Bitcoin Value Questions

Does Bitcoin offer something of value today?  Does it have the potential to be more valuable in the future? Here are some thoughts how you might be able to answer yes or no to these questions.

I.

The first point is a question of how currencies have value. How does the US dollar have value? In a very concrete and practical sense, the dollar is valuable due to legal tender laws, where any legitimate transaction that occurs in the US must accept US dollars as a form of payment. Moreover, US taxes must be paid in dollars. However, that’s not a majority of the dollar’s value.

The US dollar has value because people believe it will be accepted in the future. That’s why the dollar is valuable in countries outside America where users are presumably not under US legal tender laws. Why do people believe it has value? Well partially its derived from the practical points made above combined with the size and scope of the US economy; if dollars are used in the United States, often by legal mandate, and if the US economy is large and vibrant, it will need lots of dollars. The US economy, even if it struggles, won’t be gone overnight, so you can bet in five or ten years, there will be plenty of transactions that need to occur in dollars. There’s also the point that trade with people in the United States mean dollars cross borders pretty easily. This creates a self-fulfilling prophecy; since people know there are Americans and traders who will accept dollars, other people accept dollars too, knowing they will be accepted in the future.

That accounts for the demand side of dollars. On the supply side, there is at least implied trust in the US central bank, the Federal Reserve. This may rub Ron Paul fans the wrong way, but I think it’s somewhat undeniable. People in the US and outside see the inflation track record of the American dollar and agree that it’s unlikely to be really poorly managed. Perhaps that’s just because alternative central banks are even less trustworthy, perhaps it’s because the Fed has a reputation of being stingy about inflation. It’s hard to say. What is undeniable is that the US dollar is widely used and held throughout the world.

II.

Does Bitcoin have a role to fulfill in the market when the US dollar serves as an excellent international medium of exchange and store of value? Yes. Bitcoin is inherently digital, meaning you just need some information, on a computer, in your head, or written on paper, in order to use it. Dollars require a bank, and if international, they require a bank that reports to a local government which may or may not allow foreign currency holdings.

This means today Bitcoin offers some advantages over American dollars in certain situations without any scaling updates to the Bitcoin network that we’ll discuss later. Such areas include international transfers, domestic currency mismanagement, and anonymous transactions.  International transactions because all you need is an internet connection, not a bank or Western Union office. Bitcoin transactions have fees, but they can be lower than international wire fees. Domestic currency mismanagement is Bitcoin’s clearest use case. Venezuela has experienced hyperinflation as its currency is worth less than World of Warcraft gold. Bitcoin has become highly useful as it does not lose its value over time like Bolivars. Bitcoin also saw a spike in India when they unanimously outlawed large denomination cash bills. In another interesting case Zimbabwe actually uses the US dollar (after hyperinflation destroyed the currency last decade), but because they cannot print it, liquid cash is scarce in the country, so Bitcoin is highly valuable since it is more easily imported than dollars.

Finally, Bitcoin is of course useful for illicit activities, such as the fabled Silk Road dark net trading site.  Not much to add here, except to point out that another cryptocurrency, Monero, may actually fill this niche better if you’re just looking for confidential transactions. More on other cryptocurrencies in the final section.

III.

However, if you are in a developed country, it’s unlikely Bitcoin is better than your national currency in terms of ease of use, acceptance by merchants, quickness of transactions, cost of transactions, etc. Certainly people who believe in Bitcoin politically can pay these increased costs and use it anyway, but that’s essentially paying for a political statement.

Bitcoin may be a better long term store of value than a state currency, e.g. the US dollar. It is governed by an algorithm as opposed to a committee. Algorithm changes are difficult and slow, and there is currently a cap on the total number of Bitcoins that will ever be created. If the US hits the Fed’s estimated inflation target of 2%, then the value of any currency owned by residents will halve in about 34 years.  However, Bitcoin is volatile, and buying it as a store of value uses it as an investment. Some Bitcoin investment today is certainly speculation. And if a decent chunk of the Bitcoin price is caused by investment/speculation instead of current usefulness, then a better store of value/investment could rapidly pull the money out of Bitcoin. Perhaps some investment is acceptable, but doing more radical actions, like putting your life savings in something that can lose its value relatively quickly isn’t a good idea.

We should keep in mind that there are people even in developed countries that have limited access to banking and credit. Large commercial banks are notorious for charging fees to customers who specifically don’t have the cash to spare on those fees. Bitcoin may be a way for those with poor access to banks to “be their own bank” and hold their savings securely without needing a national bank. Perhaps transfer fees are too high to make this practical, but at the very least, this is a potential market for Bitcoin, if scaling issues can be solved.

There is one other use case where Bitcoin is clearly superior to even a developed world currency. That would be a tax-free asset and currency. It’s not particularly difficult to purchase Bitcoin and then launder it through another cryptocurrency or through CoinJoin (an anonymization protocol) and make the money untraceable. Assuming Bitcoin’s basic use cases of international transactions and troubled currency refuge continue to grow, Bitcoin offers a big tax haven. I should note, of course, that this is plainly illegal, and I suspect the more tax evasion an individual undertakes, the more likely they are to be scrutinized by authorities.

IV.

We’ve established Bitcoin has explicit use cases and therefore offers value today. We’ve also established that some of these uses cases may grow in the future. What about threats to Bitcoin’s value?

If a significant use case of Bitcoin is illicit transactions and tax avoidance, then I would claim Bitcoin is a direct threat to the state, even in developed countries. As stated in “What is Postlibertarianism? v2.0“, widespread adoption of cryptocurrencies could mean the end of taxable transactions, and possibly the end of the modern state. I’m not interested in making a judgment about whether this is good or bad, but I think the threat to states is undeniable (if still very far away).

The obvious next question: if states have an incentive to stop Bitcoin, can they do it In cases where Bitcoin has solid use cases, as in Venezuela and Zimbabwe, it seems highly unlikely. Bitcoin was built to be censorship resistant; deleting a node does almost nothing to the network, as all nodes are peer-to-peer and you can quickly switch to talking to another node or two or fifty. To shut down a Bitcoin payment network in a country, you’d likely have to shut down access to the outside internet. However, with new developments in the Bitcoin space, even partitioning a country’s internet from the outside won’t work anymore; Blockstream is currently broadcasting Bitcoin blocks from geostationary satellites (yes, really) to most of the world. Their goal is total global coverage. However, you can only receive the blockchain, not send transactions with this technology. So recently, Nick Szabo and Elaine Ou introduced a protocol for sending and receiving Bitcoin transactions (and block headers) over HF radio.

In reality, Venezuela hasn’t made Bitcoin illegal anyway. It seems unlikely that Nicholas Maduro’s ineffective government could substantially threaten the internet. China, while having the Great Firewall and having shut down Bitcoin exchanges, has not made the possession or use of Bitcoin illegal. These technologies are really only a just-in-case scenario. However, if you do live in a country with no internet or interaction with the outside world (North Korea), you still might not be able to use Bitcoin; no internet, no distributed systems, no censorship resistance (although the North Korean government itself uses Bitcoin to avoid international sanctions).  While I have to concede this point, it’s also important to acknowledge that technological advancement has enabled South Korean soap operas to be smuggled across the border; in the future Bitcoin may find a way into the Hermit Kingdom as well.

However, North Korea is one of the worst-case situations. In almost any other country, cheap computing technology and simple internet infrastructure has taken hold in an irreversible trend. And that’s all that’s really needed to use Bitcoin.

