Ron Paul's Unusual Proposition

Ladies and gents, Dean Baker endorses a Ron Paul policy idea. No matter the subject, that's always worth sharing. As Baker writes over in The New Republic,

In short, Representative Paul has produced a very creative plan that has two enormously helpful outcomes. The first one is that the destruction of the Fed’s $1.6 trillion in bond holdings immediately gives us plenty of borrowing capacity under the current debt ceiling. The second benefit is that it will substantially reduce the government’s interest burden over the coming decades. This is a proposal that deserves serious consideration, even from people who may not like its source.

I'm no expert on monetary policy, but there's some interesting debt ceiling theory crafting here. Granted, just like all of the other fantasy intervention scenarios, all of this comes with a giant caveat: we have to assume that the need for an intervention won't spur some form of market panic. We've seen a few times already how these can become catastrophically self-sustaining. Once that threshold is crossed, it doesn't matter what the Fed does.

But let's just assume that won't happen for a moment. Instead, we'll pretend that the Fed has announced with sufficient time before the debt ceiling deadline that it intends to intervene in order to ensure stability in the global financial system. This is totally within their mandate, so people wouldn't be that surprised if the Fed chose to do this. But, surprisingly, they'll announce that they plan on executing the "Ron Paul Plan."

Paul's idea, as Baker happily points out, rests on one of the great paradoxes of modern finance. The Fed is largest buyer of treasuries and by far the largest holder of US debt. All of the principal and interest that the Fed earns is eventually returned to the government. It's weird to think about, but the Fed is actually a profit center. In 2012, it sent 77 billion dollars back to the treasury.

It is totally within reason for the Fed to notify the government that it no longer intends to collect on its bonds. Or, as Ron Paul dramatically puts it, the Fed could "destroy" the bonds that it holds. Either way, this would allow the administration to issue new debt, since the debt ceiling is set at a specific dollar amount. The Fed holds about a trillion dollars in different government securities right now. Cancelling this debt would solve the debt ceiling problem for about a year.

It's an especially nice solution since there is no legal gray area. A bondholder is not legally obligated to collect his or her debt. We never have to deal with this under normal circumstances since everyone does want their money (why else would you buy a bond?). That doesn't change the fact that it is totally possible to just walk away. If the Fed walks away, the government gets a whole new chance to borrow again. Think of it like some giant bureaucratic jubilee.

So what are the consequences? As Baker points out, the Fed uses its treasuries as the key tool in balancing the availability of money and the ability of banks to lend. This is all a part of short-term interest rate targeting. If the Fed wants to reduce the aggregate amount of lending, it sells its treasuries to banks. The banks pay for these treasuries out of their reserves, and the banking system now has less money available to lend.

By bringing up this issue, Baker is taking into account a risk that is normally top priority on the right. All of the Fed's efforts over the last five years have greatly expanded the monetary base, creating the potential for inflation. The Fed's huge reserve of treasuries are insurance against this risk. If the economy grows stronger, and if inflation starts to creep upwards, all the Fed needs to do is sell off some of its bonds, reduce the money supply and cool things down a little.

Baker isn't in the tinfoil hat group that believes we are waiting for hyperinflation. That's normally Ron Paul's gig. Everyone else recognizes that we have far too low of growth to even experience normal inflation right now. This is why the Fed continues to engage in Quantitative Easing, which is nothing more than the Fed buying up all sorts of securities from banks so that they have more money to lend. But that doesn't change the fact that the Fed needs to be on guard against potential inflation in the future, and it needs tools to deal with it.

Without its treasuries, the Fed obviously can play the same game anymore. If inflation were to rise, it would need something to sell in order to reduce the monetary supply. Destroying the bonds that it holds severely reduces its stock of available assets, and it also gets rid of the most typical and liquid asset that the Fed owns. But that doesn't mean that the Fed would be totally helpless.

The Fed has another tool to manage the overall amount of money lent that it tends not to use all that often. As you know, banks are required to hold a certain amount of money in reserve as backstop for all of their outstanding loans. This reserve amount is set by the Fed, and they are the only governing body that has a say in the matter. If it wanted to, the Fed could go out there today and tell banks that they need to hold greater reserves. Banks would have to call in some outstanding loans to meet the new, higher reserve requirement, and this would ultimately have the exact same effect as the Fed selling its Treasuries.

