Economics

What Happened to the Wall Street Sheriff?

Elizabeth Warren is a big fat phony – that’s the topic of my Taki’s Mag piece today. An excerpt:

Elizabeth Warren has spent her congressional career raging against big-bank bogeymen. She was elected from the People’s Republic of Massachusetts based primarily upon her tough stance against the financial industry. “Wall Street CEOs—the same ones who wrecked our economy and destroyed millions of jobs—still strut around Congress, no shame, demanding favors and acting like we should thank them,” she boomed at the 2012 Democratic National Convention.

Hallelujah to that, Sister Warren.

I have no qualms with ripping on the coke-addled computer nerds on Wall Street who make money hand over fist without creating anything. I agree with Brit Lord Adair Turner, chairman of the country’s chief financial regulatory body, that most of what goes on in the ledgers of too-big-to-fail banks, trading on amalgamated debt instruments and betting if blue-collar Billy will lose his house, is “socially useless.”

Chief Warren is more or less on the same page. Or so I thought.

Read the whole thing thing here to find out why Sen. Warren whores herself out to Goldman Sachs instead of standing by working folk.

Chromosomal damage

Women: You can’t live with them; you can’t work with them either.

That’s the topic of my Taki’s Mag piece today. An excerpt:

These complaints might all seem trivial (and insane), but they add up. Nagging protests have the ability to snowball until they become a coherent message. By constantly hammering away at the idea that men are incorrigible Neanderthals with their brains set on “rape,” feminists have altered corporate culture so that guys must be on guard every second of the day. If they slip up, it’s a one-way trip to the unemployment line.

It’s an unhealthy mix that affects productivity and basic workplace camaraderie. Yes, there are definite cases where men take advantage of naive office girls (this is especially true in D.C., where the office manager is often having an affair with the cute twentysomething coffee fetcher). But feminists trying to equalize the workplace are engaging in a Sisyphean task. Men and women just aren’t made to work together as a unified team. The sexes are different. They excel at doing different things.

Just consider the examples of accepted sexual differentiation in our society. Professional sports are demarcated along gender lines. You rarely see a female construction worker on the site of a new skyscraper. Hooters isn’t about to hire men as waitresses.

Win one for the patriarchy and give the piece a manly read here.

Why private cities?

I have been interested in the creation of private cities for some time. A recent email exchange with Paul Romer (who I want to say was kind and clearly communicated with me which I very much appreciate as I have been critical of his work and he is a person whose time is very valuable) has led me to realize that I should write up a 15-minute pitch explaining my beliefs.

First, why care about laws at all? Romer’s TED talk is still probably the best introduction. Basically, rich countries are rich because they have good governments, poor countries are poor because they have predatory governments. A good government is one that allows private property, contract, exchange, rule of law, and organization. A bad government is one that prevents those things. With private property, contract, exchange, rule of law, and organization people learn to produce wealth, trade and have a higher standard of living. This is not just my opinion, it has become close to a consensus among economists who study the issue (see here for the best introduction, here, here, and here for econometrics, and here for a more advanced “why” analysis).

So basically, laws, or institutions, which can be thought of as the power structures which determine laws, determine the wealth or poverty of nations. So, why care about institutionally autonomous cities, institutional autonomy meaning having substantively different laws from the rest of the country? Basically, institutional change is very hard. British Prime Minister Gordon Brown has been known to quip that “the hardest part about building rule of law is the first 500 years.” In other words, getting the institutions right is very difficult.

The fall of the Soviet Union offers a useful example. A lot of well-intentioned economists tried to “fix” the former Soviet Republics. There are some success stories, Poland for example, but overall most of the countries failed to perform as anticipated. The economists were more focused on getting the prices right, than ensuring the courts were free and fair and the bureaucracy wasn’t corrupt. Another example is both Iraq and Afghanistan. The US poured hundreds of billions of dollars and thousands of lives into both, and the result is less evil governments than before, but hardly a substantive change in living standards for most of the population.

Institutional change is difficult because it first requires asking the institutions, to admit they do not function well, and second, to reform. These problems are only necessary because the institutions do not function in the first place. If a government was capable of doing so they would likely have already done it. In some sense, it is like asking coal to squeeze itself into a diamond.