…Probably. What if a high trust societies made Bitcoin illegal? What if the United States and Europe made it illegal to own or transact in Bitcoin? I don’t think this is likely, as democracies tend be very slow when it comes to legislation, especially regulation where financial markets can make a lot of money. Moreover, institutional investors have already created legitimate companies in the US and Europe and so there would be lobbying, deliberating, compromising, etc. Japan has already recognized Bitcoin as an official form of payment, and if nothing else, the US making Bitcoin illegal would create an odd situation for American citizens living in Japan and vice versa.

But let’s say it happens.

It’s undeniable that Bitcoin’s value would drop. If you were already using Bitcoin for illicit activity, you might keep using it, but it might expose you to additional legal risk where it didn’t before. However, if you were using Bitcoin as an investment/speculative vehicle or as a way to send international transfers, an illegal Bitcoin is significantly less appealing because it would expose you to legal risk that you wouldn’t otherwise have to deal with at all. Bitcoin’s growth proposition wouldn’t be zero, but it might be pretty grim, and perhaps relegated to country’s with weak state legitimacy (and where widespread mistrust of the state means ordinary activities are criminalized anyway).

However, like I said previously, I find this scenario unlikely. Moreover, the Bitcoin network isn’t just waiting for governments to act, it is constantly under development with a large technical community.

V.

Can Bitcoin scale to take on more roles and use cases? Can it upgrade to become more censorship resistant? Definitely.

One big item we’ve talked about before is the Lightning Network. The idea behind the LN is pretty simple: you can create payment channels by putting some Bitcoin in escrow through a time-locked transaction that is signed but not posted to the blockchain. This channel can be continually updated with new transactions representing different payments back and forth across the channel until the channel closes by posting the final “net” transaction to the Bitcoin blockchain (read more about it here). This uses the blockchain as a settlement layer, and saves on transaction fees since only two transactions are ever posted to the blockchain (to open and close the channel) even if lots of payments occur.

There is another interesting aspect of this technology, which is that you can use a LN channel as an initial hook into a larger network. So if you (Person A) already have a channel open with Person B, you could pay Person C without opening up a new channel as long as both B and C have a channel between them already open. A pays B, then B pays C, and everyone updates their current balances on two payment channels, but no one needs to post anything to the blockchain, so no transaction fees are needed.

This is pretty good for scaling. However, it is somewhat negative for privacy. The most efficient way any Lightning Network will exist is through large central hubs. This is because end users will want to open a single payment channel (since it’s cheaper and ties up fewer funds), so they will want to connect to a hub everyone else is connected to. A hub that doesn’t stay available all the time would be unhelpful if you want to make instantaneous payments at any time, so the trend will be towards large, continuously available hubs. These hubs will also need access to lots of liquid cash as they will have lots of funds tied up in open channels, while also needing to have liquidity available to open new channels at any time.

This will lead to hubs with lots of cash and thus corporate backing. These large hubs will best be able to scale lots of LN instant payments while keeping LN node fees low. However, a central payment hub would have lots of information about its users, users who are using a single Bitcoin address for all of their transactions. Thus each address would have much more information leaked to the LN hub nodes, which you could track across time.

Of course, if you wanted more anonymity, you could just use a regular Bitcoin transaction; any service or individual who has a Lightning address must by definition have a Bitcoin address. This seems a reasonable tradeoff: instant transactions that can be tracked over time vs anonymous transactions that you pay a higher fee per use.

VI.

Another impressive project is Drivechain.  This project would allow for sidechains in the Bitcoin ecosystem. These would be soft-forked in (that means no network split), and these sidechains would not need to impact the mainchain. The sidechain could run its own nodes independent of the Bitcoin chain, although in practice we would expect Bitcoin nodes to watch the sidechains since we would imagine sidechains would only exist if there was significant value added there. The way these work is that Bitcoin would be sent to an escrow account watched by the sidechain. That would allow those coins to appear on the sidechain and be governed by any rules the sidechain wants.

Interesting sidechain ideas include Hivemind (decentralized Bitcoin prediction markets) and MimbleWimble (homomorphically encrypted confidential transactions). Needless to say, there is an enormous amount of potential here. Drivechains would allow limitless innovation, allowing new blockchain rules to flourish while maintaining the network effects and avoiding the coordination failure of multiple currencies or blockchains.

However, there are risks with this approach. One risk is that money stored in the sidechain is sitting in an escrow account on the mainchain. Mainchain nodes don’t have to watch the sidechain, and so if incorrect transactions are posted trying to withdraw money from the sidechain, it’s up to the miners to enforce the correct rules. As long as miners believe sidechains enhance the value of Bitcoin, there shouldn’t be a problem.  But if we don’t get to that point quickly, drivechains could be a short-lived experiment ending in grand theft. I’m hopeful this is not the case though, and sidechains would offer such a massive increase in the value of Bitcoin that several will survive and grow.

VII.

Let’s take a moment to elaborate on the implications here.  The creation of a MimbleWimble sidechain or the addition of the related idea of Confidential Transactions to Bitcoin would be game changers for Bitcoin privacy. Tax avoidance with Bitcoin would become simple, easy, and possibly unstoppable. Combined with improved scaling or the essentially limitless use cases for Bitcoin sidechains, there will be a combination of high demand and availability of Bitcoin with widespread privacy.  Even if governments can continue to collect tax revenues, their ability to combat Bitcoin would be completely diminished.

The interesting corollary is that governments aren’t really getting in the way of Bitcoin. Maybe they’ll crack down on it in the future, but for now there isn’t a lot of indication for heavy regulation. In the US, electoral politics means there will be a deregulatory environment for the next year, maybe three.

Finally, the Bitcoin and cryptocurrency space is not done developing. Sidechains offer the potential to incorporate all sorts of new rulesets and innovation into Bitcoin. The potential here is literally unknowable. For these reasons, I believe Bitcoin has the potential for significant value.

I would also of course like to point out that this is just some blog on the internet so take my advice as policy speculation and not investment speculation. There are plenty of other financial risks to Bitcoin I don’t have time to cover. This includes that if you lose your private keys, your money is gone forever. It includes that there could be an unknown flaw in the Bitcoin code that could be exploited, losing money and crashing the price of Bitcoin. It includes that government agencies could compromise developers and pay them off to put in code that helps to destroy the network. Bitcoin is risky and speculative. The fact that it has a lot of potential does not guarantee that it will have value in five years.

VIII.

A final note on other cryptocurrencies. There are many other cryptocurrencies, and I’m doubtful on all of them for two reasons. (1) If Drivechain is successful, most use cases for other coins will be gone. (2) As it is, even if other chains have cool features, they don’t have the network effects of Bitcoin. Collective action failures mean that better features may be passed over if it involves transaction costs distributed over many individuals; in other words, it will be nearly impossible to get users, vendors, developers, and miners to switch over to a different cryptocurrency. In the long run, we’d probably expect one or two cryptocurrencies to dominate. This may be Bitcoin or it may be something else, but today, Bitcoin is the clear market leader. To bet on another cryptocurrency is to bet against the market and to bet against the large ecosystem that Bitcoin has built. This seems very risky.

Thanks for reading, and if you enjoyed this, feel free to donate to the Bitcoin address on the sidebar!

 


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Free Market Assumptions in Healthcare

I’ve encountered an unexpected concept when debating and discussing healthcare solutions in the United States.

Healthcare in the United States contains both public and private actors, but it’s most important characteristic for a libertarian critique is its lack of price signals. Healthcare is not purchased in an open market. Patients select healthcare providers based on reputation and what their insurance covers, but most patients do not choose their insurance provider. That is usually done by their employer or the government (in the case of Medicare and Medicaid). Conversely, healthcare providers do not charge patients, they charge insurers where prices can differ by provider and by procedure. EconTalk recently had Christy Ford Chapin on to discuss the history of American healthcare and I would highly recommend the episode.