Again, assuming no market panic, this is a totally viable scenario. Despite its source, it actually makes a whole lot more sense and poses way less risk than many of the other schemes proposed. If the Fed destroys its bonds, no other bondholder is affected. They can all collect as before and the "dollar hegemony" can keep on trucking to the next crisis. There wouldn't be a freeze up in lending, nor would the Fed remain powerless to prevent future inflation. The biggest problem I see is that this is kind of a one-off. The Fed wouldn't be able to build up its bond portfolio quickly enough to pull the same stunt again.

There's obviously a legitimacy problem too. What happens the next time Congress refuses to raise the debt ceiling? Unfortunately, very few of possible workarounds solve this problem directly. For that reason, this is all a bit of fantasy. That doesn't mean that it isn't fun.

I hear Congress is trying to offer at least a short-term raise. It should give us about six weeks to come up with other platinum coin kinds of ideas. I don't mind. It's much better than contemplating the apocalypse, that's for sure. Until next time.

Game Theory for Government Shutdowns

While there are many ways to try and understand the government shutdown, I like to take a game theory perspective. By focusing on incentives, it helps clarify each side's behavior, and it helps paint a road map for the next couple of weeks. Even if it's all pure speculation, and there's a nearly 100 percent guarantee that things will turn out differently, it's still intellectually stimulating. So let's give it a go!

I'll start with Chait's description:

Obama’s incentive structure is simple, then: Allowing Republicans to default on the debt now is better than trading something that allows them to threaten it later. His best option is to refuse to negotiate the debt ceiling and have the House raise it before October 17. His next best option is to refuse to negotiate the debt ceiling, allow default, and never have to go through it again. Bargaining merely postpones, and worsens, the next default crisis. No negotiated debt-ceiling price is small enough to be acceptable. There is therefore no circumstance under which bargaining for a debt-ceiling hike makes sense, even if the alternative is certain default.

 I think he's wrong on one point. Obama's second best option, before default, is the Constitutional problems created by his unilateral intervention. Raising the debt limit on its own (or just abolishing it), invites a continued fight with Congress, but it avoids economic harm. He's stuck with a shut-down government anyway, a continued political crisis is essentially the same thing.

One of the biggest mistakes of most observers on the left is to label the behavior of Republicans in Congress as crazy. This isn't just offensively dismissive, it does the observer a huge disservice by ignoring the other side's incentive structure. In fact, as Justin Fox writes over at HBR, the incentive structure for Republicans is very clear and very easy to decipher. Especially since it's completely rational!

Let’s consider what House Republicans have learned from their two years of debt-limit brinkmanship. They have learned, first of all, that it works. They got the White House to agree to a bunch of automatic spending cuts (the sequester) in 2011, and then in early 2013 they were able, from what seemed to be an exceptionally weak bargaining position after President Obama’s reelection, to keep most of the Bush-era tax cuts from expiring and to force yet another debt-ceiling battle only a few months later. More broadly, Republican office-holders and activists have learned over the past couple of decades that making what at first sound like unreasonable demands (no new taxes, no gun control) and repeating them for years on end can actually shift the terms of the debate to the point where the demands seem normal. It has been a successful strategy.

There have been downsides to the GOP’s debt-ceiling brinkmanship. It was a drag on economic growth, for one thing, but that’s pretty distant and diffuse and hard to prove. More tangibly, it also probably played a role in the Republicans losing six seats in the House and failing to unseat President Obama in the 2012 election.

From the perspective of the 30-odd hardline members of the House GOP that for the sake of convenience I’ll call the Tea Party, though, this wasn’t actually bad news. Their districts tend to be pretty safely Republican, so their jobs aren’t at risk. A smaller Republican majority in the House increases their leverage within the caucus. And in part because Republicans controlled the redistricting process in most states after the 2010 census (a byproduct of the anti-Democrat backlash in the 2010 elections), they don’t have to worry much about the GOP losing its House majority soon. As for Obama’s victory over a Republican nominee the Tea Party never fully embraced, that wasn’t the worst thing in the world either — it certainly helps with fundraising and energizing the base. So while it has become popular to label the Congressional Tea Partiers, and their seemingly increased zeal after a lost election, as “crazy,” most of their behavior can be pretty readily explained by self-interest and learning from recent experience.

Going into the shutdown, the Republicans now have an even smaller incentive to reach a decision before the debt limit than before. Paul Ryan stated this pretty clearly awhile back. We're guaranteed to see no resolution before then. If we do, they're basically guaranteed to face backlash for creating a crazy mess for no reason. They're probably better off digging in.

