Saturday, January 30, 2016

Inquisition to Galileo - 97% of Scientists Support Geocentric Theory of the Universe

Science is not a democracy. 97%, even 99% can still be wrong. Especially when an entrenched orthodoxy controls the review process. (Or government funds tend to favor a specific outcome.)

Need I say any more?

A Bit of Support From the Skeptics

Well, that will teach me to take skeptics to task. Though I still stand by my argument in "My Irritation with Supposed Skeptics", I have to admit, CSICOP's publication did provide me with interesting support for another argument I made a while ago. In "GMO Revisited - As Well as Hormones, Soy, Phytoestrogens, and a Host of Other Food Scares" I argued everything we see is a GMO. I did not, as I was unaware of the argument, address the claims that, because GMOs can contain genes from species only very distantly related, that it was more likely to produce dangerous outcomes than traditional modification by breeding and mutation. However, CSICOP did it for me. In this article, it is pointed out genetic research has discovered that even in nature species seem to pick up a number of genes from very distantly related species. Thus, even in nature the "dangerous" processes of GMO creation takes place naturally. In short, why does anyone fear genetic modification?

UPDATE (2016/02/01): Of course, the same archive contains an article supporting the supposed 97% "consensus" -- which is statistical nonsense, dishonest and scientifically irrelevant (as a real skeptic should know - see also here, here, here, here, here, here and here) -- and an article conflating doubt over AGW with GMO-opposition, ACAM and other nonsense, so maybe I should not be so hopeful that skeptics are starting to see the light. Seems "skeptics" remain as orthodox as ever on certain issues. (See "A Bit Disappointed in CSICOP - The Difference Between God and UFOs" and "Debunking "Debunking Global Cooling"" for some examples.)

Friday, January 29, 2016

The Madness of Our Health Insurance Scheme

I discussed this topic before in a number of essays1, but it seems important enough to address once more. Thus, allow me to take a few minutes to explain why, viewed objectively, our approach to health insurance, both before and after ObamaCare, makes no sense. Well, to be accurate, it makes sense for consumers to take advantage of the system as it currently stands, as to do otherwise would be to forfeit a considerable source of income, but viewed as a whole, the system itself is nonsensical, existing solely because of historical accident and government intervention.

Before I begin, perhaps it would be best to examine what insurance is, or least what the traditional role of insurance has been. It is important to do so, as pseudo-insurance such as our current medical system, along with other schemes such as Social Security2, have allowed us to forget how insurance really works, and why the insurance model is such a bad fit for medicine, at least as currently employed3.

There are a number of ways to view insurance, as a wager, as risk pooling, as the use of collective payment to obtain better investment returns, and so on, but let us not bother trying to decide which term fits best, and simply define insurance by what it does, or how it works. Basically, insurance works quite simply for the insured. The insured anticipates that some unwelcome event may befall him, costing him a considerable sum to make right -- anything from a fire, to a flood, to disability leaving him unable to work, to death. Since he does not know if the event will befall him, or if it is certain (eg death), precisely when it will occur, he agrees to pay a certain regular fee to the insurer, and in exchange the insurer agrees to pay either a set sum, or some or all of the costs incurred, should the event come to pass. The crucial elements being that the event is unwelcome, and that its occurrence is uncertain. Without these two aspects, traditional insurance would not work, as we shall discuss in a moment.

On the side of the insurer, the process is a bit more complex. The insurer knows he will pay out, at least to some of those he insures. That being the case, he has to be careful both in who he insures and the fees he charges. Working from actuarial tables based on past experience, the insurer knows with a degree of certainty that within a given pool of customers having certain characteristics, he will end up paying a certain amount. Using this, and his experience in investment telling him the likely return on investment over the same period, he can calculate a fee which will not only pay for claims on the policies, but also provide a reasonable return to the shareholders. In the case of the insurer, the essential feature is that he must collect more in a combination of fees and investment than he pays out, as well as having the ability to adjust those fees to suit the pool of those insured, or else the ability to accept or reject applications to make the pool of insured match his schedule of fees. (Or some combination of the two.)

Allow me to explain the essential features I mentioned above.

First, those for the insured. Most essential is that the event be unexpected, happening irregularly, or sometimes not at all. It is this feature alone which allows the insurer to pool various individuals, offsetting the risk of one against the other, making the event relatively predictable to the insurer while still unpredictable tot he insured. If it were otherwise, if the event were regular, or just fully predictable, insurance would not work. The insured would want to pay a stream of payments with a net present value(NPV)4, less than or equal to the expected expense, as if it were equal or greater, then he could simply invest the same money and offset the costs himself. However, if the NPV is less than the expected cost, since NPV is largely based on market rate of return, the insurer would likely not earn enough in investment to pay the expected costs, much less any profit for investors.

The second essential feature is that the event be unwelcome, such as a house fire, flooding, theft, serious injury or death. It must be an event which the individual will not wish to bring about, as otherwise he could cause the triggering event himself and collect the full value of insurance after paying only a trivial amount5. Only if the event is something unwelcome can the insurer be certain the insured will do all in his power to avoid the event, that is exercise diligence in protecting himself,  allowing insurers to rely on actuarial charts to predict the probability of having to pay out to the insured.

The statements above should help explain the essential feature of the insurer, the ability to adjust either schedule of fees, membership in the pool or some combination of the two. Since the insurer combines individuals based upon risk to make the payout amount, and to a degree period, predictable, and since he wants to earn enough to both pay out against claims and pay a return to investors, it is essential that he be able to either control who is insured, or else adjust the fees for each individual to reflect his anticipated risk. If he lacks either ability, then it becomes likely he will end up paying out more than he will take in, resulting in eventual bankruptcy.

Given this working definition of insurance, it should be obvious why I argue that, for example, Social Security is not insurance. And the same for unemployment insurance. In both cases, there is no ability to control the risk pool, as both pools are made up of all eligible workers. Similarly, the fee is not adjustable, as it is set by law as a fixed percentage of the worker's income. As a result, these supposed insurance plans often run the risk of bankruptcy. And the reason is easy to see, it is because, unlike true insurance, there is no risk pooling, or adjustable fees. There are other problems, such as the fact that many workers do not fear hastening unemployment, or in some cases unemployment -- such as seasonal unemployment in many trades -- is predictable, as is retirement, and thus, since workers would be unwilling to pay in more than they will collect, premiums will almost inevitably fail to cover the costs6. In short, these plans feature none of the aspects of insurance.

But I intended to look at our current health insurance plan, so I will ignore these side issues and turn my attention to the way we choose to pay for medical care.

Perhaps the biggest problem with our current approach to medical insurance is that it covers everything. That is, rather than covering unexpected injury, unplanned illnesses and the like, events which are both unpredictable and unwelcome, it covers absolutely all manner of medical expenses, both the unexpected and the predictable. Rather than simply paying for unplanned hospitalization, it pays for ordinary prescriptions, routine office visits, some forms of preventative care7 and the like.

I have explained the problem of predictable expenses, as well as insuring welcome, or just neutral, events, but perhaps an example, or two, would help.

Let us suppose, for the sake of example, a company decided to offer "auto insurance". In this case, not just insurance against collision damage, or unanticipated breakdown or damage, but insurance to pay for any costs related to owning an auto. Instead of having to pay for new tires, car washes, routine maintenance, even the cost of filling the tank, you simply pay the insurer, and he takes care of everything for you. If it is a cost related to your care, it is paid by the insurer. All you need to do is pay the monthly cost (and maybe a co-pay for some services), and you are in business.