The libertarian position (and mine) is that healthcare could be improved with prices. There are many ways to do that, you do not necessarily need patients to pay those prices, but you need them involved in the decision making process. Otherwise, there is no downsloping demand curve, and therefore there is no incentive to improve efficiency in the market. Thus, we see higher prices over time instead of the usual results of technological innovation: higher diversity of choices, higher quality goods, and lower prices.

This post is not a defense of whatever Republican healthcare bill is now being floated to replace or repeal Obamacare. This is only an argument that having known prices and price transparency would allow for demand and supply curves in the health care market. Such a characteristic could be part of a host of possible healthcare policy landscapes, and I’m only saying that a landscape that has prices is likely better than one that does not. Today, and for most of the history of healthcare in America, the healthcare industry has not been governed by an openly priced market.

Such a libertarian critique is separate from the argument that a “free-market” system with prices would hurt the poor. This is a valid critique that could be addressed with direct cash grants or other form of government subsidy that avoids having healthcare prices set by the government (refundable tax credits, health savings accounts, etc).

The remarkable argument I’ve heard is that if we allowed healthcare to be purchased in a market with prices, it would fail because you “can’t have” a free market in healthcare. It’s hard to nail down exactly what these people imagine would happen, but it seems that they believe prices themselves would not obey the laws of demand and supply. I will now list some arguments I have heard, some of them several times, and why they are incorrect. Certainly these arguments are poor and perhaps I am wasting time with them, but apparently they are common enough that I have run into them several times and therefore must be addressed.

“Healthcare Demand is Inelastic”

This is by far the most common point I’ve heard. It’s not usually stated in economic terms, but more like “if you are in need of emergency medical care, you’ll pay any amount, and this breaks normal market assumptions”.  However, I’ve also heard it stated that evidence of competitive markets working in elective procedures (Lasik or plastic surgery) does not apply to regular medicine because of demand inelasticity.

Firstly, the assumption that demand for medicine as a good is totally inelastic (i.e. quantity would not respond at all to price) is obviously wrong. That would imply there are no unnecessary procedures done ever.  Yet we all are aware that because doctors are often paid per procedure, they are often incentivized to conduct tests because there is very little downside (i.e. it costs neither the patient nor the doctor anything to run the extra test). If there is no elasticity, then there is no room for reducing the amount of procedures done by doctors. I doubt that.

Nonetheless, let’s grant the assumption, or at least let’s say that demand elasticity is very low.  That means at higher prices, you’re likely to consume a similar amount of medicine. That sounds more reasonable; if you’re sick, it’s not your choice.

Ok well…so what? We can have competitive markets with marginal revenue very close to marginal cost even if demand elasticity is low. Gasoline is a classic example of an inelastic good, yet the gasoline market is highly competitive. Prices work without issue here. Again, we’re not saying that poor people would be really happy with prices, we’re just saying that prices would exist if patients could purchase healthcare in a market.

Another related point is that if you have a medical emergency, you’re not really in a position to negotiate prices. This, however, is not just due to demand inelasticity, but also monopoly pricing.  If you’re injured, you can’t just go to a different hospital, so the ER you arrive at is pretty much the only place you can go. This is a fairly good argument for government intervention in the ER. However, insurance is also a pretty good solution; if you won’t be able to make a choice in the moment, you buy insurance so that when the moment comes, you are already prepared. There is no economic reason that medical emergency insurance could not be purchased in a free market. Additionally, medical emergencies are a small part of the medical industry. The vast majority of medical procedures are not emergencies, and so for most situations, monopoly pricing is not an issue.

“Knowledge is imperfectly distributed in medicine”

Again, the fact that market actors have imperfect knowledge does not mean a market cannot exist. It may mean there are market failures, but government interventions are subject to government failures which may or may not outweigh the benefits of trying to fix the market failure. Moreover, this proves way too much, as it implies that you can’t have any market with imperfect knowledge, yet all markets suffer from this, and plenty are functioning just fine. In fact, I’d argue that prices are the single best way to spread knowledge.

Imperfect knowledge is usually fixed through regulation, like accreditation or inspections. You don’t have the knowledge to know that your airplane doesn’t have mechanical problems. Nonetheless, you are quite capable of comparing the prices of different airplane tickets, and you’ll likely respond to market forces when purchasing a ticket. Certainly imperfect knowledge is an argument for regulation, and I’m sure I’d disagree with plenty of people on how much regulation is necessary, but there is no world in which it then makes sense to argue that imperfect knowledge precludes a functioning price system.

“People are irrational”

First, people don’t have to be economically rational, nor do markets have to be free from regulation in order to create accurate economic modeling. To make the claim that economic analysis can’t be done with healthcare because the market is not perfectly competitive, or actors are not perfectly rational, again proves too much; economic analysis would be “fatally flawed” in all markets. The only question that needs to be asked is whether it’s possible patients might call two different places for a quote on a chest CT or an MRI. If some of them would do this, there would be competitive pricing, even if most don’t know what an MRI actually does.

“Healthcare is too expensive for a market to function”

This point sort of ignores the thesis that we are arguing, as all I’m trying to say is that prices can exist in the healthcare market. However, this is related and while it’s a bad argument, I want to address it briefly.  Healthcare is pretty expensive, although I suspect that it would be cheaper if market prices were used. The obvious answer to me would be to imagine if the government gave a large amount of money to an individual to pay for their healthcare for a year. That would fix the endowment issue where the poor are excluded from the market. In this hypothetical, my thesis suggests that there would be a variety of options for healthcare spending, such as paying out of pocket, buying a high deductible insurance plan, subscribing to a doctor network, etc. All of these would be examples of functioning markets in healthcare. Additionally, if recipients were allowed to roll over funding into the next year, they’d be incentivized to find good deals this year.

My thesis is not that the government should stay out of healthcare, but that interventions that keep prices in place are preferred.

“Morally, patients should not have to pay for healthcare”

Again, this isn’t really an argument against my thesis, but I have heard it. It’s a bad argument, so I’ll address it briefly.

If we take a consequentialist utilitarian moral standpoint, there is no a priori humanitarian reason why patients should not pay for part of their healthcare. In other words, if patients paying for part of their healthcare creates benefits for all of society, including almost all patients and future patients, then the moral thing to do (from a utilitarian perspective) is to have patients pay for some of their healthcare.

So would there be benefits if patients paid for healthcare? Well, first you have to establish that prices can exists. We’ve done that for the theoretical, but how about the empirical?

Empirical Data

The first point is that in the area closest to healthcare where there are transparent prices, elective procedures, we see functioning markets with costs going down over time.  Highlights include:

1. For the top ten most popular cosmetic procedures last year, none of them has increased in price since 1998 more than the 45.4% increase in consumer price inflation (the price for the hyaluronic acid procedure wasn’t available for 1998), meaning the real price of all of those procedures have fallen over the last 18 years.

2. For three of the top five favorite non-surgical procedures in 2015 (botox, laser hair removal and chemical peel), the nominal prices have actually fallen since 1998 by large double-digit percentage declines of -25.2%, -43.8% and -23.5%. That is, those prices have fallen in price since 1998, even before making any adjustments for inflation.

3. Most importantly, none of the ten cosmetic procedures in the table above have increased in price by anywhere close to the 93% increase in medical care services since 1998. The 23.2% average price increase since 1998 for last year’s top five most popular surgical procedures, isn’t even close to half of the 93% increase in the cost of medical care services over the last 18 years.