Moreover, they too have very little pressure to compromise as long as the Hastert rule is maintained, since electoral consequences are small. This leads to some fun possible scenarios. Even the most extreme options aren't totally off the table.

Since Republicans don't think the President will let the country default, they'll intentionally skip the debt ceiling deadline. We'll get a unilateral debt ceiling increase and Republicans will get the opportunity to impeach Obama. This is something they've always wanted, and it fulfills the underlying motivation for this mess. They believe Obama's presidency is illegitimate, and now they get to show it. The Senate will acquit, and maybe then, and only then will we see sides back down. But that basically guarantees a shuttered government for something like a month, and it firmly establishes the precedent for more insane behavior in the future. Fun times.

Obviously, this is one of just many options. And this sort of events would seem totally insane for most people around the world. And yet, both sides would still be operating in a rational way that maximizes a sense of well-being over a certain times. Uncrazy behavior, under unusual incentive structures, often has some really crazy consequences.

Crime and Punishment

Like most Americans, I've spent the last few days thinking long and hard about violence in America, especially for the strange mix of factors that result in our multifaceted form of state-sponsored and state-condoned violence. I do not wish George Zimmerman ill will, and part of me is happy that he does not have to visit the hell of American prisons. As Ta-Nehisi Coats so eloquently explains, the injustice of Trayvon Martin's murder has less to do with a not guilty verdict and much more to do with a systematic assault on a broad segment of Americans:

The injustice inherent in the killing of Trayvon Martin by George Zimmerman was not authored by a jury given a weak case. The jury's performance may be the least disturbing aspect of this entire affair. The injustice was authored by a country which has taken as its policy, for the lionshare of its history, to erect a pariah class. The killing of Trayvon Martin by George Zimmerman is not an error in programming. It is the correct result of forces we set in motion years ago and have done very little to arrest.

[...]

We have spent much of this year outlining the ways in which American policy has placed black people outside of the law. We are now being told that after having pursued such policies for 200 years, after codifying violence in slavery, after a people conceived in mass rape, after permitting the disenfranchisement of black people through violence, after Draft riots, after white-lines, white leagues, and red shirts, after terrorism, after standing aside for the better reduction of Rosewood and the improvement of Tulsa, after the coup d'etat in Wilmington, after Airport Homes and Cicero, after Ossian Sweet, after Arthur Lee McDuffie, after Anthony Baez, Amadou Diallo and Eleanor Bumpers, after Kathryn Johnston and the Danziger Bridge, that there are no ill effects, that we are pure, that we are just, that we are clean. Our sense of self is incredible. We believe ourselves to have inherited all of Jefferson's love of freedom, but none of his affection for white supremacy.
 
You should not be troubled that George Zimmerman "got away" with the killing of Trayvon Martin, you should be troubled that you live in a country that ensures that Trayvon Martin will happen. Trayvon Martin is happening again in Florida. Right now.

Ta-Nehisi's post is just beautiful. Everyone should read it. Even better, it leads us in a much more important and serious direction. Injustice in America is broad and systematic. Its malfunction is emblematic of flaws existing throughout American society today. It shows up in the shooting of teenagers, in pop culture conceptions of black crime, and most importantly, in the mass incarceration of young black men. The scale of this, intentionally silent form of oppression is shocking. Adam Gopnik provides the statistics in The New Yorker:

More than half of all black men without a high-school diploma go to prison at some time in their lives. Mass incarceration on a scale almost unexampled in human history is a fundamental fact of our country today—perhaps the fundamental fact, as slavery was the fundamental fact of 1850. In truth, there are more black men in the grip of the criminal-justice system—in prison, on probation, or on parole—than were in slavery then. Over all, there are now more people under “correctional supervision” in America—more than six million—than were in the Gulag Archipelago under Stalin at its height. That city of the confined and the controlled, Lockuptown, is now the second largest in the United States.

The accelerating rate of incarceration over the past few decades is just as startling as the number of people jailed: in 1980, there were about two hundred and twenty people incarcerated for every hundred thousand Americans; by 2010, the number had more than tripled, to seven hundred and thirty-one. No other country even approaches that. In the past two decades, the money that states spend on prisons has risen at six times the rate of spending on higher education. Ours is, bottom to top, a “carceral state,” in the flat verdict of Conrad Black, the former conservative press lord and newly minted reformer, who right now finds himself imprisoned in Florida, thereby adding a new twist to an old joke: A conservative is a liberal who’s been mugged; a liberal is a conservative who’s been indicted; and a passionate prison reformer is a conservative who’s in one.