Or, to embrace a more extreme example of insurance covering predictable, welcome events, let us imagine an insurer who agreed to pay your food and drink bill for you in exchange for a monthly premium. No longer would you have to pay at the grocer, or at a restaurant, all you do is pay your insurance premium, and the insurer will take care of all your bills.

Hopefully we are not yet so economically illiterate that anyone imagines either of these is a good idea. Taken at face value, both offer two possibilities, either bankruptcy for the insurer, or crippling premiums for the policy holder. (The possibility of excessively restrictive rules could also make these work to a degree, but we shall discuss that later.) And hopefully the reason that these are the only two possible outcomes is equally obvious. But, as I have learned that many times what I think is obvious is not clear to everyone, let us take a moment to examine the situation in detail.

First, and most important, we need to recall that, whenever someone buys something, someone must pay for it. I will grant, if an insurer buys in sufficient quantity, he may be able to negotiate a discount, but in general such discounts are relatively negligible8, especially in areas of strong consumer competition, such as petroleum, car repair and food. In these and similar fields where consumers can shop around for a good deal, profit margins tend to be narrow, and so the maximum possible discount is likewise quite small, at least so long as sellers want to avoid bankruptcy.  Thus, in most cases, insurers will end up paying close to retail, close enough as to make very little difference.

Why do I say that? Because, when dealing with insurance, we must consider not just the costs paid by the insurer, but also the overhead involved in managing policy membership, collecting premiums, accepting claims, paying out on those claims and so on. In the end, these overhead costs alone would almost surely consume any discount and more. And that does not even take into account the need to pay out some sort of return to the owners of the company, be they private owners or shareholders. Adding in that requirement, it should be clear that the costs of paying the bills, administering the plan and paying a profit to the owners would require more cash than would be needed if the plan holders simply paid the bills themselves.

Thus, it is inevitable that the premium required to support such an insurance plan would cost the policy holder more than would simply paying the bills himself. Granted, this may not be the case for every policy holder, some who consume a lot of resources may end up paying less in premiums than they would for the goods themselves, but they would doubtless be a minority, and the greater their benefit, the smaller the minority. Overall, on average, each individual would pay out more in premiums than the same goods and services would cost him in the market, and so, for each dollar saved by a big consumer, that dollar must be added to the cost of everyone else.

But that is not the only problem with such a plan. As we said above, it is not only essential the event insured against must be unpredictable (as these examples are not), but the event must also be unwelcome. And, again, these examples provide triggering events which, for the most part, are not unwelcome. Eating a meal, washing your car or filling the tank is not something which unduly troubles the average individual. That being the case, by divorcing such actions from any sort of obvious cost, insurance would encourage policy holders to consume more than they would otherwise. With gasoline being effectively free -- as the premium is the same regardless of consumption -- they would be inclined to drive more. Likewise, with car washes effectively free, there is every incentive for policy holders to become overly fastidious about their cars. And the list goes on and on. Admittedly, some of the events insured against, such as collisions or breakdowns, are still unwelcome and the related coverage would not likely be overused, the remaining coverage is for events policy holders have no reason to avoid, and thus would tend to increase consumption.

That being the case, insurers would have two possible responses. First, they could adjust their premiums, charging a rate such that the payments would compensate for the potential consumption of the most ardent consumer, but such a plan would make even more obvious the fact that such insurance is a bad deal for most buyers. With their rates tied to the habits of the most profligate, for most consumers the premium would be clearly far greater than the cost of paying their own bills9.

Since raising premiums to such a level is unlikely to be popular, insurers would try one of two alternate approaches.

The first is to make the events insured against less appealing to the consumer. Since it is not possible to change their nature, the only way to do so is to impose some sort of cost, and this is accomplished by assigning co-pays. The idea is simple, since consumers keep consuming more because it costs them nothing to increase consumption, let us impose some sort of per-use cost, so they will not keep consuming more with abandon. And it works, to a degree. With a co-pay the amount consumed does affect cost, and thus it does act to discourage unrestrained consumption. On the other hand, there are two obvious drawbacks. First, because the cost is still only a fraction of the real cost, while it discourages consumption, it does in a relatively attenuated way, and thus consumption will still be significantly higher than normal. Second, by making the policy holder pay out of pocket, it makes the insurance seem ever less useful. After all, if he needs to pay a co-pay on top of a premium, he sees the premium as more of a burden. So co-pays, while at least partially effective, also tend to reduce the appeal of insurance.

Which brings us to the second alternative, the imposition of rules. As mentioned above, various policies can be used to make consumption less appealing, or at least to place some limits upon how much of a bill the policy holder can run up. In the most basic form, these policies could simply refuse to pay for certain goods or services. In our examples, the car policy could pay for regular gasoline but not premium, or food policies would pay for ground beef but not prime rib. While this would obviously cut out more pricey items, it does nothing to check the total amount of consumption, and so it would pose only a small control on total consumption. Thus, in addition to limiting what will be covered, such policies would also limit the total number of times a service could be used. In our example, let us say, limiting the holder to one car wash a week, or three meals a day. And, if that proved too weak a control, there is always the possibility of requiring approval from the insurer before using certain services, thus farther limiting possible consumption. And the list goes on. Just imagine every restriction you ever read in the description of an HMO plan and you will get the idea. While unpopular, for the most part, such restrictions are still a very effective way to curb consumption.

But even with such restrictions, and even with every cost cutting approach imaginable, we still run up against the one big deal breaker, the problem with any such scheme. Quite simply, if we insure against routine and regular happenings, in other words if we substitute insurance for simple payment for services rendered, in the end, either the premiums will exceed the out of pocket costs for the same things, or the insurer will end up running at a serious loss. And since insurers don't stay in business long operating at a loss, in the end this means inevitably that the premiums for such insurance will cost more than it would to pay out of pocket.

And that is the situation we have with much of our medical insurance. Routine checkups, prescription medication, vaccinations and the like, which form a considerable part of our health insurance business,  are predictable, regular events, more akin to the food or gas payments I described above than the traditional concerns of insurance. And so, as a consequence, we end up paying more in premiums than we would out of pocket for these things.

Now, to a degree this is concealed, but not all that well. Fist, it is hidden by the fact that doctors have a tendency to pad out bills, then "discount" them for people paying out of pocket. It is not mentioned often, and seems a bit unethical, but as insurers -- especially government insurance -- tends to pay only a fraction of the amount charged, they routinely set fees well above what they expect to get in reimbursement. And thus, looking at the "sticker price" for medical services, and comparing to our insurance premiums, we may believe we are getting a good deal. But spend some time paying out of pocket, and it becomes obvious that the sticker price for medical care is even farther divorced from reality than the MSRP for cars10.

And then there is the other part of medical insurance, the part that truly is insurance, that is the amount charged to offset the unpredictable payment of hospital bills for sudden injury or illness and the like. As this true insurance is confounded with the pseudo-insurance that simply passes money through the insurer to pay routine bills, it is hard to tell exactly how much we are losing by using insurance as a way to pay ordinary costs. But, if nothing else, logic tells that, since the insurer has to pay the same amount we do, or perhaps a slightly discounted amount, and must add to that operating costs and profits for investors, there is no way we could pay him less than we would pay out of pocket.

Finally, there is the fact that part or all of our health insurance premium is paid by our employer, and that our portion, if any, is paid in pre-tax dollars, which takes some of the bite out of the premium inflation. However, if we think about it logically, if our employer were not paying for our insurance, he could redirect that money to our salary, since it obviously is figured into the cost of employing us, and so, though it helps to distract us from the true cost, the cost is still there.

So, if our current way of paying bills is such a bad idea, why do we do things this way? The answer is a mix of historical accident and government meddling.

