Ones and Zeros

Karl Rove was to be the architect of the GOP permanent majority, but the legacy of the Bush administration is a Democratic majority. Note that I’m not keen on permanent majorities of any party. I think a good debate of a variety of points of view is a good idea. It’d be nice if the GOP would participate in that instead of lying and making up nonsense. Birthers, rabble-rousers, health care lies and other nonsense doesn’t further any useful or rational debate.

However, this strategy isn’t helping the GOP. The follow graphics struck me in their similarity that shows the effect of political mismanagement. Gallup released a poll of political party affiliation by state with the graphic below.

The above political map has some interesting correlation with the following unemployment map from the Bureau of Labor Statistics. Funny how that works: Mismanage the country and screw up the economy and we’ll all eventually pay attention and vote you out.

Quick: What are the basic outlines of a cap-and-trade approach? Or, more generally, what is cap-and-trade supposed to affect?

If you, my readers, are typical, about 75% of you don’t really know. The other 25% can correctly say that it is intended to control carbon emissions. The Rasmussen Reports gives this statistic about people in the US at least.

More generally cap-and-trade systems are used to control pollutants. The idea is that there’s a legal cap on what the total pollutant can be emitted into the environment. That total gets divided up by the companies in that industry that emit that pollutant somehow more or less equitably. (Or based on who spent the most on lobbyists.) Then this cap is lowered over time.

That’s the “cap” part. The “trade” part is that a company that wants to emit more pollutant can buy the right to emit that amount from another company that isn’t using its full allocation. A new market is created for the “right to emit” the pollutant. Then, Adam Smith’s invisible hand of the market that the free market enthusiasts are so vocal about comes into play.

The problem with dumping pollutants into the air, rivers, and lakes is that this doesn’t really cost the companies that do the dumping. It affects all of us and costs us in health and cleanup costs, but isn’t captured in the market price of what the companies produce. Therefore there is no incentive to stop pollution. This is one of those “market externalities” I’ve written about before.

A cap-and-trade system neatly takes that market externality and internalizes it. This is a wonderful use of market economics and human nature.

In some circles there is currently criticism of capitalism, or market economies. The idea of an economic market is just a tool. The tool isn’t at fault, instead it is our fault for not using the tool correctly. Cap-and-trade can be (depending on its implementation) a good use of this tool.

I think of this general approach as an engineering design approach to economics. Thus neatly putting together an vocation and avocation.

More and more services are becoming subscriptions. If you check you bills you’ll see that you pay more of a percentage of your income on various subscriptions now than you did ten years ago. There’s the usual: phone, cell phone, cable, DSL or internet access. Then there’s various online subscription services: websites you belong to, a domain name purchase, ISP for a hosting service. Or perhaps a yard service.

Then some people lease their car, that’s a form of subscription as well. In the economic technical term all subscriptions are referred to as “rents” after all.

On a very prosaic level, if I pay money and buy something, I have ownership and within various social and legal limits I can do what please with this thing. If I subscribe to a service, I by much more limited rights. Not only time-limited but the range of what I can do is more limited. I typically don’t own that data that I subscribe to. Someone else does and their rights trump mine.

Kevin Kelly in “The Technium” post “Better Than Owning” talks about how everything is going to subscriptions. And, how all this will make our lives better. One only has to look at the RIAA suing its customers to see the problems there.

Kelly’s also being economically ignorant in not making the distinction between government produced commonly-held assets like roads, with privately produced and privately held assets like music and movies. I like his writing and his futurist pieces, but he’s off the mark here.

If I own data (i.e. bits. Once text or music or movies are bits then it’s all data.) then I need to find a way to store it and update as necessary. This is taken care of for me if I subscribe to it. However, subscription gives me time-limited access. If the owner decides to terminate business, my access purchase (really a subscription) is void. Yahoo Music demonstrated that recently and they won’t be the last.

Plus, there’s the need to keep paying for the thing too. The increasing subscription fees for TV, movies, and many other things etc. raise my monthly costs and require me to have a consistent income or sufficient financial reserves. Ownership does not require that, at least not in the same way. This is great if you’re a business owner charging subscription fees, but is increasing problem for a consumer.