The scale and the brutality of our prisons are the moral scandal of American life. Every day, at least fifty thousand men—a full house at Yankee Stadium—wake in solitary confinement, often in “supermax” prisons or prison wings, in which men are locked in small cells, where they see no one, cannot freely read and write, and are allowed out just once a day for an hour’s solo “exercise.” (Lock yourself in your bathroom and then imagine you have to stay there for the next ten years, and you will have some sense of the experience.) Prison rape is so endemic—more than seventy thousand prisoners are raped each year—that it is routinely held out as a threat, part of the punishment to be expected. The subject is standard fodder for comedy, and an uncooperative suspect being threatened with rape in prison is now represented, every night on television, as an ordinary and rather lovable bit of policing. The normalization of prison rape—like eighteenth-century japery about watching men struggle as they die on the gallows—will surely strike our descendants as chillingly sadistic, incomprehensible on the part of people who thought themselves civilized. Though we avoid looking directly at prisons, they seep obliquely into our fashions and manners. Wealthy white teen-agers in baggy jeans and laceless shoes and multiple tattoos show, unconsciously, the reality of incarceration that acts as a hidden foundation for the country.

If we wish to better understand these problems, the best place to turn is William Stuntz's posthumously published masterpiece, The Collapse of American Criminal Justice. Stuntz forcefully explains that the fundamental problem with the criminal justice system is that it is no longer democratic. Policing and jurisprudence have become entirely divorced from the communities that actually need these services. This is why you have Stop Snitching campaigns and the like, since the relationship is fully adversarial. People from one community are exercising their political/social power over another, to the detriment of all involved. You fix this problem by getting the community more involved with its own criminal justice system and external actors more involved with the community.

I do understand that drive for national unity, but it's important to recognize diversity too. No one says a white person from the suburbs can't be a cop. But who are we kidding? A deficit of white police officers, white lawyers and white judges from the suburbs is not exactly a problem facing urban/ ethnic communities.

The opposite is true. We have people who act like police work is like soldiering because they come from outside the community with hostile attitudes. Even worse, they're entering these communities with military style tactics and weaponry to engage in some bizarre form of urban warfare. And we see the effects. Black people, usually from urban areas, are punished, brutally, at rates astronomically higher than whites that commit similar crimes. No doubt that it's easier from a white cop to empathize with a drunk white teenager than a black one found in a similar situation.

Justice Stevens talks about the effectiveness of community-driven police work in his review of Stuntz's book, where he compares the different policing provided to European immigrants as opposed to those received by African Americans moving north.

Stuntz believes that two enormous migrations that led to crime waves largely define the history of crime and punishment in the United States. The first occurred during the seventy years preceding World War I when over 30 million Europeans came to America and settled primarily in cities in the industrial Northeast. The second occurred during the first two thirds of the twentieth century when seven million blacks left the rural South and moved into the same cities. To put simply Stuntz’s description of the central difference between those two migrations: during the European migration, urban politics soon produced local police forces made up of officers who were similar to and resided among the residents of the areas they were protecting—Irish-Americans trusted Irish cops from the neighborhood to treat them fairly—whereas during the black migration, the white majorities living in suburban areas selected the prosecutors and police officers who enforced the law in black urban neighborhoods.

During the Gilded Age, crime was not controlled chiefly through punishment, but rather through local democracy and the network of relationships that supported it:

Police officers sometimes lived in the neighborhoods they patrolled, and had political ties to those neighborhoods through the ward bosses who represented their cities’ political machines. Those patrols happened on foot: officers, those whom they targeted, and those whom they served knew one another. Cops, crime victims, criminals, and the jurors who judged them—these were not wholly distinct communities; they overlapped, and the overlaps could be large.

Going back to these more democratic forms of justice will be difficult, but its not impossible. There are already movement in place with a strong determination to return democracy back to the lives of ordinary Americans. Like most movements, we won't see results right away, but efforts over the last two years have seen the formation of grassroots institution like Occupy matched with an unheralded distaste for American government.