During World War II there were any number of government intrusions into the economy, and one of the most foolish was the effort to freeze wages. As in any state that employs such a scheme, this produced two problems. First, it makes it impossible for employers to compete for employees. Since they cannot pay more to get the best workers, workers end up randomly distributed, with the most efficient companies, or the most strongly felt needs, as likely to go short of labor as the least efficient and least urgent demands. Second, because wage freezes usually also imply low differential in wages between jobs, it also becomes difficult to fill many jobs. After all, the most demanding jobs usually pay more to begin with, and,on top of that, often offer the best prospects for wage increases, as that is what is needed to attract labor. If there is no possibility of a pay raise, and the easiest job pays a considerable fraction of the most demanding, there is little incentive to take on more challenging work, and it becomes impossible to fill any number of upper echelon positions11.

To remedy this, government -- officially and unofficially -- allowed a number of substitutes for wage competition, with companies replacing wages with a number of non-wage forms of competition, such as retirement plans. Among this assortment of wage surrogates was employer paid health insurance. And, since it was being used to replace wages, not only was it traditional insurance, covering the unforeseen, but it was also another way to smuggle in additional compensation, paying for routine medical services traditional insurance would not normally have covered.

That is the historical accident, after which began the government meddling. By making such plans payable in pretax dollars, offering various incentives for employers to provide such plans and otherwise encouraging the continuation of such schemes, the government made it unthinkable that we would ever return to a situation where insurance was truly insurance again. We had turned our insurance into a scheme for funneling our payments to doctors through insurers, and we were not going to go back. And now, with the advent of "universal health care", laws mandating we all possess such plans, and with the government underwriting the purchase of these plans for those who do not receive them from employers or family members, it seems impossible to imagine a time when we would revert to true insurance once again.

However, that does not change one simple fact, that every time we involve another party in making a payment, it increases costs. In some cases (eg paying a grocer rather than negotiating with farmers) the convenience is well worth the cost, but in this case, the truth is, we are not getting anything for our expense. If anything, with the proliferation of rules about what services we can receive, and the the increasing acceptance of insurer gate keepers limiting access, we are actually getting less while paying more. And yet, it seems, whenever someone points out this madness, the public treats him as if he were insane, and insists we not only persist in this madness, but expand it, until it involves everyone.

I just do not understand.


1. See "Redefining Insurance... To Actually BE Insurance", "Medical Reform, An Overview", "The Absurdity of Mandatory Insurance", "Clarification of my Argument for a Free Market in Medicine", "High Cost of Medical Care", "The Devil is in the Definitions (And Assumptions)", "Three Ideas That Never Work" and "Preexisting Conditions".

2. See "Social Security is Not Insurance".

3. It is conceivable a true insurance model could be developed, paying the costs of emergency medical care, the costs of catastrophic injury, or other irregular, unexpected medical costs. It is not medicine itself that is a poor fit for insurance, but rather the attempt to fit routine, regular costs into an insurance model. But both of these topics will be covered in the essay proper at a later point.

4. For those unfamiliar with the term, the net present value (NPV) is the value of one or more cash amounts, adjusted by the present interest rate (or some other expected "rate of return"), allowing financiers to compare payments received at different times, or calculate the purchase price of, for example, a perpetual annuity. It is calculated by taking each payment and dividing by one plus the interest rate per period, raised to the power of the number of periods (C/((1+i)^n)), and adding together the sum of all such adjusted payments. There are special calculations for situations such as perpetual payments, but in general they are based upon this formula. In theory, if the rate of interest and compounding period are accurate, the NPV of a future value should be the amount you would need to invest to get that amount at the given date.

5. This is why insurers will not insure property for more than its value or replacement cost. If I own something worth $100 and insure it for $1000, it would be very tempting to "accidentally" destroy it, collecting the full $1000 after paying only a few premium payments, replacing the item for $100 and essentially collecting a $900 profit, less the handful of payments made. It is also why insurers are reluctant to take policies for unusual situations, such as life insurance on strangers, as the death of the insured would likely be meaningless to the policy holder, making it tempting to hasten his demise.

6. It is more tricky with unemployment insurance than Social Security, as technically unemployment is not supposed to be predictable, so workers do not often complain of paying in more than they receive. And, in the case of unemployment, as many workers never collect, they help subsidize those who do collect. On the other hand, since Social Security is paid for a predictable period, workers would complain if they were paid less than they paid in -- and the public is aware enough of the employer-employee split that even that subterfuge would not serve to hide a lesser payout --so Social Security must inevitably pay out something more than it collects. But, since most of those paying in do eventually collect, there is no large pool of non-recipients to subsidize those who do collect, as there is with unemployment insurance. This is why Social Security is chronically at risk of bankruptcy, saved only by inflationary periods, where loss of purchasing power makes it possible to pay "larger" amounts using devalued post-inflationary dollars. (See "The Rubber Yardstick", "What is Money?", "What is a Dollar?", "Why Gold?", "The Free Market Solution", "When Help Hurts II", "Inflation and Uncertainty", "Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "Bad Economics Part 7", "Bad Economics Part 8", "Bad Economics Part 19",  "The Gold Question, Not "Why?" But "When?"", "Fiscal Discipline", "Putting the Bull in Bull Market" and "Misunderstanding Money".)

7. Preventative care is even more troubling than simple routine care. See "The Problem with Common Sense Solutions".

8. Health care is a bit different, as licensing, insurance requirements for referrals and a number of other features reduce competition significantly, and allow for considerable price inflation. Thus, in these fields it is routine for insurers to anticipate a considerable discount. This sort of price inflation is not possible in competitive fields, and thus would not be an issue in my examples. (Nor, for that matter, would it exist in a less regulated health care industry. As with student loans and university tuition, our defective health insurance scheme inflated prices badly. See  "Denying Reality", "When Help Hurts", "The State Versus Universities", "Help and Harm", "Medical Regulations" and "Medical Regulation II".)

9. I actually saw a real world example of such a policy. At one time I picked up a brochure for pet health insurance, and was shocked at how high the premium payments were. Then I thought about it, and realized that there are a considerable number of pet owners who are overly cautious with the health of their pets, who would happily increase the number of preventative procedures and routine checkups. As a result, the policy was established with the habits of such individuals in mind, and thus was priced absurdly high for anyone who had a more modest approach to pet health care.

10. Actually, this is not just the case for those paying out of pocket. Many times my insurer will cover only part of the amount charged, and more often than not my doctor will "forgive" the remaining amount, or all but a trivial sum. It is not universal, but it does seem to occur quite often.

11. See "The Basics", "Employment A to Z", "The Cart Before the Horse, or, Some Thoughts on the Iron Law of Wages", "The Sado-Masochist Society, or, Would Primitive Communism Work?" and "Socialism, Communism, Democracy, Authoritarianism and Freedom - Is It Possible to Have a Non-Authoritarian Socialism?".

Tuesday, January 26, 2016

My Irritation with Supposed Skeptics

On the face of it, I have no real objection to professional skeptics. Debunking pseudo-science, conspiracy theories and the like is something I do here fairly often, so I should, in theory, be quite comfortably in their camp. Even the objections I have to some of their stands seeming a bit didactic, rather than skeptical (eg arguing skeptics MUST be atheists*, or calling those rejecting scare tales of AGW and the "hockey stick" nonsense "deniers"**), should not make me completely opposed to them. But there is one thing I have discovered about professional skeptics which truly makes me reject joining their ranks.