However, there are some doctors who just take cash for normal, non-elective procedures. These would be procedures where there is “inelastic demand”. What happens to these doctors? Do they go bankrupt immediately? Is everyone confused and bewildered? Not really, it just works like any other market. They post their prices online, and people come and pay for their procedures directly, without insurance. The Oklahoma Surgery Center is one of the more well known health centers with this approach:

The Surgery Center would charge $19,000 for his whole-knee replacement, a discount of nearly 50% on what Villa expected to be charged at his local hospital. And that price would include everything from airfare to the organization’s only facility, in Oklahoma City, to medications and physical therapy.

And once that happened, lots of groups were incentivized to send their patients there, making other Oklahoma hospitals compete.

While no organization keeps track of how many cash-based medical centers have cropped up nationwide in recent years, Smith and Lantier say they’ve witnessed an explosion. In Oklahoma City alone there are roughly three dozen centers that are all or partly cash based, specializing in everything from radiology to oncology.

The RAND institute ran an RCT in the late 70s that found patients who cost shared saw a reduction in unnecessary procedures. Obviously it’s pretty old, but I’m doubtful human nature has changed that much from the late 70s; if people have an opportunity to save money, they will do so. Healthcare policy should utilize that.

More recently, in 2008, Oregon had a Medicaid experiment, where several people were given access to Medicaid based on a lottery. Thus, a study was conducted to determine what the affects were of having access to Medicaid. As you would expect, patients with Medicaid coverage were much more likely to utilize healthcare generally, and more likely to go to the ER. The price of medical care went down when this group was enrolled in Medicaid, and consumption of medical care went up. This supports the notion that healthcare has a downsloping demand curve…just like every other market that has ever existed.

Finally, there was a study done in 2015 looking at the healthcare system and it’s lack of prices. It found that transaction prices, that is prices negotiated between hospitals and insurers, still accounts for much of the differences in private inpatient healthcare spending. It also found that even after controlling for several different variables, hospital monopoly power was responsible for higher prices. This seems to indicate to me that if we had significantly more price transparency in a functioning market, hospitals and patients would respond to those incentives, creating incentives for lower prices and better, more efficient care.

Conclusion

This isn’t revolutionary by any means, but there’s seems to be plenty of empirical and theoretical reasons that if we had transparent pricing systems in the healthcare industry, it would function similarly to prices everywhere else in the economy. Certainly the use of insurance complicates things, but the way we use medical insurance is a result of the unique way we created the medical payments system as detailed in the EconTalk episode mentioned at the top of the post. There is no technical reason we need to retain that system, and I think transitioning towards more procedures having known prices would be beneficial, whatever that system would be.

 


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Urbanization and Free Markets

I’m not an environmentalist. I find global warming problematic because it will likely make living on Earth more expensive for humans. Preservation of natural resources is not inherently important to me because I don’t find it morally wrong to consume these resources at high levels. Nonetheless, it could be valuable to preserve natural resources if there is a tragedy of the commons where resources are underpriced by the market and are thus being inefficiently overconsumed. I also think humans tend to enjoy at least visiting and observing pleasant natural land and seascapes, but it only makes sense to preserve them to the extent of which the value of observing these natural areas outweighs their economic value in improving human lives through development.

Unfortunately, I find a lot of the arguments for urbanization tend to emphasize the environmental benefits. These types of arguments will not do well in convincing libertarians that they should also promote urbanization. The goal of this post is to present an argument for libertarians, classical liberals, and free market economists on why they should be interested in urbanization and urban policy.

Cities

Cities are a vital part of human civilization due to specialization, economies of scale, and network effects. You can’t build a hospital with specialized departments and research facilities in a town of 100 people. You can’t make an engineering startup in a town without stores that sell specialized equipment. You can’t teach specific niche courses in cryptography if your city can’t support a university large enough to have advanced Math and Computer Science departments.

Cities also provide more for their inhabitants to consume due to economies of scale. Cities have more diverse food and cultural entertainment like museums, concerts, or festivals. These experiences are also in constant competition, spurring innovation. We think of cities as being more expensive than living in the country, but that’s somewhat misleading; diverse experiences are available in cities rather than rural areas because they can only be provided cheaply in cities. The selection of products is much narrower in less densely inhabited areas. In cities, supply chains can focus on getting tons of varied products to a single location where everyone lives, rather than transporting fewer standardized products across a giant area. The internet is a mitigating factor to some of this, but it’s also true that you can’t get continued technological innovation without concentrating innovators in cities!

There’s another important point about cities from a libertarian or postlibertarian perspective: they offer anonymity and individuality. Cities pack enough people into an area that you can make choices about your social interactions. Unlike a small town where your personal relationships are limited by geography to the few people in the town. It is far more likely you can meet with others that share your obscure interests in a large city rather than a small town. You’re not forced to conform to what your few neighbors believe are acceptable social behavior or beliefs. Diverse cities allow for varied cultural norms, and I’d argue increased tolerance.

The policies and discussions surrounding urbanization and urban planning have mostly been driven by those on the political left. Their political enemies, the Red Tribe (for more explanation, see section IV of I Can Tolerate Anyone Except the Outgroup), is often identified by its opposition to rich urban elites. Libertarians themselves have streaks of this disdain for progressive cities and yearning for an idealized Jeffersonian yeoman farmer nation, where everyone lives on their own separate plots of land and does as they please. But postlibertarians and the Grey Tribe should not cede urban policy to the left so easily; cities are largely vital for the economic reasons I’ve put forward. While today they are often bastions of progressive politics, cities are too important to be left to be governed by the ideas of a single political group.

Dense Cities

Since there are benefits to people who live in cities as described above, it seems to follow that denser cities might emphasize those benefits to a greater degree.

The economic argument seems to make sense here: if cities concentrate people, denser cities should concentrate logistical costs. That means less investment cost in infrastructure per person and less cost to deliver a larger amount of physical goods to the same people. There should be better economies of scale for transportation when cities are packed together. Another interesting benefit might be that with locations closer together, fewer people would use cars, so there would be less total hours wasted in traffic for a city of similar size but lower density. Perhaps this would be offset by longer total transportation time since walking is slower than driving. Certainly it seems that fewer people would die in car accidents at least.

Another benefit specifically for libertarians might actually be fewer road square footage per person. Roads are expensive, are often centrally managed by the city, and so don’t respond to price signalling. Optimal road work is thus not easily achievable, leading to poorly timed construction (overabundance of construction due to road opportunity cost not being priced) or not enough road repairs (too little construction due to no consumer payment for roads). Narrower streets specifically would essentially privatize space in a dense city, space that is highly valuable.

There is also a little bit of anecdotal evidence for cultural benefits of dense cities too. For example, we might expect denser cities to have more people from an odd subculture willing to meet than the population of the city might suggest (due to close proximity). As an example, let’s use Slate Star Codex’s series of local meetups earlier this year. If we expected SSC meetup populations to be based solely on total population, we’d see it match the US Census’ Core Based Statistical Area ranking: New York, Los Angeles, Chicago, Dallas, Houston, Philadelphia, Washington, Miami.

If we expected denser cities to show the social/cultural benefits to a greater extent than spread out cities, we should expect the SSC meetup populations to more closely match the population density of top cities. Unfortunately there’s no exact definition for a dense city. The simple way to define it is total population within a city’s political borders divided by the land area under that polity. However, cities usually extend beyond the political boundaries specifically because those municipal governments get in the way. If we go by this definition, the top US cities should be New York, San Francisco, Boston, Chicago, Philadelphia, and Miami. Now this actually matches the top SSC American cities pretty well, with the exception of Miami which didn’t meet the 10 person minimum despite being in the top seven cities in both total population and density. Another way we can represent density is through the number of high density areas in each metropolitan area. This yields in order: New York, Los Angeles, Philadelphia, Miami, Boston, Chicago, San Francisco.