Even better, we already have good evidence of how effective community-driven policing can become, thanks to New York. While there are still serious problems with things like stop and frisk, New York's increased police presence throughout the city have led to the largest drop in crime in American history. This has been accomplished without particularly meaningful changes in social or economic factors. New York's racial composition, poverty and even drug use has not changed substantially over the last twenty years, yet the city is now as safe as just about any other place in America. Most importantly, New York's incarceration rate has not really changed at all over the last twenty years. Prevention has meant focusing on misdemeanors instead of felonies, and it's doing a great job of keeping people out of prisons.

The most important lesson from Trayvon Martin's murder is that it does not have to be this way. We do not have to live in a society where state violence is the norm. America is unique both in its level of violent crime and its level of incarceration. It seems odd to think that stronger democratic institutions can address these issues simultaneously, but evidence from places like Jersey in the Channel Islands show that this is actually the case. Almost all of America's major public institutions are due for a good shaking. We know the way forward, the only job now is to act.

Nuclear is Green

Writing in The Guardian, George Monbiot has an excellent argument about why the Fukushima disaster has led him to strongly support nuclear power as a green technology. As he explains,

A crappy old plant with inadequate safety features was hit by a monster earthquake and a vast tsunami. The electricity supply failed, knocking out the cooling system. The reactors began to explode and melt down. The disaster exposed a familiar legacy of poor design and corner-cutting. Yet, as far as we know, no one has yet received a lethal dose of radiation.
 
Some greens have wildly exaggerated the dangers of radioactive pollution. For a clearer view, look at the graphic published by xkcd.com. It shows that the average total dose from the Three Mile Island disaster for someone living within 10 miles of the plant was one 625th of the maximum yearly amount permitted for US radiation workers. This, in turn, is half of the lowest one-year dose clearly linked to an increased cancer risk, which, in its turn, is one 80th of an invariably fatal exposure. I'm not proposing complacency here. I am proposing perspective.

[...]

Before coal became widely available, wood was used not just for heating homes but also for industrial processes: if half the land surface of Britain had been covered with woodland, Wrigley shows, we could have made 1.25m tonnes of bar iron a year (a fraction of current consumption) and nothing else. Even with a much lower population than today's, manufactured goods in the land-based economy were the preserve of the elite. Deep green energy production – decentralised, based on the products of the land – is far more damaging to humanity than nuclear meltdown.

But the energy source to which most economies will revert if they shut down their nuclear plants is not wood, water, wind or sun, but fossil fuel. On every measure (climate change, mining impact, local pollution, industrial injury and death, even radioactive discharges) coal is 100 times worse than nuclear power. Thanks to the expansion of shale gas production, the impacts of natural gas are catching up fast.

Yes, I still loathe the liars who run the nuclear industry. Yes, I would prefer to see the entire sector shut down, if there were harmless alternatives. But there are no ideal solutions. Every energy technology carries a cost; so does the absence of energy technologies. Atomic energy has just been subjected to one of the harshest of possible tests, and the impact on people and the planet has been small. The crisis at Fukushima has converted me to the cause of nuclear power.

I also sympathize with a lot of the concerns of the greens, and I strongly believe that we must move to a more sustainable form of energy over the next several decades. To accomplish this lofty goal, we cannot ignore human nature. As Mark Lynas explains in The God Species, human beings evolved to depend fully on external energy sources for protection, comfort and food. Just as uranium serves a distinct purpose within the earth, so do trees, oil and coal. The latter three we burn prodigiously, upsetting the earth's carbon cycle and polluting the planet. These substances play a distinct role in the environment by capturing carbon and toxins beneath the earth. We've clearly upset it.

We can see how toxic petrocarbons are without even getting into global warming. Burning coal, for example, spreads mercury and other toxins all throughout the biosphere. We find fish and other animals all throughout the world who have been deformed and poisoned by the mercury released by coal. If you don't care much about fish, look at China. The country is facing an epidemic of asthma and other respiratory diseases due mostly to its massive reliance on coal.

Given the damage that our energy reliance has already caused, we have little choice. We must accept our flaws as a species and find ways to make our energy reliance less dangerous. While images of atomic explosions would lead you to conclude otherwise, civilian nuclear technology is surprisingly safe. The UN commissioned report on the effects of Chernobyl, the largest nuclear disaster ever, lists the death toll around 9000. Other nuclear events have much lower casualty rates. According to the WHO, not a single person has died from radiation exposure since the Fukushima event, and at most, two people died because of Three-Mile Island. More people die of respiratory diseases related to pollution each week in China than the total number of people that died from these three major accidents combined. That's only one country, which goes to show the massive scale of the problem that we already face.