There was once a quote heard among socialists, communists, liberals and others. "There are no enemies to the left." In short, if someone is moving society leftward, he is an ally, no matter how much you disagree with his methods, his specific approach, his policies and so on. In practice, it never really worked out, it was mostly used by communists to curry support among more moderate leftists, while the far left still completely repudiated their "reactionary" liberal allies. But the theory did exist, and, in a way, it reminds me of what I find objectionable about skeptics.

You see, I have recently noticed that skeptics have a strange blind spot. They are willing to accept nonsense***, so long as the goal is "noble". This came to my attention mostly in terms of performer Derren Brown. It seems since Brown is willing to debunk mentalists and psychics, supposed skeptics completely ignore the fact that he has, through his act, created equally absurd beliefs in NLP and other pseudoscience.

Now, people claim Brown "admits" to using trickery, but this is something of a dodge. He admits to using "trickery, deception and suggestion", and it is that last one that leads to my objection. People see Brown and think he really does somehow hypnotize others, or "force thoughts" into their heads, where, in truth, he is using simple sleight of hand, or the stage hypnotist certainty an audience member will play along. But, because of his NLP patter, and this disclaimer, we hear people say "He admits it is all trickery, he just uses suggestion", and fail to notice, they have themselves been misled.

And that is what offends me. Because Brown opposes the "right" people, supposed skeptics refuse to denounce his own misleading act, which itself encourages belief in new age nonsense such as NLP. And that, along with a few other objections, would prevent me from ever seeing myself as a skeptic.


*  For a discussion of this, see "Atheism's Circular Reasoning", "Is The Flying Spaghetti Monster From Canada?", "Materialist Arrogance" and "A Bit Disappointed in CSICOP - The Difference Between God and UFOs". It was always my belief that God, and his existence or nonexistence, not being falsifiable, was not a proper question for scientific inquiry, and thus outside the realm of scientific debate supposedly proper to skeptics. To hear them embrace outright atheism seemed to me a bizarre position for a group demanding proof in support of any espoused belief.

** I am not denying the climate changes, or even that man may have some effect on the climate. What I argue is that (1) the "hockey stick" by hiding, for example, the Medieval Warm Period, cannot be an accurate model and (2) that most current models do not track well going backward in time and thus, I am not convinced we know enough to accurately predict the future climate or man's effect on it. For more details see "A Brief Thought on Skepticism", "Why "Hope for the Best, Plan for the Worst" is Bad Policy", "Some Global Warming Links", "Debunking "Debunking Global Cooling"", "Very Quick and Simple Logic", "Skeptics? Really? I Beg to Differ" and "More About the Hockey Stick Graph".

*** Then again, in accepting the obviously misleading "hockey stick" and supporting M&M even when they refused simple peer review requests, it seems many scientists were willing to accept bad scientific practices if they liked the results, so maybe I am being naive in thinking the truth matters in academia (or to skeptics) any longer.  Perhaps skeptics have gone from debunking obvious fallacies to doing so part time, while spending more of their time supporting specific agendas, such as atheism and AGW.


Update (Later the same evening): Apparently I am not alone, someone else is complaining about the impression Brown gives that NLP works. And, despite the claims of some that he "admits" to trickery, the number of "NLP is real" and "he uses suggestion" comments show this is pretty much true. Also, I found a copy of an article I found quite interesting on, apparently the original is no longer available.

Saturday, January 23, 2016

Hugging You to Death

This title comes from a conversation I had with my son. He was asking me why I was not a fan of the sitting president, and I explained that, to my mind, his policies, even by the measure of his own intentions, did not work, as they failed to produce what he promised. This led me to ask "Is it a good thing to do something with good intentions, but having bad results? Is it a good idea to hug someone to death?" And, having said that, it struck me that is the best characterization of the Democrats' policies. Many of their goals (not all, but many) are unobjectionable, at least as long as you keep to the really big, broad goals.  Everyone would like us all to have more wealth, to have health care, to earn more and have to work less, and so on.The problem is, the methods they use to achieve these measures -- mostly simply decreeing they shall be so -- tend to produce exactly the opposite results.

For example, in terms of "access to health care", congressional records of the Medicare/Medicaid debates show there was a general consensus health care was generally available, the problem was that people suffered the "stigma" of having to ask for free or reduced cost care. So, to avoid that "stigma" the government began to dabble in regulation. And now, fifty-odd years later, we actually have less access to healthcare, and have created more people with inadequate care, than existed in the 60s. In short, we created a problem that did not previously exist, all for fear of some people being embarrassed.  THAT is an example of hugging people to death.

Or, let us look at labor. The 19th century, by and large, did not have unemployment. Some jobs were unsafe, in fact many were, but industry was young, and life in general was less safe. Wages were low in a lot of jobs, and some jobs treated workers pretty poorly, but no worse than they had been in the past, and things were improving. As overall wealth increased, the demand for labor did as well. Wages -- either monetary or at least real* -- increased, and so did safety. Child labor -- which had existed since the dawn of time, just ask any farmer -- was becoming less common, not due to government, but because families could afford to support idle children (a novelty for poorer families throughout history). But, the pace was slow, and there was political capital to be made by riling up workers, and so we got the government involved. And after years of unions and regulations and minimum wage, what do we have? Chronic unemployment. Something unheard of throughout history until the modern age. Granted there have always been poor, but those who were poor and not working were those who could not, those without limbs, or with health problems. The only eras that saw chronic unemployment in history were those, such as the late Roman empire, where fiddling with the money and fixing prices created melt downs. But unlike our age, they usually collapsed of their own weight pretty quickly. It took the modern age to find a way to make unemployment a way of life. THAT too is an example of hugging people to death.

The list can go on, but I think the point is clear. The world is not perfect, and I doubt it ever will be. Change is slow, and improvement takes time. Sometimes it stumbles, and things get a little worse for a time. Sometimes improvements lag. But, in general, allowing people to follow their own desires without any meddling tends to produce as close to the ideal results as is possible in our imperfect world. It doesn't reach perfection. It doesn't get to whatever point it does reach swiftly. And people will suffer along the way. But people suffer along the way under every solution. The question is whether we will make everyone more miserable to make a few suffer a bit less now, or recognize life is not perfect and allow each and every one of those people the same opportunities to make things better. And, history shows us, if we pick the latter, in the process of resolving their own problems, people tend to help their neighbors as well. Not out of kindness -- though sometimes that is the case -- but because the free market route to wealth require fulfilling the wants of others. So, if you would be rich, you have to make a lot of other people as happy as you can. So, without the state messing things up, the simple nature of the free market, funnels our most base instincts into courses of behavior which benefit others. And that cannot help but make things better. And it does it, not by fancy rules, or difficult regulations, but simply by protecting individual rights to life, liberty and property. Once those are protected, the state can step back, and the rest will, sooner or later, work itself out.

Or we can adopt the alternate solution, and try to resolve, in detail, each and every problem that arises, pile answer on answer, rule on rule, regulation on regulation. Try to balance the interest of every party, manipulate each solution to produce an optimal outcome. In the end building a massive mountain of laws, with an army of regulators, enforcing a mass of contradictory rules, with each individual fighting to make sure his interests are not stomped upon. In short, we can hug everyone to death.


*  The mid to late 1800s saw a period of falling monetary wages, but with an even greater rise in the purchasing power of gold, meaning, while nominal wages were falling, real wages were actually rising. It was basically the opposite of our ordinary inflationary model, the one we are so used to, where our money wages go up impressively, but inflation means that, in truth, our real wages stay largely the same or even drop.