There are obviously other factors at work in the SSC meetups including culture of the city (Silicon Valley/startup culture is probably the best predictor of SSC readers, as we see small Silicon Valley towns like Mountain View on the list) as well as a number of English speakers (explains why dense foreign cities are not high on the list), and college degrees. This last point is interesting. This article discusses how denser cities only seem to realize productivity gains in high human capital situations. Finance, technology, and other professional industries requiring higher education stand to gain from higher density cities. One question then is whether college graduates are attracted to dense urban cores or whether urbanization simply occurs around where college graduates tend to be (around universities?). To me it seems that cities clearly predate modern universities and college graduates. The establishment and growth of cities seems fairly organic, emergent, and spontaneous.

Too Dense?

This brings us to the next point: cities don’t require urban planning to exist. Humans are completely capable of decentralized self-organization of urban areas, and cities existed and continue to exist without strong municipal governments, zoning laws, building codes, etc. Nonetheless, with close quarters comes externalities, and so governments arguably have a lot of benefits to offer residents of cities over not having governments. Yet, as urban economist Issi Romem writes, American cities tend to expand outwards, and those cities that don’t expand geographically see large cost of living increases. Relatedly, as this Forbes piece points out, many of the highest density cities in the world (Dhaka, Delhi, Karachi, Mumbai)  are also relatively poor. Cities can be rich, but density doesn’t seem to be a requirement for being rich. In the U.S., most new housing comes from urban expansion, not density increases. This seems to beckon that it is not only cheaper to expand at the outside of cities than it is to expand the interior of cities, but more desirable to residents. Given the benefits of cities and density, how could this be?

One possibility is that it could be more expensive to bring goods into a city center than we thought. Maybe economies of scale don’t work as well due to increased traffic. I don’t have much evidence for that, but I guess it’s possible. This seems unintuitive though, as living in the suburbs means dealing with much more driving and traffic anyway.

However, some goods don’t need to be transported into the city…like housing. Once it’s there, it is consumed slowly over time. Yet rent is fairly correlated with density.  I don’t have good data on it, but I took at look at padmapper.com in a couple cities that I knew the general density of. I took the price slider and noted where the high priced places were compared to the low priced areas. It wasn’t a perfect correlation, but it did match my general feeling that more density was associated with higher prices. So if we assume that a housing market is in equilibrium, differences in price for dense and non-dense areas indicate on the demand side that there are plenty of people who would prefer to live in urban dense cores over suburbs given the same price.

Next, on the supply side, differences in price between dense and non-dense areas indicates higher marginal cost in dense areas compared to less dense areas. So what is driving that cost?

Certainly more complex tall structures are needed for dense living, although part of that cost is spread over many more inhabitants. Additionally, there is more reliance on public transportation infrastructure than is needed in the suburbs, which might lead to higher taxes to pay for it. However, other infrastructure costs are lower per person in the city than in the suburbs (lower fixed costs to build water, sewage, electrical, internet, and roads because they scale largely with horizontal distance, which is minimized in a city). Additionally, if cities are supposed to help make people more productive then we might hope similar tax rates would bring higher revenue in dense cities than suburbs.  It’s hard to know then whether tax burdens should be higher in cities, but it seems colloquial wisdom believes they are (high density cities don’t seem like low tax areas). I did find this 2005 paper from Harvard indicating that multi-family buildings (apartments) had a higher tax incidence than individual family homes. Moreover, as Stephen Smith at Market Urbanism pointed out, much of that local tax money goes to roads and schools, things denser urban dwellers likely use at lower rates than suburbanites. Finally, the federal mortgage interest tax credit further makes housing cheaper for suburbanites over urban core residents.

Free Market Perspectives

So while it’s possible to say that it simply costs more to live in a dense city, it’s also true that government seems to cost a lot in cities. Perhaps that’s a necessary part of living in cities, but if we leave urban policy as the sole domain of the Left, there will be no counterbalancing philosophy that understands market forces. Without that check, government will cost more than its benefits.

Moreover, raising tax revenue and providing services are not the only functions of municipal governments: they also create regulations, which are another way they contribute directly to the cost of living in cities. Here it seems there is little nuance to be had: most high productivity cities have far too restrictive housing regulations. This has reduced the ability of labor to relocate to more productive areas of the economy, and according to this NBER paper, has allowed for massive missed opportunities in economic growth. And this makes intuitive sense; over time, technology should allow us to build denser and denser cities more cheaply, yet new housing in some of the most productive cities has not kept pace with demand. The explanation must be regulatory hurdles on new housing.

Such an outcome squares well with the common opposition to urban development known among the urban policy community with the pejorative NIMBY (not in my backyard), and it applies not just to housing, but to any development in a city. Elected municipal governments are responsible to the people who live in the city at present, not to possible future citizens. While this may seem just, it is emphatically a net negative in a utilitarian calculation; improvements in human lives should not be discounted based on where that human lives. Policy that makes it harder for people to move to a city to make it denser, when those people want to move there, creates worse outcomes than we would otherwise have.

Finally, let’s take a step back: I’m not saying that people have to live in dense urban cores; people should live wherever and however they would like to. I’m saying that governments can mismanage urban policy in ways that prevent people from moving to where they would actually want to go. Bad policy changes the nature of cities and reduces the potential benefits they can bring. Because urban policy tends to rely significantly on some state intervention, I find that there is not a plethora of free market urbanists. Nonetheless, cities are an important part of the modern human experience and they will continue to be in the future. Libertarian perspectives have much to offer urban policy and it would be a shame to abandon it to the left.

 


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Metacontrarian contributed to this post.

What is Postlibertarianism? v2.0

When I started blogging here about 18 months ago, I knew that I was having trouble identifying myself as exactly “libertarian”, despite that being my primary blogging perspective for years before that. I’ve mapped out important parts of this “new” position in previous posts, but now I think it would make sense to put everything in one place. This post is labeled “2.0” since former postlibertarian.com blogger Joshua Hedlund defined it pretty well in 2011. This is a more in depth analysis.
Continue reading What is Postlibertarianism? v2.0

The Obama Presidency Was Bad

We’re already caught up in how terrible the Trump presidency is, but over the next four years, it will be important to remember just how bad the Obama presidency was. When overcome with frustration at the current administration, I would urge readers to come back to this post and remember that the last president was also quite terrible. In his farewell speech, Obama tried to make the argument for his presidency’s accomplishments, but many of them were simply court cases that were decided while he was president, or decisions that were nice but had little real policy impact.

There have been plenty of reflections on the Obama presidency, but I think a high level overview of everything Obama did would put in perspective just how awful he’s been, especially as we experience the incompetency and horrible policy decisions of the current administration. I’ve done this by letter grades A through F.

The A’s

Iran Nuclear Deal

So…there was only one thing I could give an A to. Even this A is very hesitant. We did give up a lot for this deal–the Iranian government is pretty awful and by unfreezing their assets, they got access to very large amounts of money. However, I don’t think there was much else to do. Unless Republicans actually wanted to declare war on Iran, this seems like the only way to stop them from developing a nuclear weapon.  Iran’s nuclear program will be prohibited from refining any uranium for 15 years, and this was accomplished without any military intervention whatsoever. That’s pretty excellent. Moreover, the average citizens of Iran matter as well and it is somewhat unfair to punish them with high inflation and economic hardship because their authoritarian government is irresponsible.  Cato expands more here.