We need to adopt cleaner technologies, and we need to do it with a clear understanding of the risks. We have been willing to accept terrible costs for energy dependence because of people's inborn laziness to settle for the status quo. Unfortunately, this is a recipe for disaster. People are already contributing to the greatest mass extinction event since the end of the dinosaurs, and our demands from the planet will only grow over the next century.

Yes, nuclear fallout is scary. This is a positive, since it makes us even more wary of the consequences of screwing up. The nuclear power industry has not had a single accident in the 30 years since Three Mile Island. This is a clear sign of diligence and the relatively strong grasp of a still imperfect technology. But even better nuclear technologies are coming very soon, and this includes the ability to recycle spent fuel from older reactors. Like it or not, these technologies will eventually be the key towards ending our dependence on carbon and finding a more healthy and sustainable relationship with our planet.

The Biggest Problem with the Surveillance State is that It Will Never Actually Work

One of the biggest oversights in the ongoing conversation about the surveillance state depends and the generally low level of public knowledge about statistics. Thankfully, Carl Bialik in The Wall Street Journal has taken the effort to help clear this up. As he explains,

Reports about the National Security Agency's program to collect vast amounts of data on personal electronic communications have created an uproar about the implications for privacy. But some statisticians and security experts have raised another objection: As a terror-fighting tool, it is highly inefficient and has some serious downsides.

Their reasoning: Any automated approach to spotting something rare necessarily produces false positives. That means for every correctly identified target, many more alarms that go off will prove to be incorrect. So if there are vastly more innocent people than would-be terrorists whose communications are monitored, even an extremely accurate test would ensnare many non-terrorists.

Kaiser Fung, in his book terrific book Numbers Rule Your World, points out that statisticians tend to be much more interested in variability than actual predictions. Analyzing data based on samples is fundamentally an imprecise science, and statisticians have diligently worked to formalize a system of expression uncertainty. Take an introduction to statistics class, and almost half of your time will be taken up by calculating variance, standard deviations, variance and confidence intervals. All of these are simply ways of saying how much (and how little) you actually know.

This obsession with variance matters because statistical inference is not actually built around binary outcomes. In fact, any projection or estimate contains four possible outcomes: a true positive (correctly guessing something is there), true negative (correctly guessing that something isn't there), false positive (saying something is there when it isn't) and false negative (saying something is there when it isn't). The latter two are labeled type 1 and type 2 errors. While better algorithms and more data can, to an extent, reduce the total number of errors, it is essentially impossible to be perfectly accurate. Instead, a statistician must always accept a trade off between false positives and false negatives. Getting rid of one means accepting the greater prevalence of the other.

Why does this matter? Terrorism is an inherently rare activity and terrorists are very rare among any population. This makes it extremely difficult to establish any robust model for identifying terrorist activity within communication data. Moreover, the incentive system for an NSA agent is badly stacked against false negatives. Let one suspected terrorist go, and you have another 9/11 on your hands (or so they're all trained to think).

In response, the data mining algorithms used by PRISM have to be extremely large. Because reducing false negatives is so important, a basic Bayesian model developed by Corey Chivers estimates that there will be about 10,000 false positives for every successfully identified piece of terrorism-related communication. The government has tried to trot out a handful of terrorist plots that they've interfered with as evidence of the effectiveness of these broad surveillance tactics. For the statistician, this is a tacit admission from the government that hundreds of thousands of Americans have had their constitutionally-protected civil liberties shockingly violated by agents engaged in a hopeless wild goose chase.

The fundamental case against torture, past ethics and human rights, is that it simply does not work. It has never proven to be an effective intelligence gathering tool. Even worse, we have lapsed towards torture despite the fact that much more humane tactics have proven to be incredibly productive.

The case against the surveillance state is exactly the same. Comprehensive data collection accompanied with data mining algorithms is a terrible way to actually investigate and pursue terrorists. Agents will spend most of their time dealing with false positives. At the same time, massive direct costs will be incurred by maintaining such an elaborate system and even larger indirect costs will amount from the systematic violation of civil liberties.

This isn't a particularly novel concept, as the Cato Institute was already tearing apart the fundamentally flawed ideas behind mass surveillance seven years ago. As Jeff Jonas and Jim Harper wrote in 2006,

Though data mining has many valuable uses, it is not well suited to the terrorist discovery problem. It would be unfortunate if data mining for terrorism discovery had currency within national security, law enforcement, and technology circles because pursuing this use of data mining would waste taxpayer dollars, needlessly infringe on privacy and civil liberties, and misdirect the valuable time and energy of the men and women in the national security community.