I don't mean to suggest the Democrats are alone in their foolishness. Many Republicans would adopt their own version of hugging others to death. And others, to prove they are tough and strong would adopt policies which are just as destructive and harmful. And some would sacrifice necessary rights in the name of morality. Or try to deal with pet issues by making exception which open the door to all of these ills. Both parties, unfortunately, seem to have their problems. Then again, I am hardly a fan of Libertarians either, both because imposing freedom from above is a nutty policy (See "Why I Am Not A Libertarian") and because many have adopted a lunatic mix of isolationism, liberalism, anarchism and libertarianism that is clearly unworkable, yet oddly supported by increasing numbers. (See "The State of Nature and Man's Rights", "Learning From Crows" and "Societal Evolution".)

Thursday, January 21, 2016

Did Deregulation Fail?

Often when discussing the 1980s and 1990s we hear the allegation that some incident, often the S&L crisis, but sometimes others  -- the deregulation of public utilities, especially electricity, being the second most popular example -- that deregulation failed, leaving us in much worse shape than we had been in under the "mild" regulatory environment of the 1960s and 1970s. And, of course, this is quickly followed by the argument that what is needed to cure our current economic woes, is not just a restoration of all those old regulations, but similar regulation of other areas of our economy.

Memories of such arguments came to me several times while I was writing my last essay "A Passing Thought on Cell Phones". Obviously, the topic -- how the breakup of the AT&T monopoly lead to the spread of cell phones -- was part of that, but that was not all there was to it. You see, the phone industry is one of those examples sometimes offered as proof of the failure of deregulation. Of course, it depends on the economic climate. When rates are low, and phone companies are stable, we hear little, but when some big telecom company crashes (this was an especially common argument during the dot com bubble's demise), or when phone rates rise, or service quality declines1, suddenly we are deluged with claims that the state of telecommunications is all due to sinister Republicans pushing their ideological agenda by deregulating the phone company.

Obviously, I am not convinced by such arguments, as I have made clear in other posts2. But since it does come up so often, I figure it is worth examining the various types of deregulation we experienced, especially through the 1980s and 1990s, to ask what were the positive and negative effects, and, more important, to ask what caused the problems we experienced, if any.

Actually, it is something of a mistake to imagine deregulation began in the 1980s. Carter actually began removing extensive Nixon era price controls during his presidency, leaving in place only a handful of controls, many on oil3. Of course, this had a mix of good and bad outcomes, though overall it was positive. Nixon had implemented the controls in an effort to prevent massive inflation when he took the dollar off the gold standard completely. However, though people could not exchange dollars for gold, the fact that gold could still be purchased for various uses meant there still was a spot price for gold, and people could see that from 1971 to 1981 there was a 600% rise in prices relative to gold. Thus, rather than creating an economic boon, as the closing of the gold window was supposed to, it created recurring shortages, beginning with the early 70s oil crisis. Of course, when these price controls were removed the result was massive "inflation" at least in terms of dollars4, but it was a necessary fix, as the only other alternative was to keep prices artificially depressed, with ever increasing shortages. This is not an attempt to exonerate Carter for "stagflation", as he met the inflation brought about by his removal of controls with still more "pump priming" inflation, exacerbating the situation, and setting the stage for the S&L collapse as we shall see later. But I can say the blame is not entirely Carter's, Nixon5 is to blame as well.

But that was a single incident in a decade otherwise known for increasing regulation and centralization -- such as the creation of the Nuclear Regulatory Commission, the Department of Education, Housing and Urban Development and a host of other massive, national-level agencies. So, let us ignore for the now the one case of deregulation in the 1970s and look at the 1980s and 1990s.

This era was unusual in that the trend toward deregulation was not consistent, and was not even found in a single level of government. In much of the 1980s, deregulation was the official policy of the federal government, and most efforts were centered there, especially in reducing and removing the powers granted to new Carter-era creations (a topic we will not discuss much in this essay6). But, in the late 1980s, and early 1990s, the impetus behind deregulation seemed to die, with the Bush administration giving no indication it would expend its limited political capital on efforts to deregulation. It was only with the beginning of the Clinton era that we see deregulation begin to reappear, but initially not at the federal level, but rather in the states. Granted, by 1994, with the change in congressional makeup, deregulation became a federal concern once again, but even then, it was quite a different world from the 1980s, with many efforts originating in the states, before moving to the federal level, or, in a few cases, remaining purely state efforts without any federal involvement7. And then, sometime in the late 90s, around the time of the dot com crash, the more vocal public support for reducing government seemed to fade away. And with it, most of the political influence required at the federal or state level to make such changes. But, for that period of somewhat less than two decades, there were a number of changes made that substantially reduced government power, and gave us a real end to many types of regulation.

So, what particular deregulatory efforts should we examine? Given that there were quite a few, it would be foolish to cover every deregulatory effort, so, perhaps it would be best to cover the most well known, and, among those, pay special attention to those which have been, at one time or another, been put forth as failures of deregulation.

Obviously, the first of these would have to be the deregulation of banks, especially the FLSIC. As this was involved in the subsequent crash of the S&L industry, it makes a great candidate. Second, let us look at the deregulation of power and other utilities. Though a much later effort, and mostly done at the state level8, it too is often held forth as evidence of the ways deregulation harms customers. After that, we will need to look at some less obvious candidates. Airline deregulation, for example, did not bring any massive failures such as the S&Ls did, but many point to continuing issue with over crowding, inadequate flight paths, poor service, bankrupt airlines and so on as evidence that deregulation was a failure. And the same is sometimes said of phone deregulation. Though more popular than airline deregulation -- and largely forgotten in today's world -- at one time phone deregulation garnered quite a few complaints. Turning to another state project, or one where the states had much more of a role than the federal government, let us look at school voucher programs. While not a traditional deregulation, it achieves similar results, and has the same aims, and, most important, produces the same complaints, so it is another good subject for our essay.

I could probably come up with another dozen examples if I wanted, but for now, let us stick with this list, if only to keep our essay to a reasonable length9.

So, let us start with the Savings and Loan crisis. This is the argument most often offered to show how deregulation failed. According to the standard argument, greedy bankers managed to manipulate friendly politicians into removing various regulatory reserve requirements, as well as eliminate oversight of investments. Once this was done, these bankers, without a thought about their depositors, undertook horribly risky investments in order to get high returns. In the end, these investments failed, and the S&L industry collapsed. But it all could have been prevented simply by leaving in place the original regulations.

In this case, the story is actually not too far from the facts, though it is wrong as to motivations, and forgets the real forces driving the fiasco, but in the facts alone, it is not too far off. And, unlike other cases where I will argue the supposed failure of deregulation conceals significant benefits, in this case, there truly was a problem, though, in the long run, it was a problem that would have materialized eventually in any case, so it has nothing to do with deregulation.

To make this argument easier to follow, let me lay out the main issues involved in the collapse. First, quite simply, the S&L industry, as created by statute, was of such a nature that massive inflation would inevitably cause its collapse. So whether deregulated or not, the S&Ls were doomed by the actions of Nixon and Carter. Second, the deregulation itself was not complete, restrictions were removed, but deposit insurance was left in place, making it easy for bankers to take excessive risks. Some may have done this out of greed, but as mentioned in our first point, inflation was also ruining the bottom line of S&Ls, making high return investments the only hope of staying afloat. Third, the entire capital market was suffering as well, thanks to massive inflation, gas crises and economic stagnation. Conventional banks were somewhat supported for a time by the ability to add an inflation premium to interest rates, as well as borrow at a prime rate set far too low to cover inflation. But S&:s were largely stuck with long term mortgages with pre-1970s interest rates, which no one wanted to buy and which had negative real returns thanks to inflation. Couple that with the failure of many of the risky investments attempted to stave off collapse, and there was no way the S&L industry could have survived.