The B’s

Trade

One of the most important accomplishments is that Obama’s administration worked to pass several free trade agreements with Korea, Colombia, and Panama. He also tried to complete the Trans-Pacific Partnership and the Transatlantic Free Trade Area, although he could have really pushed harder on these initiatives. Obama didn’t do a great job making the case for free trade and his signature deal was ultimately a failure; honestly, a B is generous here, and is more of a function of the importance of free trade more so than Obama’s actual impact. Also worth noting is that his rhetoric while campaigning was pretty vigorously anti-trade, so he should be commended for changing his mind on this.

Gay Rights

Obama ended Don’t Ask, Don’t Tell, but was still on the record as anti-gay marriage as late as 2012. Sure, public opinion on gay marriage shifted rapidly, but Obama basically waited until it was 50-50 to switch to the right side on this; the Libertarian Party has been on board with gay marriage since the 70s. He should also be applauded for essentially not getting in the way of the court case. I know that’s a low bar, but he could have fought it and tried to keep the DOMA. The other issue is that while this is excellent, the impact of gay marriage legalization is somewhat limited to people who can take advantage of it.

Cuba

The Cuban embargo was imposed over 50 years ago in a bid to quickly end Castro’s dictatorship on the island. It failed. 25 years after the Soviet Union had disintegrated, a president finally spent some political capital to remove an outdated institution. Trade embargoes harm populations, and trade embargoes on a country that has been crushed by horrific socialist economic policies are even more harmful. The president cannot remove the embargo, but everything he can do without Congress, Obama has done on this issue. Trade can bring countries together, and Obama took steps to build those bridges. If he had actually gotten the embargo lifted, this would be an A.

The C’s

Marijuana Legalization

And that’s it for the entirely positive! Marijuana’s big progress had basically nothing to do with Obama, and Obama actually started out fighting it, performing more federal raids on state legal marijuana dispensaries in his first term than Bush. Eventually the administration did make the decision not to continue attempts to enforce marijuana laws with federal police forces. While kind of obvious and not very impressive, this may turn out to be something we remember fondly during the long night of the Jeff Sessions era.

Healthcare

As an incredibly brief overview, the ACA is flawed because it does nothing to address the fundamental problem with the healthcare system: a lack of market forces.  The laws of supply and demand create incentives for lower cost and higher quality care. Plastic surgery and lasik are not covered by insurance and thus must compete on price and quality and over time these areas have seen remarkable improvement with prices remaining the same or even dropping.

Our insurance system insulates both consumers and providers of healthcare from the market prices; consumers don’t pay for care, they don’t pay different prices at different places, and they often don’t even buy the insurance that does pay for care. Instead their employers pay for the thing that pays for their healthcare. And sometimes, if you go to a hospital, the insurance doesn’t really pay for care either, it pays the hospital in obfuscated and arcane ways, which in turn provides the doctors and actual equipment needed to provide care. It’s a complete mess.

The ACA did do some nice things like allow people with pre-existing conditions and people who didn’t get their healthcare through their employees and poor people to get health insurance. This is great, and any healthcare reform should strive to do that. However, by not addressing the price issue, they doomed these reforms. Things have sputtered along, but healthcare costs have kept rising, and now insurers are stuck with a disproportionate amount of sick people, needing to raise prices, which only drives away more healthy people. The death spiral was a predictable consequence (and indeed I did predict this in 2010 in a blog attached to my real name and thus will not be linking to here). Obamacare was not a poorly intended bill, but it was an incredible missed opportunity to actually fix the healthcare system. The only reason I didn’t give it a lower grade was because the system was so bad already, it’s hard to argue it was made that much worse.

Global Warming

Obama took steps to reduce climate change. Even if you’re not concerned about the most dire predictions of global warming, that’s probably a net benefit. He also was able to get China to sign onto the Paris Agreement. While not having legal punishments for countries who break their promises, it’s a solid negotiating achievement. However, Obama also implemented, largely by executive order, regulations on coal plants in the US that will have very little impact on carbon emissions. It’s also not at all market oriented, and therefore not particularly economically efficient. Additionally, in his first year in office, Obama had a chance to try and pass a more economically efficient carbon credit trading bill. Assuming climate change is as dire a threat as many say it is (I’m admittedly less worried), it seems to be a poor decision to spend political capital on other bills that did pass, especially something that was as flawed as Obamacare.

The Economy

The employment rate is lower than it has been in a long time, but the problem is this graph. Labor force participation has plummeted from 65% in the depths of the recession to around 62% now. The last time it was this low was before 1980. Since the current labor is around 160 million people, and we are at 62% participation, that means the cohort of the working age population is about 258 million. In 2009, unemployment was around 9%. With a labor force of 155 million people, that’s almost 14 million unemployed. Today with an unemployment rate of 4.7%, that’s only 7.5 million unemployed. However, looking at the people not in the labor force in 2009 there were 83.5 million not working but not unemployed. In 2017, there are 98 million not working but not unemployed. so unemployment dropped by almost 7 million, yet more than twice that many more people were staying out of the labor force entirely. The economy isn’t in free fall, but it’s not knocking it out of the park either, and this is 8 years after the recession. This isn’t entirely Obama’s fault, as the Federal Reserve is much more responsible for economic success overall, but the things Obama did have control over were abject failures: fiscal restraint, entitlement reform, and deregulation.

Immigration

Obama’s legacy on immigration liberalization is mixed. Unfortunately, as this is one of the more important issues in improving the world, a mixed record is disappointing. Obama deported more people than George Bush and he failed to pass any sort of comprehensive reform bill. Obviously, he couldn’t pass bills on everything, but this would have been a pretty important area to do so. Obama did however create an executive order delaying deportations for millions of illegal immigrants. This was a bit odd constitutionally, but with so many illegal immigrants in the United States, it would be impossible to deport them all anyway. Obama’s order simply prioritizes some over others, protecting children and parents of American citizens. This was certainly a good policy, but unfortunately Obama’s legacy in this area should have been so much better.

The D’s

Endless Wars

Obama is the first president to be at war for every day of his presidency. From Iraq to Afghanistan to Libya and Syria, to undeclared wars and bombings in Yemen and Pakistan, we have entered a new era of endless war. Libya is specifically horrifying: Obama chose to involve the American military in Libya unilaterally. He explicitly did not get authorization from Congress, and in fact Congress explicitly voted against a resolution to authorize his military involvement after the fact. That is a terrifying precedent to give Donald Trump.

The only reason this category is not an F is because of Obama’s continued reluctance to expand the US involvement in Syria.  Of course, he did this in the worst possible way, by drawing a line in the sand and then backing down from it but it’s undeniable that a larger American role in Syria would have involved the US in one of the largest, bloodiest civil wars of the last decade. Of course, we have not even touched the fact that American troops are in Iraq 14 years after the invasion, and many US contractors remain in Afghanistan 16 years after that invasion. Obama has still institutionalized war in way never before seen.

The F’s

Surveillance

I mean wow. How did we get here? If you want all the citatations, this Mashable article is a good start. The United States government engages in broad sweeps of Americans’ phone records through unconstitutional general warrants issued via a secret court that had no defense team, no oversight, and has only rejected a handful of warrants in its entire history. The NSA also had a program for collecting data on foreigners and Americans from major technology companies, as well as a massive database storing all of that information for later search. Every available method of siphoning data is apparently being used.  The NSA also invested heavily in ways to break internet encryption standards. They even paid $10 million to RSA to get them to set their default encryption algorithm to one that was fundamentally broken in one of their products. Most impressively, it turns out that the big phone record collection the NSA was conducting in total secret, that had no oversight and Senators couldn’t even talk about, it’s illegal according to a federal appellate court.