What the 9/11 story most clearly calls for is a sharper focus on the part of our national security agencies—their focus had undoubtedly sharpened by the end of the day on September 11, 2001—along with the ability to efficiently locate, access, and aggregate information about specific suspects.

Living with terrorism means accepting living in a world that is fundamentally unpredictable and having the courage to face the day knowing that something bad might happen, no matter how hard you try and stop it. There will never be a surveillance system fine tuned enough to actually accomplish what the government wants from PRISM. Instead, a much different approach is necessary: one that modestly accepts our ability to control the world and holds the value of personal sovereignty to the highest degree.

Both at home and abroad, the actions of the US government violate these basic precepts. There is little regard for the well-being of American and foreign citizens, and a hopelessly irrational obsession with trying to control the uncontrollable. A drastically more modest approach has the potential to both reaffirm the importance of human rights and offer the greater opportunity for meaningful security. It's badly needed.

Four Economic Lessons Courtesy of Dorian Electra

Dorian Electra is Youtube pop star who devotes most of her efforts to promoting Austrian Economics. Awhile back, she posted a video called "FA$T CA$H: Easy Credit & the Economic Crash," which unexpectedly turns out to be a useful teaching tool for some fundamental economic theories. You can check it out below.

Dorian seems like a nice enough girl, and I apologize in advance for holding her up as a representative of a whole body of thought. While this isn't very fair (or nice on my part), I think it is very useful to see how her video illustrates public knowledge of economics and the current debate over monetary and fiscal policy. People like Dorian try to create an economic framework based entirely on their (limited) understanding of "economic crashes." This might be because these ideas are inherently sexier than other economics topic (three cheers for AD-AS!!! no one?). But it also has a lot to do with how "nationally screwing up" is a much more relatable story. We can imagine the debtor that gets in over his head. It's harder to understand more specific macroeconomic problems.

But proper economic management is a much broader subject than crashes, and economic recovery has very little to do with what happened before. Even if (and I'm not conceding that point yet) a "fast cash bubble" was the sole cause of the crisis, it should not immediately stop us from doing similar things to encourage a recovery, especially since fiscal and monetary stimulus are proven solutions to a demand-side shock.

Saying "crash, crash, crash" when you want to "cut, cut, cut" is like a doctor who won't treat your cancer because you were a smoker. Fixing the disease and solving its cause are fundamentally independent problems. That's lesson one.

This is lesson two: there is no economic problem so important that it takes precedence over getting back to full employment. To get to that point you need deficit spending and currency devaluation. The latter can come through higher inflation (which I've talked about before, and is more suitable to big economies) or actual exchange-rate manipulation (the Iceland scenario, which you can do if you're small, open and control your own currency). At this point, especially after the Reinhart-Rogoff meltdown, there is almost no debate about this point. There also is no evidence over the last five years of a country returning to macroeconomic stability using any other set of policies.

No matter which monetary path you choose, the end goal is to get people back to work as quick as possible and encourage hard work. The things you could buy before the collapse are harder to get now (especially imports), but you're all working to a solution together. You'll eventually have to pay more taxes too, which sucks. But as long as everyone keeps working, you'll eventually get out of it.

People often  want to make economics into the broad morality play. Even though this is generally a big mistake, there is a bit to think about here. The austerian solution focuses all of the suffering of its policies among the poor and disenfranchised. No rich German is bothered much by the European crisis. On the other hand, a solution that returns to full employment through fiscal and monetary stimulus forces everyone to share the burden of recovery. This is important for the institutions that maintain the long-term well being of a society.

Lesson three is that not all economic problems are the same. A whole bunch of things that led into the crisis, and they continue to plague Europe. This includes the challenges with adopting the Euro, the various housing bubbles, the risk of complex financial instruments (like derivatives), inefficiencies in European labor markets and regulatory challenges facing those countries. Obviously, austerity can't be the solution to all of them. In fact, the euro, for example, has been one of the chief causes of austerity on the periphery. Germany won't accept higher inflation, Greece can't devalue on its own, so they get forced into a debtor's prison version of policy where European bureaucrats decide their budget for them.  

