Science communicators should now use valid empirical methods to identify which plausible real-world strategies for counteracting those mechanisms actually work.  Collaboration between social scientists and communicators on evidence-based field experiments is the best means of using and expanding our knowledge of how to communicate climate science.

Whew.  I can’t help thinking if they put that much effort into ensuring that the climate science that is reaching the public is evidence-based, there wouldn’t be so much public controversy requiring a science-based approach to persuasion techniques.  In a related paper, although he makes hard work of it, Kahan admits that empirical data do not support the conclusion that conservatives are less cognitively sophisticated than liberals.  Instead, he makes the interesting finding that high cognitive scores are associated with the fervency of ideological beliefs on both sides of the political spectrum:

Seeming public apathy over climate change is often attributed to a deficit in comprehension.  The public knows too little science, it is claimed, to understand the evidence or avoid being misled.  Widespread limits on technical reasoning aggravate the problem by forcing citizens to use unreliable cognitive heuristics to assess risk.  A study conducted by the Cultural Cognition Project and published in the Journal Nature Climate Change found no support for this position.  Members of the public with the highest degrees of science literacy and technical reasoning capacity were not the most concerned about climate change.  Rather, they were the ones among whom cultural polarization was greatest.

Kahan tries hard to figure out how this could possibly mean that AGW makes the most sense, but can’t get there.  He fears that ideologues on both sides of the fence are more concerned with fitting in with their tribes than with arriving at truth; he worries about “the tragedy of the risk-taking commons” and the proper “communication” strategies that must be employed by people who know the real score.  He reluctantly concludes that no amount of “clarification” of the AGW position will bring the public around “so long as the climate-change debate continues to feature cultural meanings that divide citizens of opposing worldviews.”  He recommends, therefore, that

communicators should endeavor to create a deliberative climate in which accepting the best available science does not threaten any group’s values.  Effective strategies include use of culturally diverse communicators, whose affinity with different communities enhances their credibility, and information-framing techniques that invest policy solutions with resonances congenial to diverse groups.

And from there he’s back to the need for a “new science of science communication.”

Myself, I hypothesize that AGW science is too weak to win committed converts except among people with a strong social-justice worldview, who are drawn to the most common AGW amelioration schemes, and whose enthusiasm grows the more familiar they are with the schemes.  The suspicion that AGW is junk science in service of a social-justice political agenda, in turn, tends to turn conservatives more rabidly against the AGW hypothesis the more they investigate it.  It’s not necessarily a difference in an approach to pure science at all.  The portion of the public paying the most attention, and best equipped to evaluate the evidence, knows that the science is far from definitive, especially when you consider not only the fact that it is based on predictions generated by emerging models, but also the need to assign definitive blame to human activity and to evaluate a cost-benefit analysis of proposed remediation that itself must be based on highly speculative information.  Given that murky picture, why should it be surprising that the most educated part of the public polarizes primarily around its reaction to the proposed solutions?

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Who put the “liar” in “liar loans”?

Megan McArdle has a fine post up at the Daily Beast on the housing market collapse. I’ve read far too much about how the big banks caused the problem. That’s true in a sense; they certainly rode a bubble all the way up, then presented us all with a scary prospect when it seemed they might all fail at once, precipitating a liquidity crisis.

But I find too few articles looking closely at how fraud happened. Most writers completely miss the function of interest rates in allocating risk in a lending market. You can stop reading right away if an author starts talking about interest rates and monthly payments that give borrowers a “fair” chance of buying the house we all think they deserve as a human right.

Likewise, there’s almost no talking to anyone who thinks that someday there’s going to be discovered a substitute for people actually repaying the debts they incur. This problem is particularly acute in the home mortgage context, because most buyers don’t seem to understand that the bank didn’t loan them a house; it loaned them cash to pay to the seller of the house. The seller walked away with the cash. The bank is out the cash. It is not fundamentally the bank’s problem if the house later drops in value, any more than the bank is entitled to a windfall if the house rockets up in price. The buyer/borrower really, truly owes the cash to the bank, even if he’s disappointed in his expectations of a flourishing housing market, even if he loses his job, and even if he has to move to another city. Am I unsympathetic to a homeowner in this situation? Of course not. But I’m not inclined to say it’s the bank’s problem to bear the cost, either. That’s just another way of saying we’re so tender-hearted that we want charity for a guy in a tough spot, but we want someone else to pay for it. (This is my nomination for the social-policy error that creates the great confusion and damage while permitting the maximum preening by people who want to look and feel altruistic at no personal expense.)

Anyway, I liked McArdle’s article because she looked carefully at the incentives for writing the garbage loans to begin with. Her commenters chimed in with more clear thinking about the incentives further down the chain of investment, all the way to the government-sponsored entities (GSEs) whose limitless appetite served as the vacuum pressure back up through the supply pipe, to the would-be homeowner.