Institutionally autonomous cities offer a way around this difficulty. By being built in rural land with no strong interest groups, they do not disrupt the status quo. Second, by being opt in, the acquire more legitimacy. They are not an outside body imposing new laws on an unwilling populace, but rather a new option for people trying to make a better life for themselves. Simply put, because they are regional instead of national, institutionally autonomous cities offer an easier path to institutional change.

So, I have focused my studies and energies on institutionally autonomous cities because I believe they offer the best option for institutional change, economic development, and improving the lives of the least well off humans.

Of course, there are different visions for the ideal institutionally autonomous cities. The visions can be distinguished by the governance body for the cities.

The best known advocate for institutionally autonomous cities is Paul Romer. His vision is Charter Cities. The governance body in a Charter City would be a first world country, Denmark for example. In that sense it would directly import first world institutions to third world countries. Instead of Indians or Zimbabweans needing to move to Denmark, Danish law and the opportunities and economic growth that comes with it could be brought to this country.

However, Charter Cities are not the only option. I think private institutionally autonomous cities, administered by Google for example, could produce better results more quickly than Charter Cities. However, before I discuss why I would like to say I pretty much entirely agree with the Charter Cities project. I think building a Charter City would likely be an enormous success. It would generate a great deal of wealth and improve the lives of people in the host country. In this sense, my quibbles are relatively minor. A Charter City would be a huge leap forward from the existing world, and a private autonomous city could be a small step beyond a Charter City.

So, why do I prefer a private city. The primary reason is adaptability. Building a new city is a megaproject. Private companies would be more responsive to changing conditions, new information, and unforeseen challenges.  However, before going into more depth, I would like to take a second to explain how a private autonomous city would function.

A private autonomous city would begin by buying a large area of relatively uninhabited land. They would also negotiate for institutional autonomy, basically a special economic zone. For this essay I will assume a private city state, for complete autonomy, but the arguments I make will also apply to a private city with more limited autonomy.

The business model would be similar to that of a mall. The proprietor of the land would pay for improvements, then rent out the space at a higher value because of those improvements. In this scenario, the improvements would be traditional public goods, roads, lights, water, sewage, electricity, as well as non-traditional public goods, police and courts.

The general argument is that the land proprietor would have a long term interest in the economic success of the city because such success would increase the value of the land and therefore the rents of the proprietor.

For this essay I will focus on the non-traditional public goods, police and courts, and conclude with my argument that private autonomous cities would be more adaptable. Traditional public goods are often supplied by private contractors to governments, suggesting it would be easy for a private city to contract with similar companies, if not do it themselves. Further, to the best of my knowledge, no one has argued against private cities on the grounds of higher utility costs.

The strongest argument against a private criminal and civil justice system is that it would favor the powerful. A private city, especially a small one, would likely have a small number of large employers. Several big companies would pay a disproportionate share of the city’s budget, and the city would be somewhat beholden to them. Combined with the more direct link between rent and profit this could lead to a criminal and civil justice system that favors the powerful. Especially because residents in a private city would not have the same sense of ownership as they might in a democratic city. Rather than citizens, they would be more akin to customers, which could embolden the city to favor the powerful and delegitimize the voice of the residents.

This argument applies to civil justice, police, and criminal justice. I will discuss them in that order. However, first I will make several general arguments which apply to all three.

First, all cities will have some companies which pay a disproportionate amount of taxes. The specific claim against private cities, is that private cities will be more likely to favor the powerful than other types of city governance. It is not obvious that private cities will necessarily be worse in this regard. Reputation will be very important to a private city hoping to convince residents and companies to locate there. A perception of injustice, either in the civil system, police, or criminal system, could hurt them in the long run.

As an example, many companies, Amazon, MasterCard, Geico, and Ebay for example, likely have a small number of sellers which account for a disproportionate amount of revenue. However, there companies are generally perceived as fair in their dispute resolutions. Few people are going to buy car insurance from a company that favors large clients, or use the credit cards of a company that has unfair dispute resolution mechanisms.