Part of the problem with making broad arguments, as Dorian does, is that it reflects a limited understanding of relevant issues. This is true for most people, no fault there. Nonetheless, even the more informed argument against stimulus-based recovery has fundamental problems. Many conservatives look at something like the economic problems of the 80's and then blindly assume that the actions of the Volcker Fed somehow stop us from using loose monetary policy now. This is obviously absurd. Economic problems can have many sources, just as your car can suffer from many different problems. A solution for one problem might not be the same for the other.

So yes, after Europe gets back to full employment (whenever that will be) there will be other things to address (remember lesson two: full employment comes first). Complex financial instruments need more transparency, as does the actions of mortgage originators and intermediaries (the primary actors in the housing bubble that you cite).

Austrian solutions might be suitable to certain aspects of labor markets and other supply-side problems facing Europe, but they're not alone. More importantly, though, is solving a fundamental Austrian myth when we get to the point of trying to address them. I'll let Matt Yglesias explain:

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.
 
And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background. 

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

It's probably very uncomfortable for people to recognize that the success or failure of a national economy comes down the work of a few bureaucrats. It's probably very uncomfortable to realize the money is fundamentally worthless too. Unfortunately, there's no way to make this more palatable. Economic policy has to be an active and progressive force, since an economy is an inherently managed venture. The Austrians, and more broadly austerity pundits in general, fail to address so many problems because they cannot recognize this fact. And that's lesson four. 

On the Need for Additional Evidence

There is an interesting new report from the University of Waterloo that claims Chlorofluorocarbons (CFCs) are the chief cause of global warming since the 1970s. It was published in the International Journal of Modern Physics B  last week. As phys.org explains,

CFCs are already known to deplete ozone, but in-depth statistical analysis now shows that CFCs are also the key driver in global climate change, rather than carbon dioxide (CO2) emissions.

"Conventional thinking says that the emission of human-made non-CFC gases such as carbon dioxide has mainly contributed to global warming. But we have observed data going back to the Industrial Revolution that convincingly shows that conventional understanding is wrong," said Qing-Bin Lu, a professor of physics and astronomy, biology and chemistry in Waterloo's Faculty of Science. "In fact, the data shows that CFCs conspiring with cosmic rays caused both the polar ozone hole and global warming."

"Most conventional theories expect that global temperatures will continue to increase as CO2 levels continue to rise, as they have done since 1850. What's striking is that since 2002, global temperatures have actually declined – matching a decline in CFCs in the atmosphere," Professor Lu said. "My calculations of CFC greenhouse effect show that there was global warming by about 0.6 °C from 1950 to 2002, but the earth has actually cooled since 2002. The cooling trend is set to continue for the next 50-70 years as the amount of CFCs in the atmosphere continues to decline."

I might not be the most qualified person to criticize Dr. Lu's work, but I do think we should not jump to conclusions right away. The carbon/ temperature record goes back a long time, tens of thousands of years if we are referring to ice cores.With that much data, it's fair to say that the very strong correlation between carbon and temperature can be assumed to continue to the future. But even with that much data, establishing a causal basis can be very difficult. Since we can't run control experiments, we'll almost always have enough uncertainty in the data to keep climate denier websites busy for decades.

The black line represents a three-year moving average. Data from the NOAA, which is available here.

Considering this challenge, I find it very presumptuous to go that far against consensus based on only 10 years' worth of deviation from the original trend. The argument for CFCs is based entirely on the fact that temperatures have not risen as quickly as CO2 levels in the last decade, even though it remains much hotter than any period before it. Considering measurement challenges and the huge number of almost random processes that influence weather (just ask Lorenz about that), it seems presumptuous, to say the least, to claim that CFCs are the only compounds that matter. There's just too much that we don't understand to make that claim with that little of evidence.

To be fair, I'm not claiming that CFCs don't matter in this debate. I only want to recommend caution about extreme claims. A much older report from the US Environmental Protection Agency did say CFCs were responsible for about 15 percent of global warming. They could also play a strong role in the less-than-expected recent rise in temperatures. So could volcanoes, so could a lot of other things.

So what's really going here? Academics have strong incentives to make almost absurd claims, since it helps them get published, and it generates references. While this can be annoying on a case by case basis, the overall scientific discourse benefits from the trolls as it forces people to expand their cases and move the debate forward.  It will take a lot to overturn consensus at this point, since about 97 percent of scientists in a recent survey agree on the mechanism and the effect. As readers of scientific literature, wish should keep this in mind. Prior beliefs should be adjusted only when there is substantial evidence to change course. So far with CFCs and global warming, we're not there yet.