While it’s easy enough to realize that I don’t need HBO, NetFlix, or whatever and simply to terminate that service. At some point various subscriptions, like my ISP or cell phone connections, would become essential enough that I would become a lesser member of society if I didn’t have that.

A friend emailed me recently (thanks WSM!):

The HUGE amount of money being spent from Obama and Bush bailouts is positively stunning, do you think economy will recover quickly and to an extent that will generate enough tax revenue and for loans to be repaid quickly? I keep hearing commentary and it seems an almost even split on whether we are spending our selves into financial oblivion or fixing our problems. What do you think is going to happen ?

I replied:

The bailout is necessary, but is another problem to solve. The great depression lasted a decade from 1929 to the early 40s and in the end was only alleviated by the ramp up in spending to go to war. War is a really terrible way to solve a economic crisis of course. As a side note, you can make a very good argument that Hitler would have never gained power if Germany and Europe wasn’t a disaster area economically. Lack of money drives people to do bad things and creates social upheaval and chaos.

More recently Japan had their “lost decade”, also caused by a price bubble. So this sort of thing can last well over 10 years if it is not addressed well. The stimulus has some technical problems, but is a good attempt at addressing the real problem. A decade of lost opportunity, poor health care, poor education, and shortages all around is enough to cause major problems for a generation of people. And that’s the least of the problems (see Hitler above).

The real problem is the GDP (gross domestic product - the sum of the economic production of the country plus exports minus imports) has a shortfall caused by this crisis. That shortfall is from the money “evaporating” as a result of the loss of value. The stimulus is intended to fill that hole and thus “stimulate” the economy. It is partly too late already, but better late than not have it at all. Unemployment is high now, and will get higher. It is a more useful indicator that the stock market. The stock market is a fickle indicator, it is more tuned to Wall St than Main St. Its daily ups and downs are not that important, but its longer term trend is a forecasting indicator. However it is hard to tell the difference between the trend and the various short-term ups and downs.

The problem with the stimulus spending is that we need to either borrow the money or simply print it. Both create problems. If we borrow it we have to borrow it from those that have it: China, the Middle East, etc. We also have to pay it back. Borrowing that much can make those borrowers nervous. Some of China’s recent statements show that they’re not happy loaning that much. If we print it then we cause inflation later. That has its own distorting effect on the economy as in the 1970’s and 80’s. Inflation discourages saving and encourages borrowing.

But if we don’t do the stimulus, the economic problems we see now are trivial compared to what will happen. Right now we have 8.5% official unemployment rate. In the 30’s it was as high as 25% officially. (Unofficially we have around a 15% rate with people who are either underemployed or have just stopped looking.) It’s bad now, but most people are not going hungry. That will change if we don’t fix the problems.

Some people, like Newt Gingrich, just want to “let the markets work” and companies fail. That’s one solution, but not the best one. Besides, this idea is based on the notion of free markets. As I’ve written before there are very few actual free markets in the economic sense. Market corrections work by people losing money, losing their jobs, and perhaps losing their futures. The can also result in price gouging and personal suffering. Market corrections like that are unfeeling. They also sweep up things that wouldn’t otherwise be affected; healthy companies that just can’t get working credit anymore, or bankrupt cities and towns that can’t afford basic services.

It’s funny that the politicians I’m seeing complaining and wringing their hands over the size of this stimulus are the same ones that are willing to go massively into debt to fund an endless war, lower taxes on the rich, and also to reduce regulation so let companies get away with creating this mess. Now, with Obama in office wanting to spend money on infrastruction and to help non-rich regular Americans these same people object.

So yeah. I think we need the stimulus, but I sorely regret that we need it as it will cause other (fortunately smaller) problems. When Bush came into office, the annual budget debt that the government had since 1863 was zero (although we still had an accumulated long-term deficit to pay off). Bush squandered the surplus he inherited by giving it to the rich and starting an unnecessary war in Iraq.