Which brings me to my main argument, nothing could have saved the S&Ls. With their reserves made up largely of low rate, long term instruments such as mortgages, their revenue was negative, and was only going to get worse as inflation continued to rise. The deregulation was simply an attempt to hold off this collapse, though an ill-advised one. Not because deregulation is a bad idea, but because nothing could have saved them, they were going to crash from their very design. And, to make things worse, by only partially deregulating, leaving insurance in place, the stage was set for the pressures on bankers to inspire them to make risky investment which would eventually make that crash much worse.

Or, to put it more plainly, the S&L deregulation was not a true case study of deregulation. It is akin to taking a terminal cancer patient and putting him on an exercise regiment and then arguing his inevitable death proves the uselessness of exercise.

Electrical utilities are a bit more difficult to discuss, as there are so many individual cases. I wrote before about the case of Maryland10, where the state paid our previous monopoly firm a stipend to compensate for taking over the lines,a stipend which the statue predicated upon them continuing to charge set prices, prices far below what the remaining firms could charge. Thus, for almost 10 years, competitors were closed out of the market, and, when the stipend finally ran out, and prices rose to market prices, it was argued as a failure of deregulation11.

I don't recall the problems of many other states, though I do recall California had tremendous problems with brownouts, and the need to buy expensive power from the grid well outside of the state. Then again, given California's environmental regulations, and opposition to building new infrastructure, both before and after regulation, these problems were unavoidable, and were taking place before regulation. In short, they were hardly the fault of deregulation, they were the fault of excessive regulation.

And, in truth that is the problem with many schemes to deregulate utilities, in most cases, the deregulation is partial at best, with the government still playing a considerable role, from environmental regulation, to sometimes still setting rates. Obviously, the transition from a monopoly utility to a truly competitive market in electricity or gas or water would take some work, and may not occur all at once, but still, in most cases I have examined, the amount of remaining regulation is still quite large, making claims that deregulation has failed rather amusing.

The deregulation of airlines is a bit harder to discuss, since the complaints about the supposed failure of deregulation are not as frequent any longer. But still, when there were a number of airlines merging or going bankrupt, there were any number of pundits who argued that deregulation had destroyed the airlines. Similarly, today, from time to time, when someone discusses the shortage of new airline routes, the maxed out capacity of air traffic control systems12, and so on, we will sometimes hear once more that the problem is deregulation.

To answer these objections, we need to make two observations, or rather to deal with each objection separately. The first argument, that airline failures was due to deregulation was absurd, as airlines failed prior to deregulation as well, and, comparing airlines to other low-return, very high capital industries of the same time show that they had no more failures than other companies of a similar nature. Then again, even if they had, for a time, suffered from more closures following deregulation, that would have been neither surprising nor upsetting. In many cases, cartels and monopolies created by regulation allow companies to stay in business even when they should be closed due to relative inefficiency13. So, when regulation ends, there is often a period when inefficient firms are liquidated or bought out, and either new competitors enter the market or existing firms expand. Thus, seeing an increase of bankruptcies would not have been upsetting had it occurred.

The second argument is more interesting, as it suggests that the free market, far from being more efficient, is actually less efficient than regulation. Why else would we suffer from such shortcomings after deregulation?

But, as with the case of utilities -- but even more so -- the reason for the inefficiency, the lack of resources and the inability to meet new demands, is not that the free market is failing, but rather that the airline industry is far from deregulated. Just think about it. The FAA oversees almost all aspects of aviation. Airports are generally publicly owned, or, if not, then highly regulated. Air traffic controllers are overseen by the government. TSA is a government agency. Flight paths are assigned by the FAA. New airports are approved or denied by the FAA. And so on and so on.

Does this sound like an industry that has been deregulated? Yes, some of the most onerous regulations were removed from airlines in the two decades we are examining (and a few years earlier as well), but there remain ever so many more. Not to mention a host of others imposed in the aftermath of September 11, 2001. All of which makes it meaningless to examine airlines as an example of the failure or success of deregulation.

Phone deregulation is one of the few areas where we see deregulation which comes close to actual deregulation. Granted, the government still exercises a lot of control over broadcast bands14, and there is still regulation of some aspects of phone service -- such as the requirement phone numbers be portable, disabled cell phones can dial 911 and so on -- but for the most part, phone companies are a true case of deregulation, and, for the most part, quite successful.

I admit, during the earlier days of phone deregulation, we heard complaints about phone service sales calls, bout the failure of a number of phone carriers and so on, but these are trivial complaints. Sales calls are hardly a real cause for worry. And the failures of a number of phone carriers came, as anyone could have predicted, from the inexperience of new companies attempting to exploit a new market. It would be surprising had there not be some bankruptcies.

Which brings us to the final topic, school vouchers. This is an oddity, as most specific programs were claimed as successes, even often by those who opposed them. Yet, time and again, school systems will argue that voucher programs "as a whole" have failed15.


1. This is similar to the arguments we hear about global warming whenever there is a particularly long or hot heat wave, or a particularly severe storm. (A practice I parodied in "Mandatory Global Warming Post", "Global Warming Revisited", "Oh That Global Warming", "Global Warming Watch", "Odds and Ends", "Global Warming Watch, Again", and discussed a bit more seriously in "The World's Most Stupid Bureaucrat".) Not that it is unique to either those promoting theories of anthropogenic global warming or advocates of regulation, it seems every group I could name is susceptible to the simplistic argument founded upon one current and highly publicized example. (See "The Plural of Anecdote is Not Data".) But these two groups do seem to be particularly frequent promoters of such arguments.

2. See "How To Blame The Free Market", "Those Greedy Bankers", "Greed and the Price of Oil" and "Killing the Railroads".

3. The outcome of leaving the oil price controls in place, which mostly made "old" wells more profitable than "new", was to prevent exploration for new reserves, and cause an ever increasing dependence on foreign imports, setting the stage for the late 70s oil crisis.

4. Dollar figures often mislead. People knew that there were goods they had to sell at a loss, thanks to the price controls. And so we had shortages, even though there was no official inflation, as prices were pegged at set points. Removing those pegs did not create the problem, it just allowed people to adjust prices to reflect market realities. See "The Rubber Yardstick".

5. And the same can be said of FDR for beginning the process which made it illegal to hold monetary gold, eventually allowing us to divorce money from gold. And, even earlier, Wilson can be blamed for creating the Federal Reserve, which made the whole fiasco of fiat currency possible. See "Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"", "Bad Economics Part 19","Fiscal Discipline", "Putting the Bull in Bull Market", "Why Gold?", "The Free Market Solution" and "Misunderstanding Money".

6. Well, to a degree. I will obviously touch on some of these topics, as efforts such as education vouchers relate to reducing the influence of the Department of Education. But for now I will not look at efforts which had an explicit goal of reducing the scope of these departments.

7. In a way, I suppose I should be optimistic about this, as it indicates a more federalist approach to government, with the states bearing the burden of government reform. (See "Reforms, Ideal and Real", "The Benefits of Federalism", "Conservatism, Incremental Change and Federalism", "Power and Disorder", "Redundancy as a Protective Measure", "Adaptability and Government", "Inflexibility and Bureaucracy" and "Why Freedom is Essential") But I am not so sure that is the truth behind these changes. Having lived through the era, it seems far more probable that those local politicians who won their way into federal office gradually gave up their commitment to deregulation, leaving the states on their own. Of course, since there was, for a time, strong public support for such reforms, many times federal politicians would step in and claim credit for state successes, but in many cases it is very clear who truly pushed a project through.