It was such a disaster that Congress eventually tried to pass a reform bill to fix Section 215 of the Patriot Act which is what the courts cited as the justification for these general warrants. Yet in the end, that bill was watered down to the point of uselessness, with Justin Amash, Thomas Massie, and Rand Paul all voting against it due to its lack of real power. In fact, the bill extended the Patriot Act for several years. Obama’s legacy in this area is a total disaster, and he leaves an out of control intelligence agency with no oversight in the hands of a petty authoritarian. The NSA (and all agencies they share information with) knows intimate details about all of our lives, our communication patterns, and our digital existences. As we’ve written before, this is not good.

Transparency

Reason does a good job tearing the Obama administration apart over the “most transparent administration in history” line. Again, this area is such a disaster there are too many things to cover. We can start by discussing how just a month or two prior to the Edward Snowden revealing everything we talked about in the last section, DNI Clapper blatantly lied to a Senate committee about the government’s spying capability. Obama himself has hardly given any interviews to the press. His administration has had more than double the Espionage Act charges against whistleblowers than all previous administrations combined. Which is especially concerning since none of these were acts of espionage! These were legitimate problems that were hidden from view from the public, brought to light by people doing the right thing. But the secrecy was pervasive throughout the administration; regular employees were banned from talking with reporters, a record number of FOIA requests were denied and at least 1 in 3 were denied improperly (which was only ever found out if challenged), and, of course, the government had a secret extrajudicial kill list.

Drone Strikes

Conor Friedersdorf writes that in Obama’s first year in office, his administration conducted over 100 drone strikes…in Pakistan. Quick recap: Congress voted for an Authorization of the Use of Military Force against the perpetrators of the 9/11 Attacks, which allowed the government to invade Afghanistan. Congress also voted to go into Iraq. Pakistan is not one of these countries, yet apparently Obama was carrying out an entire proxy war via drone strikes. In 2010, those strikes only intensified, yet it was worse than that; to cloud the truth, the Obama administration counted all military age males in the vicinity of these strikes as combatants, regardless if they were civilians or not. There were eventually reforms to this process, and the number of civilian casualties per strikes started to go down, but this is but the smallest of victories. In waging these undeclared wars in Yemen, Pakistan, and Somalia, the Obama administration concocted an absurd “legal” process to target specific individuals without a trial, including American citizens. We are talking about a logistically planned and funded protocol for murdering American citizens overseen only by the President. This process eventually ended up killing a civilian by accident, a 16 year old American. This is unjustifiable. No one was ever held accountable for these lawless actions, and the president retains power to murder at will, which he has promptly done, murdering the deceased teenager’s sister this past week. Someone get this guy a Nobel Peace Prize.

Executive Power

This section condenses much of what Gene Healy says in his excellent piece “Goodbye, Obama”. The powers the Obama administration seized and expanded are vast. While initially running against “dumb wars” and unauthorized wars, Obama became the first president to be at war for every day of his presidency. He undertook drone strikes in countries where he had authorization to be in, he even undertook an entire military action in Libya when Congress had expressly voted against supporting it. He continued to use the 2001 AUMF six years after the death of Osama bin Laden and against a group (the Islamic State) that essentially didn’t exist on 9/11. And the Trump administration has continued this justification. His drone strikes have killed hundreds of civilians, and even American citizens. He has created a secret kill list with no oversight from courts or Congress. He has ascended to new heights of secrecy and prosecution of whistleblowers, and he has thwarted attempts at transparency at every turn. Without public knowledge, the ultimate oversight of the democratic process is destroyed as well. And none of this is even touching areas outside national security where Obama also took unilateral presidential orders to new and creative areas. These include instituting new immigration law by executive order when it was bogged down in Congress, creating new overtime labor rules, adding new environmental regulations on power plants, national school curriculum requirements, and even unilaterally amending Obamacare. Healy writes “More than any recent president, Obama has embraced and, to some extent, legitimized the anti-constitutional theory that congressional inaction is a legitimate source of presidential power.”

Obama’s legacy is the Imperial Presidency. Simply by occupying the same office as Obama, Donald Trump inherits vast powers, legislative, military, and judicial. Americans’ private information is available, their lives at risk without the need for due process, the very laws of the country can be changed via the presidential pen. Barack Obama has accomplished much during his presidency, but most of his important projects have ended in utter disaster, and the manner of their attempted accomplishment has greatly imperiled the separation of powers and constitutional restraint. While itg is quite possible, even likely, that the Trump presidency will be worse still, we cannot forget the incredible cost and horrific events of the Obama legacy.


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2017 Predictions

It’s fun to have opinions, and it’s easy to craft a narrative to fit your beliefs. But it’s especially dangerous to look back at events and place them retroactively into your model of the world. You can’t learn anything if you’re only ever looking for evidence that supports you.  However, if you try to use your model of the world to create testable predictions, those predictions can be proven right or wrong, and you can actually learn something. Incorrect predictions can help update our models.

This is, of course, the basis for the scientific method, and generally increasing our understanding of the world. Making predictions is also important for making us more humble; we don’t know everything and so putting our beliefs to the test requires us to reduce our certainty until we’ve researched a subject before making baseless claims.  Confidence levels are an important part of predictions, as they force us to think in the context of value and betting: a 90% confidence level means I would take a $100 bet that required me to put up anything less that $90. Moreover, it’s not just a good idea to make predictions to help increase your knowledge; people who have opinions but refuse to predict things with accompanying confidence levels, and therefore refuse to subject their theories to scrutiny and testability, must be classified as more fraudulent and intellectually dishonest.

First let’s take a look at how I did this past year, and see if my calibration levels were correct. Incorrect predictions are crossed out.

Postlibertarian Specific

  1. Postlibertarian to have >10 additional posts by July 1, 2016:  70%
  2. Postlibertarian Twitter to have more than 240 followers:  70%
  3. Postlibertarian.com to have >10k page loads in 2016: 50% (had 30k according to StatCounter)
  4. The predictions on this page will end up being underconfident: 60%

World Events

  1. Liberland will be recognized by <5 UN members: 99% (recognized by 0)
  2. Free State Project to reach goal of 20,000 people in 2016: 50% (occurred February 3rd)
  3. ISIS to still exist: 80%
  4. ISIS to kill < 100 Americans 2016: 80% (I think <100 were killed by any terrorists, fewer in combat)
  5. US will not get involved in any new major war with death toll of > 100 US soldiers: 80%
  6. No terrorist attack in the USA will kill > 100 people: 80% (50 did die in the Orlando shooting unfortunately)
  7. Donald Trump will not be Republican Nominee: 80% (whoops)
  8. Hillary Clinton to be Democratic nominee: 90%
  9. Republicans to hold Senate: 60%
  10. Republicans to hold House: 80%
  11. Republicans to win Presidential Election: 50% (I predicted in December, Nate Silver had Trump at 35% the day of, who’s a genius now??)
  12. I will vote for the Libertarian Presidential Candidate: 70% *
  13. S&P 500 level end of year < 2500: 70%
  14. Unemployment rate December 2016 < 6% : 70%
  15. WTI Crude Oil price < $50 : 80%
  16. Price of Bitcoin > $500:  60%
  17. Price of Bitcoin < $1000: 80%
  18. Sentient General AI will not be created this year: 99%
  19. Self-driving cars will not be available this year to purchase / legally operate for < $100k: 99%
  20. I will not be able to rent trips on self-driving cars from Uber/ Lyft: 90% **
  21. Humans will not land on moon by end of 2016: 95%
  22. Edward Snowden will not be pardoned by end of Obama Administration: 80% ***

*I didn’t personally vote for the libertarian candidate, but I did trade my vote, resulting in Gary Johnson getting two votes more than he would have had I not voted at all. I’m counting this as at least a vote for Johnson.