Now, if the GSEs had been purely private investors, all that would have happened is that they would have gone broke when it turned out they had been buying garbage loans in a bubble market. But the GSEs weren’t quite private. They had powerful friends in Congress who implied all along that they could count ultimately on taxpayer bailouts, because we have to ensure stability, and everyone (in both parties) knows that homeownership is part of the American Dream. Those same friends in Congress never missed a chance to bully banks into loaning money to whatever members of their constituencies weren’t actually qualified for a big loan in the harsh light of soulless financial calculations (a/k/a “the Man”). Without the GSEs standing at the far end of the pipeline ready to soak up whatever came through the spigot, Congress would have had limited ability to force banks to make loans that were unlikely to be repaid (or to be more accurate, to buy packages of bad loans that independent “originators” put together). Yes, the banks could bundle the bad loans up and sell them off in strips to investors of greater or lesser sophistication, but the investors in turn had a big appetite only because of the GSEs standing down at the end of the pipe.

Wait, you say, wasn’t it the fault of the rating agencies? Shouldn’t they be accused of fraud for rating garbage as triple-A? Well, what are the odds they would have stuck to the triple-A ratings without the presence of the GSEs, with their implied (and later actual) taxpayer underwriting?  Look at the abuse they took when they finally started to hedge about the wisdom of giving a triple-A rating to anything that could be said to have U.S. government support.

But although this is a big, multifacted picture, the fraud element is not as complicated as much of the press over the last five years would lead you to believe. The fraud all boiled down to lying about the ability of homeowners to repay their loans. Buyers fudged their creditworthiness so they could get a loan.  Originators fudged the buyers’ creditworthiness so they could qualify the loan. When the originators sold the loans in bundles, they lied to the banks about the same thing. Buyers of the loan packages theoretically shouldn’t have lied to themselves about it, but individuals within buyer institutions had a big motive to lie to other individuals within the same institutions, to close the deal, get the annual bonus, keep the job, and so on. It wasn’t their personal money, right? And then those buyers bundled up the packages of loans and sliced them various ways and sold them again — and at that stage the same kind of lying occurred again.  By the time the pipeline had grown really long and the investment instruments had grown really intricate, investors simply persuaded themselves that the risk couldn’t possibly be that great, and boy, look at those yields!

At some point, you’re supposed to reach a buyer whose own skin is in the game, and who is motivated to stop listening to lies and stop lying to himself about whether all those homeowners could repay, because that’s what the risk boils down to at every stage in this domino structure. The beauty in this system is that you never reached that person with skin in the game until you came to the taxpayers. And then the taxpayers (not an outstanding bunch in the area of financial acuity) were persuaded that the problem lay almost anywhere you can imagine except with the practice of lying about the homeowners’ credit.  Because who wants to be mean to people who are being thrown out of their houses?

The McArdle article goes further than most, by identifying some empirical investigation into just who knew the most about homeowner creditworthiness, and how they let it affect either their willingness to close or their willingness to set a low interest rate.  She was also lucky enough to attract this intelligent commenter, “circleglider”:

People follow rules because those rules are congruent with their morals or because the risk/reward ratio of any sanction is unfavorable.

When governments regulate otherwise private economic transactions, they necessarily create principal-agent problems.  Rules – especially arbitrary ones – only exacerbate agency costs.

This is one of the many reasons why command and control economies fail.  And the diversion of ever more resources into rule enforcement is a signal step in their decline.

In those rare cases where true market failures exist, the most effective interventions are those that minimally impact incentives and consequences.  The U.S. housing finance system operates almost entirely contrary to these principals.

. . .

The vast majority of markets work just fine.  “Economic crashes” are separate from market failures and may or may not be exacerbated by them; government intervention is almost always the causative factor.  There are few true monopolies or oligopolies outside of those created by government (hint: try naming any that constitute even 10% of the U.S. economy).  Asymmetric information, while technically a type market failure, can be and is often rectified by private actors.  And by definition, the Tragedy of the Commons only occurs where market forces are not allowed to operate – otherwise, the commons could not exist.

Throughout history and across the globe today, there is an inescapable inverse relationship between economic growth rates and government interference in private economic affairs.

Most alleged market failures are simply outcomes that some person or group finds objectionable.  Indeed, some of the most often decried outcomes are those that represent markets doing what they do best — facilitating mutually beneficial trade and allocating resources to their best and highest uses. Markets are where people come together to do what they do best:  self-organize.

Those who work and live in the private economy rarely see markets fail.  Those who work and live in the public sector rarely seem them work.

This sorry spectacle should make us take especially careful note of what California public entities are getting up to lately in the way of issuing bonds.  They really need the money, and they really don’t have it.  They’ve already tried borrowing it, but they need to commandeer more than the resources of the the next few years of taxpayers.  What they really need is the resources of taxpayers forty years from now.  But they’d be thrown out of office if they tried to get next year’s taxpayers to start paying on a forty-year obligation for this year’s schools or pension obligations, so they came up with a brainstorm:  balloon bonds!  Pay nothing now, and then the payments will mushroom later, much later, don’t even worry about it.  Sound familiar?  When that structure crashes, will people remember that the problem was that the public entities should have known right from the start that they were borrowing more than they could possibly afford to repay?  Or will there be a confused scramble to sue the Big Banks that helped structure the deals?

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