8. Obviously, to some degree the Department of Energy was involved in these efforts, but for the most part, specific details were decided by the states themselves, which is why outcomes were so varied.

9. The list of other possibilities is quite long, though some stretch beyond our time limits. The death of the ICC, the side lining of the NLRB, the weakening of the FCC (though that was a joint effort by both parties, with each removing elements it found objectionable), the break of Conrail and overall deregulation of rail freight, and so on. If you have a particular topic you want me to examine, let me know and I may write a follow up on those new subjects.

10 See "How Did the Press Miss This?" and "How To Blame The Free Market".

11. This was a particularly clever political move as well, since most of those who passed the bill, and especially the governor who signed it, no longer held office when the bill came due and prices rose. In fact, to the joy of the Democrats, the price hike hit during an almost unheard of Republican governorship in Maryland, causing blame to fall on a governor, and a party, which played no role in the deregulation. But, as deregulation is seen as a Republican issue, the smear stuck.

12. I recently attended the ACSAC conference in LA, and this topic was discussed in one of the LAWS sessions. It was interesting to hear the requirements imposed on developers of air traffic control and collision detection and prevention systems.

13. See "Anti-Business Businesses", "Bad Economics Part 11" and "Bad Economics Part 19".

14. Personally I oppose vouchers, for reason I explain in "Never Ascribe To Evil, A Discussion of Education", "Why Vouchers are not the Answer" and "You Don't Drown in a Glass of Water - Vouchers Revisited".



When I started this, I forgot that the airline deregulation act was enacted in 1978, and thus a Carter era measure. On the other hand, I am hardly alone, as most people seem to think it was part of the 1980s era of deregulation and blame any shortcomings on Republicans. It doesn't really change anything in my essay whether it was a measure from the 1970s or 1980s, as my premise is not predicated upon the party responsible, but simply whether or not deregulation is advantageous. Had Carter enacted every measure mentioned, or Clinton truly been responsible for those parts of the Contract with America he tried to claim as his own, it would not change my basic premise. Thus, I did not feel a need to go back and correct my initial version, though I did want to add this note to point out my small mistake as to date.

For Cruz and Rubio

Since this "natural born citizen" nonsense has popped up again, I have decided to provide links to all the essays I wrote about the "birther" arguments about Obama. Since they apply to the cases of Rubio and Cruz every bit as well, I figure it is time to bring them back:

Think of the Impresison You Make *
Our Donatists *
On The Other Hand... *
Picking Your Fight *
To Clarify - Birther Controversy *
An Interesting Question
A Small Update on the Birth Certificate Controversy
Birth Certificate Controversy Revisited
One More Post on the Birth Certificate Controversy
Really, The Last One on This Topic
Wrong is Wrong
A Few Comments on the Berg Ruling *
A New Take on an Old Topic
A Brief Follow Up
Slate Imitates Me, But I Really Don't Mind
Legislative Intent
Not A Smoking Gun
Can Hawaiians Travel Overseas?
Maybe Obama Was Born in Gulf Breeze, Florida
An Impossible Argument to Lose
While I am Away... (A Question on "Natural Born")

And, since the "birthers" are nothing but a particularly bizarre form of conspiracy theory, here are all the links I could find to essays on conspiracy theories:

Sinister PNAC? Hardly!
Food For Thought
Bill Clinton Murdered Leon Trotsky!
Idiots or Geniuses?
Dismissing Conspiracy Theories
Our New Paranoia
259 Lies?
Isn't History Enough? *
The Appeal of Conspiracy Theories
A Shortcoming of Conspiracy Theories
Amusingly Left Wing *
Absurdities on Oil
Your Fellow Man *
Revival of an Old Absurdity *
A Question for Those Who Believe "Bush Lied" *
Tips for Conspiracy Theory Buffs #1 *
Rewriting History Concerning World War II *
Those Darn Jews *
Those Darn Jews Part 2 *
One Last Time *
Conspiracy Theorists' False Logic *
Can They Both Lose? *
All In How You Say It *
Conspiracies Vs. Conspiracy Theories
Sorry, But Jews Aren't the Problem *
The Zionist Conspiracy and Israel Lobby *
Life is Strange *
The Delusional World of Oliver Stone *
Mumia, the DaVinci Code, Full Body Scans, and Loose Change - How Conspiracy Theories Arise
Conspiracy Theories -- The Exceptions *
All Conspiracies Great and Small
Katrina and BP
I Have To Laugh *
Conspiracy Theory Enters the Mainstream
Amusing "Truths"
False Flag Theories and 9/11
Some Thoughts About a Specific Conspiracy Theory, or Maybe Two
Conspiracy Theories
Self-Sustaining Beliefs
Self Perpetuating Delusions
The Appeal of Conspiracy Theories
Backwards Logic
Ritual Abuse, Backwards Logic and Conspiracy Theories
Backwards Thinking and the Number of the Beast
Technophobes and Conservatives -- The Risk of Assumptions
The Futility of Blame
Faulty Logic
Deceptive Spectra
More Persistent Myths
A Brief Thought on Skepticism
GMO Revisited - As Well as Hormones, Soy, Phytoestrogens, and a Host of Other Food Scares
The Gadarene Swine Fallacy
Blood for Oil
Those Greedy Bankers
Please Get Your Facts Straight
The Great "What If?" - Advertising, Gullibility, Education, Capitalism and Socialism
Deadly Cynicism

Don't worry, I am not going to start filling the blog with nothing but lists of links to old essays, but in this case, I have said so much, there is not much point in repeating myself.

* These links still point to the Townhall blog links and thus do not work. I hope to change them over the next few days as I copy these old essays to this blog, but for now they do not work properly.

Monday, January 18, 2016

A Passing Thought on Cell Phones

I was speaking to my son today about cell phones. A friend had told him some study said the average American spent 2.7 years of their entire life on a cell phone, and -- apparently having inherited my skeptical nature -- he was dubious, asking me how long cell phones had existed. I explained that, in this case, no doubt they were taking current usage data, based on the past year, or several recent years, and extrapolating. However, his interest had now shifted from the specific question to a more general interest in the history of the cellular phone, and so I told him about car phones, and "bricks", the 90s flip phones, and my phone that was about the size of two largish TV remotes glued together, as well as the old Motorollas with the "walkie talkie" function, and the yellow-and-black displays which served as the first attempt to move beyond simple telephone services.

What struck me as I told the story was how long cell phones, or their car phone predecessors, had existed prior to their explosion into the mainstream, and, even more fascinating, how long the technology had existed which would have allowed some form of cellular phone1, and yet remained unexploited.

And then it struck me, the beginnings of the cell phone explosion took place not too long after the break up of the phone monopoly2. Before anyone accuses me of over-simplification, I agree that this is not the whole story, nor is it the single cause for the sudden growth of cell phones. However, if we look at the technology, most of the tech used in early cell phones was available a decade earlier. Perhaps in the early to mid 1970s, and certainly in the 1960s, the devices would have been far too bulky in pre-transistor days. (Or at least in the days when transistors were more costly and less reliable.) But by the mid-1970s, the car phones could have been moved out of the cars and into the users' hands if there were an impetus to do so.

So, why was the force lacking which would have inspired this innovation?

I would argue it is, quite simply, the lack of competition. The government so often tell us of the problems of trusts and monopolies3, and yet, when government regulations create these monopolies, they seem to forget their own warnings4. And yet this example gives a perfect example of the way a coercive monopoly (see n. 3) produces the very same negative effects the government -- and much of conventional economics -- ascribes to all monopolies.