Second, such critiques of private autonomous cities often underestimate how bad civil justice, police, and criminal justice is in undeveloped countries. For a quick sense skim the World Justice Project’s report on the Rule of Law. For example, 21%, 23%, and 24% of Nigerians believe that police, follow the law, respect the basic rights of suspects, and are punished for breaking the law respectively. As a personal anecdote, several Honduran friends have told me they fear the police more than they do the gangs, even though Honduras is the murder capital of the world. More generally, it is common knowledge that justice systems in the undeveloped world rarely deliver justice. Unfortunately, that knowledge is often forgotten or ignored when considering the possibility of a private replacement.

There is strong evidence that private civil justice mechanisms can perform as well, if not better than public civil justice mechanisms. The best book on this is “Private Governance”, by Edward Stringham. One particularly telling example is the emergence of the Dutch stock exchange. Not only was short selling not enforced, it the Dutch government actually banned it. Nevertheless, people continued to write short contracts and they continued to be paid. Those who refused to pay contracts, even ones that were technically illegal, were simply banned from future participation in the stock market.

In a more modern example, international trade is often “lawless.” Companies frequently specify that contracts be settled under private adjudication for both speed and accuracy, as government courts sometimes fail to keep up with complex commercial contracts. The prevalence of international arbitration is reflected in detailed guides to drafting contracts, exemplified here, and here. Such contracts show private dispute resolution is often better equipped to handle complex contracts.

To some extent, international arbitration clauses can be said to exist in the shadow of the state. The New York Convention ensures participating governments enforce private arbitration agreements and rulings made in other countries. However, Peter Leeson found that state enforcement only accounted for 15-38% of international trade, a substantial amount, but not nearly enough to suggest private mechanisms were not working.

There is less evidence that private police can perform as well as public police. This is not to suggest there is suggesting private police would be worse than public police, merely that there is relatively little evidence regarding private police at all.

Edward Stringham has an article about private police in San Francisco. When people and businesses who hired the private police force were asked why they did not use the free public one, responses ranged from, “they take too long to arrive” to “they scare me”. The best response was “that’s a joke right? I have little confidence in SFDP”.

The best argument for private police is the general untrustworthiness of public police in the undeveloped world. I think most honest well-traveled people would admit they trust security guards at restaurants or hotels more than the local police. Unfortunately, improving on public police in the undeveloped world is not a very high bar.

The last, most controversial point, and the one with the least evidence to support privatization is criminal courts. This would be an extreme example, as it is highly unlikely that a private city would gain sovereignty. If a private city did manage to gain some autonomy, the criminal courts would likely be the last thing a host country would abdicate control over. While there is very little evidence on this point, I would like to make several overarching statement.

First, there are lots of examples of private actors acting badly in criminal justice, honor killings, feuds etc. However, I think these examples have as much bearing on a private city as the Saudi Arabia beheading teenagers has on arguments for social democracy. While they are in some ways the same, private criminal justice, and the actions of a state, they strip out the context that makes them different. Saudi Arabia is still a primitive state and honor killings are a primitive form of private justice. If Google were to build a city it is hard to believe it would try to build the honor killing, teenager beheading, primitive criminal justice system.

Second, a private city could remove sovereign immunity. Wrongful actions taken against citizens, including in the criminal justice sphere, would penalize the city.

Of course, that private cities could provide better civil justice, police, and criminal justice than undeveloped countries does not mean they would do a better job than a Charter City, merely that they would be better than the status quo. A Charter City, assuming it is implemented well, would provide civil justice, police, and criminal justice, at a level consistent with the Charter country. In other words, a Charter City would have low variance of its justice system.

A private city on the other hand, would have high variance. It could outperform a Charter City, but it could also greatly underperform a Charter City. Compared to a Charter City, a private city would have a slightly higher ceiling, but a much lower floor.

So, given the expected value of a private city based on civil justice, police, and criminal justice, is lower than a Charter City, why prefer a private city? The answer is adaptability, the ability to respond quickly to rapidly changing on the ground circumstances.

Cities, especially institutionally autonomous cities, are complex. The problems they have at 10,000 people are not the same problems they face at 1,000,000. Difficulties faced by the developer will not scale linearly. This requires a decision making body that is equipped to respond rapidly and effectively to such problems. Simply put, that body is not government.