The first thing we have to examine, to understand why a monopoly would work against innovation is that government created monopolies usually have their rates, fees and other sources of income set by statute or some regulatory body. I suppose this is the one concession the government makes to recognizing that the monopolies they create might have negative consequences5. As a result, the utilities and other monopolies cannot count upon being able to turn a profit on their services, or, if they can be sure of some modest profit, they cannot count upon rates being set in such a way that the profit provides a particular rate of return.

We can see the consequences of this quite clearly in the case of cell phones. I know I said the technology existed, and I stand by that argument, at least in so far as the essential elements existed. However, there was a lot of innovation that would still have been required to both make cell phones portable enough to attract users, and cheap enough to make it a service for the masses. Prior to this, where a private firm would have marketed it as a luxury service,  with the high price being used to provide funds for future innovations, a public utility would be on uncertain ground. Perhaps regulators would allow them to charge enough, perhaps not. Nor is that early innovation the only worry. Besides developing new technology, there is also considerable infrastructure as well. There are new towers, new DDD services, capable not only of standard routing, but of finding the identity of the incoming caller. This is very costly to develop, to build, to test, and, beyond those initial costs, also costly to maintain. And thus the phone company must be guaranteed that, at every step of the way, regulators will allow them to charge enough to pay for all this research and infrastructure, as well as provide a buffer in case income falls short at some time. That is a very uncertain proposition. A private firm would simply set the price, and, if the product could not support the price, then discontinue -- as such problems would become obvious early in the process. But when prices are set by regulators, there is no way to know if prices might suddenly change at some future point.

Of course, it was risky for private firms as well, especially in the early days of cell phones, but they also had a reason to assume that risk. With phone companies vying for customers, anything which attracted them to your lines was a boon, and providing the best cell service was one of those ways to attract customers.

But for a monopoly phone service there was no such incentive. If customers did not have cell phones, they would use one of the pay phones you also owned. Or call from home, or the office, again, using your service. Granted, the convenience of call phones might have been worth a slightly higher fee6, but there was, as we stated before, no guarantee cell phone service would be priced high enough to make it worth the risk. And thus, in the end, a monopoly phone service had little reason to bother developing cell phones.

I know some will doubt this argument, thinking it overly simplistic, or thinking I underestimate the technical requirements, but I disagree. Yes, it would have required some innovation, but with sufficient incentive it would have been quite possible. Of course, I would never say the monopoly was the sole factor preventing cell phones from seeing widespread use, but I would argue it was a significant factor.


1. In essence, there is little difference between a cell phone and the radio phones used by the military for a very long time. To push the most extreme requirements, once phone technology allowed for automatic DDD rather than switchboard operators, the technology for basic cell phones was in place. And we can see this, as the pager is basically a cell phone minus voice. The same technology that carried signals to pagers could easily carry audio. And to reverse the process, allowing outbound calls, and identifying the caller, involved no more than the call routing technology that replaced the operator. I grant, there is a bit more to it, but not very much. Basically, the requirements for developing a primitive (and admittedly bulky) cell phone system were certainly available by the 1960s, and probably could be argued to have existed in the 1950s, at least in some more developed areas (DDD having been first implemented in a handful of New York exchanges in 1951).

2. To clarify, when I say "cell phone explosion" I am referring tot he first of two explosions. Many recall more clearly the more recent one, taking place between 2000 and 2010, when cell phones began to take over the functions once performed by PDAs, as well as incorporating ever more feature-rich web applications. The explosion to which I refer is the earlier one, which happened between, approximately, 1985 and 1995 (more or less, maybe 1987 to 1997 if we want to keep it a decade long), when cell phones replaced pagers as the basic form of mobile communication, when "car phones" vanished, and cell phones stopped being a luxury item and became a -- still somewhat expensive -- commonplace, at least in most urban areas.

3/ I would not entirely agree with the state in this regard, even though I am writing about the harm done by a monopoly. You see, I believe monopolies can be harmful, but only when they are coercive, uncompetitive monopolies; that this, when a monopoly is forced upon the market by the power of government or some other coercive force. If a monopoly were to be formed due to the competitive ability of a firm, if it were to drive out all competitors because of its ability to deliver cheaper and better service, then there is no harm done. It is only when the monopoly is created by non-competitve forces. (See "Imperfect Competition, Abstraction and Anti-Trust", "The Problem of Antitrust", "Consumer Protection, Cartels and the Failure of Regulation", "The Basics" and "Competition".)

4. See "The Difference Between Public and Private, Or, The Real Monopolies and Cartels". See also "Government Quackery", "With Good Intentions", "The Endless Cycle of Intervention", "The Cycle of Compassion", "Sleight of Hand", "The Secret of Success, or, Why Government Fails", "When Help Hurts", "When Help Hurts II", "Denying Reality" and "The Gadarene Swine Fallacy".

5. Oddly, this is not universal. For example, the sport franchise monopolies (eg MLB), which the government ignores, in exchange for being implicitly granted a greater say in operations than would be normal, does not have any government body overseeing prices. I am not sure exactly why this is, but I shall examine it in the future.

6. Also recall that, even as late as the breakup of AT&T, many people would rent the physical devices rather than buy them. Thus, it is likely cell phones would have been leased under a similar program, cutting off one possible means of deferring costs, and an especially important one early on when hardware was a significant part of the cost of the service.



After writing this, I wondered if I might not be jumping to conclusions, makiing assumptions based on coincidences of dates, along with a theoretical framework explaining those coincidences, which was not valid. So I looked up articles on this topic, and, surprisingly, found several essays (here and here) where those with much more knowledge than myself came to the same conclusions.

Saturday, January 16, 2016

A Revealing Comment

I was reading discussion boards on IMDB recently, when I came across a comment that struck me as quite interesting:
Would I like to see more women of color in Hollywood productions? Yes. But unlike corporate affirmative action, casting choices is never as clear-cut. There are many factors to consider, most importantly "who's the best fit for the role?", personality-wise. 
What makes this interesting is precisely how little comment it produced. Hardly anyone batted an eye at it, as if it were self-evident, common sense. In fact, the only objections seemed to be a few who objected to allowing an exception for the entertainment field. Otherwise, the basic premise seemed to be accepted without a second thought.

So, why is this so interesting?

Well, quite simply because it shows exactly what mindset underlies affirmative action, and makes it clear why it is so harmful. Just think about the statement: Actors need to have certain qualifications, there are many factors in picking an actor, and thus we cannot impose simple-minded affirmative action on Hollywood casting.

On the other hand, in mere business, when hiring for simple tasks such as corporate executives, stock brokers, attorneys and so on, there we have no other factors to consider, and so we can simply apply head-counting logic, forcing companies to allocate positions by race, sex or other factors.

Does anyone see the problem here? I will agree, acting is a nuanced field, where many factors come into play in selecting an actor for a part. But I would argue that the same is true of every position. From CEO, attorney or surgeon down to workers on the assembly line, or even cashiers at a fast food shop, in every case there are factors beyond the simple checklist of required skills, and thus it is not possible to simply apply head counts. Perhaps a company did not hire a specific minority candidate even though on paper they were "equally qualified", but that does not show racism, as with the actor, perhaps one of the millions of other factors came into play.

And yet, it seems from the way this comment was received, and thousands like it are made every day,  most of my fellow citizens seem to believe that in "mere jobs" people can be treated as interchangeable, and thus we can apply simple head counts to determine if a company is racist or not, or can impose quotas upon them, as it makes no difference exactly who they hire.

Is it just me, or does this imply a pretty simplistic, dismissive view of all things commercial? And is it not troubling that such a view has become so widespread?