One illustration of the difficulty of complex systems is massive multiplayer online games. Some of the more popular online games have millions of players trading with each other. While companies can test the games with thousands, even tens of thousands, of players before release, the dynamics will fundamentally change with millions of players. Often times the initial release is followed by several months of trying to rapidly respond to consumer feedback about the game. For comparison, take the difficulty state governments have had in establishing Obamacare exchanges online. Hawaii spent $205 million dollars developing a website far simpler than most big budget modern games, and it doesn’t even work.

Another example is the refugee crisis in Europe. Naguib Sawiris, an Egyptian Billionaire, is actively trying to buy a Greek island to house refugees. The EU, which has the resources, as well as the political clout to create a refugee city on a Greek island is standing on the sidelines.

For another thought experiment, think of a major institution of the US government that can respond quickly and effectively to new problems, the FDA, the Department of Homeland Security, the Department of Energy? The Department of Homeland Security is the newest cabinet level department created in the US. It’s most visible program, TSA, is widely considered a failure. It was recently revealed that they had a 95% failure rate in a test, failing to detect 67 out of 70 people trying to sneak fake bombs and guns on a plane. Is the political body that created the TSA really going to create an organization capable of building a Charter City, especially as the problem faced by the TSA is far simpler than problems faced by a Charter City. In this sense it is possible for a Charter City to end up a large boondoggle, a new Brasilia built but mismanaged to the point of vastly underperforming expectations.

In a Charter City there is the added problem that the decision making body would not necessarily be close to conditions on the ground. If Denmark, for example, is the Charter Country, would we expect all the Danish workers to move to sub-Saharan Africa? Requiring them to move would likely eliminate many married or elderly workers. If they are not required to move, they will be out of tune with the local conditions.

That being said, there are historical examples of public cities rapidly growing, Shenzhen being the most prominent example. However, these cities had different institutional arrangements than what is likely to arise in a Charter City.

To conclude I’d like to reiterate my main points. Institutionally autonomous cities are currently one of the best ways to improve the lives of the world’s poorest. The two competing visions of institutionally autonomous cities are Charter Cities and private cities. The primary advantage of Charter Cities is low variance and better provision of justice systems. The disadvantage is adaptability. The advantage of private cities is adaptability. The disadvantage is the low floor for the justice systems (though even a low floor would likely be an improvement in many undeveloped countries).

Ultimately, the success of a Charter City or a private city will depend on the organization with decision making authority. It is certainly possible, though unlikely, that business, growth oriented organization can emerge from negotiations between two governments to build a Charter City. Similarly, it is possible that a business with few ethical scruples can take advantage of a country granting institutional autonomy, preying on those who move there. The potential success of either project will depend the governing body, and those of us interested in such a project should do what we can to ensure the process for choosing the governing body is fair, open, and transparent.

Applying the ten principles of Burning Man

This year, like every year, there is a discussion in burner circles about plug and play camps at Burning Man, camps where rich people pay over ten thousand dollars to have their camp set up, meals prepared, costumes designed, even sometimes a “sherpa” to help guide them around. These plug and play camps go against several of the principles of Burning Man, most notably, radical inclusion, radical self-reliance, and participation. Though I am a second year burner, I have tried to abide by the ten principles. Here is my attempt to clarify what they might mean in practical terms.

Like all rules, there is difficulty in interpreting the principles. Radical inclusion, for example, if taken literally, could mean no private property. This year dozens of people tried to wander into our camp on Friday night (our neighbors were having a big party and we experienced some overflow). Some lovely members of our camp spent the night directing the wanderers to the party next door and out of our camp. This was sometimes met with questioning, “aren’t all camps open?” The perhaps unfortunate answer is no. Most camps pack only enough food and booze for themselves. If there are leftovers to dinner they might share them with passers by, but most campsites are private property of the campers themselves. In this sense we can differentiate between private and public spheres in Burning Man. Public spheres, them camps and art cars should be radically inclusive, limiting people for mainly for safety reasons. Private spaces include sleeping areas, shade areas, and kitchens which are constructed solely for the use of people in the camp. Of course, these private spaces should be welcoming to outsiders, but outsiders should not feel entitled to use them.

More specifically, what constitutes a plug and play camp. Paying a camp mate for buying groceries does not make a plug and play camp. What about paying someone to use their generator, paying someone for a shade structure. Again, these do not seem to define plug and play camps. Simply by the nature of large camps, a small group of people will keep and maintain important playa gear, shade structures, cooking equipment, art cars etc. Paying for the maintenance and storage seems in line with Burning Man principles.

Let us have another scenario. Suppose you do not live within a day’s drive of Black Rock City. However, you have several friends in the Bay area. They camp together every year and are fairly well organized. One year you join their camp. They buy the food and bring it to Black Rock City as usual, as well as bringing shade structures and kitchen supplies, however, you are un-involved in the process except for an email chain simply because you live in a different area. You pay them at cost for the food and the shade structure. This seems to be getting closer to plug and play, but it is not quite there yet. What if you arrive on Tuesday after they have set up the communal shade structures and leave on Sunday before they take them down. How radically self-reliant are you?

I ask these questions, because, like most things, hard lines are difficult to draw. What then, separates someone of modest means of joining a camp of well-organized burners and paying a few hundred bucks for storing, maintaining and bringing the shade structure and kitchen to camp, as well as food and electricity, from a wealthy burner paying ten thousand dollars for something similar? In the above scenario, the only substantive distinction would be the quality of food/shade/alcohol/etc.

Larry Page, for example, attended Burning Man before 2002, far earlier than me. Who am I to judge him if he wants to organize a camp with all his rich friends? He likely contributes a lot more to the art projects than I do.

That being said, there are substantive differences between the plug and play camps and friends getting together and splitting costs. I will outline them below, but I think the primary aspects are, paid employees, wristbands, and setting up your own tent/yurt/etc.

Paid employees at Burning Man clearly go against radical self-reliance in a strong way. I think having a camp cook is a strong dividing line between chipping in when someone buys groceries and a plug and play camp. If Larry Page wants to eat caviar all week, that’s his prerogative, however, he or his friends should prepare it themselves.

Wristbands are another indicator of a pay to play camp. Human experience puts a natural limit on the number of people who can share a space/food with no formal exclusion. For example, my camp this year had 43 people and I had trouble remembering all of them. This seems around the natural limit for a camp which shares a kitchen. Our camp was small enough that we could identify most of our camp mates. On the other hand, wristbands mean that a camp is so big that facial recognition alone isn’t enough. The wristbands then act as a formal method of exclusion of outsiders from the food and drink. While not as clear of a giveaway of a plug and play camp as paid employees, wristbands still suggest something is running counter to the ethos of burning man.

Lastly, setting up your own sleeping structure. It is better if everyone helps set up the whole camp, but that is not always possible. This year there were a limited number of early arrival passes in my camp so the kitchen and the shade were mostly constructed by the time I arrived. However, people should at least set up their own sleeping structure. Of course, they can ask for help, and some people might be unable to do it. However, if you arrive at camp and everyone had their sleeping structure set up by someone else, it might be plug and play.

These are some of my recommendations on how to differentiate plug and play camps from regular camps. I purposefully left them fairly loose. I think radical inclusion means we should welcome everyone except those who repeatedly and intentionally violate the ten principles. In this context that means only defining plug and play camps as an extreme.

The next question is how to deal with these camps. This year, Larry Harvey said he would visit plug and play camps to see how he was received. This seems like a poor idea. I would be somewhat skeptical of a 50 year old man I did no know entering my camp. I would offer him beer, water, or a snack, but try to guide him out, as I would feel obligated to stay with him to ensure he did not take anything. I imagine female campers would be extra cautious for obvious reasons.

As for how to reduce the number of plug and play camps, I would recommend banning those who advertise for paid positions from Burning Man, and perhaps creating a public registry of them for humiliation. Even if they did not publicly advertise for the positions, word would likely escape it would be relatively easy to set up a mechanism for determining whether or not a camp had paid staff.

In conclusion, I am appreciative toward rich people at Burning Man. They allow me to see beautiful art that I would never be able to fund myself. However, they also have created some camps which violate the spirit and the principles of Burning Man. Banning paid employees at Burning Man (of course this excludes essential staff, police, doctors, EMTs, DPW, etc), would help restore some of those principles.

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Higher learning at an all-time low

In so many words, I say college is dumb and people who go are stupid over at Taki’s Mag today. An excerpt:

At a more general level, American universities have become far too lax regarding admissions. Many of the students I attended university with were spoiled, listless, and just going through the motions to graduate in between keggers. They weren’t challenging themselves to think more broadly about the world. For many it was a struggle to make it to class Friday morning after getting sloshed. Should the government really be picking up the tab for what amounts to a four-year Oktoberfest?

If you still aren’t convinced that college does more harm than good, consider the damage done to mental health. According to a recent survey by the American College Health Association, 54 percent of college students say they have felt overwhelming anxiety within the past year. In a recent Atlanticcover story, psychologist Jonathan Haidt and constitutional lawyer Greg Lukianoff detail how college administrators and professors are combating increased anxiety by suppressing unpleasant or controversial thoughts from the greater student body. Students are no longer engaging with ideas that are contrary to their own. Instead, they are shunning anything that is uncomfortable. This includes harassing professors, forcing speaker cancellations, and vandalizing the property of those who refuse to give in to political correctness. With this amount of thought policing on campus, it’s no wonder students are more anxious than ever.

Read it here, and then tell your friends in college they are wasting their time (all the while decreasing the supply of degrees in the marketplace and thus boosting your own value).

(Image source)

Big government and economic development

Noah Smith has an interesting piece on big government and economic development. Namely, there is a strong correlation between the size of government and economic development. The bigger the government, defined as government spending as a percentage of GDP, the richer the country. This relationship is fairly strong. Take, for example, the Economic Freedom Index published by the Fraser Institute. The index is constructed by five metrics, size of government, property rights, sound money, international trade, and regulation. Of these, four are strongly positively correlated with GDP per capita. One, size of government, has a negative correlation.

The point being, the typical libertarian story about the importance of government spending on economic development is false, or at least, incomplete. Noah, however, then makes a common error. He confuses size of government with strength of, government. State capacity, as it is commonly described in the economics literature, is not necessarily defined by government spending as percentage of GDP. Think of state capacity as the ability of a state to get things done. Singapore, for example, has a great deal of state capacity, yet the size of government is small compared to other developed countries, 17% compared to 40% for the UK.

It is possible to have a small government that is strong, a big government that is strong, and a small government that is weak. It is very difficult to have a big government that is weak. This is because a weak government is unable to tax enough of the economy for it’s spending to qualify as a big government. This dynamic creates a bias where big governments are going to be relatively well off because they have strong states which boost economic growth.

I also think Noah is mistaken when he identifies public goods as the reason big government is necessary. Examining America’s budget, it is clear only a fraction of it is spent on public goods in the traditional sense. The big ticket items, military spending, social security, medicare, are not public goods. The latter two are transfers, and America’s military spending does not count as a public good (for Americans at least). Even railroads, which Noah mentions and are generally considered to have been one of the most transformative innovations, only increased GDP in 1890 by 2.7%. Given that rich and poor countries are separated by wealth magnitudes of 30 or more, a 3,000% increase, it would take 1200 public goods on the order of railroads to account for the disparity in wealth.

A more plausible explanation for the importance of state capacity is free trade, though in a fairly roundabout way. States are better thought of as a coalition of different interest groups. In the middle ages, this group was a number of local lords, princes, etc. Each of these territories would impose a small tax. Even though each tax was small, the sum was large, making trade prohibitively expensive in many cases. State capacity is important because a strong state would be able to crush these local taxing authorities, creating an internal free trade zone. Britain, for example, had higher tariffs than France during the first half of the 20th century, when the industrial revolution began. Britain’s advantage was far freer internal trade.

In the modern world there are no longer local princes and lords. There are largely analogous actors though. Latin America, which I am more familiar with, has extremely strong unions. Mexico, for example, only recently eliminated the practice of buying and selling teaching positions. This was heavily protested by the teachers union. These interest groups protect their rents, ensuring low economic growth. A weak state is dominated by these interest groups. A strong state is able to overcome them.