**Technically, I am not particularly able to get a ride on a self-driving Uber because I don’t live in Pittsburgh, but I don’t think that’s what I meant. I also didn’t expect any self-driving Uber rides to be available anywhere, so I’m counting it against me.

***Obama still has a few weeks to pardon Snowden, but it’s not looking good

So let’s take a look at how I did by category:

  • Of items I marked as 50% confident, 3 were right and 0 were wrong.
  • Of items I marked as 60% confident, 3 were right and 0 were wrong.
  • Of items I marked as 70% confident, 4 were right and 1 was wrong.
  • Of items I marked as 80% confident, 7 were right and 2 were wrong.
  • Of items I marked as 90% confident, 1 was right and 1 was wrong.
  • Of items I marked as 95% confident, 1 was right and 0 were wrong.
  • Of items I marked as 99% confident, 3 were right and 0 were wrong.

As you can see from this data graphed, I have absolutely no idea what I’m talking about when it comes to predictions.

You’re supposed to be as close to the perfect calibration line as possible. The big problems are that I only had 2 or 3 predictions for the 50%, 60%, and 90% confidence intervals. For example, my slip-up on predicting Uber wouldn’t have self-driving cars this year means I was only 1 for 2 on 90% predictions. Clearly I need to find more things to predict, as I had 5 and 9 predictions for the 70% and 80% confidence levels, which were right about on the mark. Luckily for next year, I have almost double the number of predictions:

Predictions for 2017:

World Events

  1. Trump Approval Rating end of June <50% (Reuters or Gallup): 60%
  2. Trump Approval Rating end of year <50% (Reuters or Gallup): 80%
  3. Trump Approval Rating end of year <45% (Reuters or Gallup): 60%
  4. Trump 2017 Average Approval Rating (Gallup) <50%: 70%
  5. ISIS to still exist as a fighting force in Palmyra, Mosul, or Al-Raqqah: 60%
  6. ISIS to kill < 100 Americans: 80%
  7. US will not get involved in any new major war with death toll of > 100 US soldiers: 60%
  8. No terrorist attack in the USA will kill > 100 people: 90%
  9. France will not vote to leave to the EU: 80%
  10. The UK will trigger Article 50 this year: 70%
  11. The UK will not fully leave the EU this year: 99%
  12. No country will leave the Euro (adopt another currency as their national currency): 80%
  13. S&P 500 2016 >10% growth: 60%
  14. S&P 500 will be between 2000 and 2850: 80% (80% confidence interval)
  15. Unemployment rate December 2017 < 6% : 70%
  16. WTI Crude Oil price > $60 : 70%
  17. Price of Bitcoin > $750: 60%
  18. Price of Bitcoin < $1000: 50%
  19. Price of Bitcoin < $2000: 80%
  20. There will not be another cryptocurrency with market cap above $1B: 80%
  21. There will not be another cryptocurrency with market cap above $500M: 50%
  22. Sentient General AI will not be created this year: 99%
  23. Self-driving cars will not be available this year for general purchase: 90%
  24. Self-driving cars will not be available this year to purchase / legally operate for < $100k: 99%
  25. I will not be able to buy trips on self-driving cars from Uber/Lyft in a location I am living: 80%
  26. I will not be able to buy a trip on a self-driving car from Uber/Lyft without a backup employee in the car anywhere in the US: 90%
  27. Humans will not land on moon by end of 2017: 95%
  28. SpaceX will bring humans to low earth orbit: 50%
  29. SpaceX successfully launches a reused rocket: 60%
  30. No SpaceX rockets explode without launching their payload to orbit: 60%
  31. Actual wall on Mexican border not built: 99%
  32. Some increased spending on immigration through expanding CBP, ICE, or the border fence: 80%
  33. Corporate Tax Rate will be cut to 20% or below: 50%
  34. Obamacare (at least mandate, community pricing, pre-existing conditions) not reversed: 80%
  35. Budget deficit will increase: 90%
  36. Increase in spending or action on Drug War (e.g. raiding marijuana dispensaries, increased spending on DEA, etc): 70%
  37. Some tariffs raised: 90%
  38. The US will not significantly change its relationship to NAFTA: 60%
  39. Federal government institutes some interference with state level legal marijuana: 60%
  40. At least one instance where the executive branch violates a citable civil liberties court case: 70%
  41. Trump administration does not file a lawsuit against any news organization for defamation: 60%
  42. Trump not impeached (also no Trump resignation): 95%

Postlibertarian

  1. Postlibertarian.com to have >15 more blog posts by July 1, 2017: 80%
  2. Postlibertarian.com to have >30 blog posts by end of year: 70%
  3. Postlibertarian.com to have fewer hits than last year (no election): 60%
  4. Postlibertarian Twitter account to have <300 followers: 90%
  5. Postlibertarian Twitter account to have >270 followers: 60%
  6. Postlibertarian Subreddit to have <100 subscribers: 90%

 


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Rawlsian Rebuttal to Inequality Concerns

This was stolen from a comment on this week’s EconTalk with Richard Epstein.

The concept of the rich getting richer and the poor getting poorer is oft-repeated, although according to my Google results, many of the top hits are articles disproving it. Despite this, sources from the Washington Post to Gawker to Thomas Piketty have talked about inequality and its negative consequences.

On EconTalk Russ Roberts stated the following:

I want to create a Rawlsian veil of ignorance…where we’re going to imagine different states of the world, but you don’t know where you’re going to be in those different states.

First state of the world is 1900. You might end up being a rich person or a poor person. The next state of the world is 2016.  Again, you might end up being a rich person or a poor person. I think most people alive today…would prefer to have a random shot at a 2016 life than even actually to be in the upper 10% or 5% in 1900.

This is a fascinating application of the Rawlsian veil of ignorance, an excellent moral and political philosophy tool. As Russ states, under a veil of ignorance, we take a society and imagine that we could be randomly assigned the life of anyone in that society. Usually this is used comparatively to accept or reject certain layouts of society.  For example, I’ve personally heard economists discussing surveys based on the Rawlsian veil of ignorance where most citizens would choose to live in a more equal society than they think they live in.  Interestingly, most people underestimate the level of inequality in most western countries compared to the actual level of inequality, and would choose societies more equal than what they estimate society to be. The implication is that people’s own revealed preferences when they put themselves in the position of an outsider is to advocate for more income redistribution.

However, there are some links between economic growth and inequality; it may be hard to have one without the other.  If that’s the case, an important question to ask is whether you’d want to be in a poorer economy with low inequality or a richer economy with high inequality. Russ’ thought experiment does this pretty well. It’s also worth comparing today’s economy with the 1970s or 80s. Would you choose to be randomly placed in more equal 1980 or less equal 2016?  Today cars are safer, communication is better, food costs less and more varieties are available, and life is better in immeasurable ways.

What if you were guaranteed to be in the top 50% of the world in 1980? What if you were guaranteed to be in the top 50% of the US in 1980? What level of wealth would you need to guarantee before you stopped risking being a poor person today?  It’s an interesting question, and uses our own intuition to counter the notion of the “rich getting richer and the poor getting poorer”.

Comment on reddit.

Should Tesla charge more for their cars?

Tesla Motors announced their newest car, the Model 3, is now available for pre-order.  It’s always been Tesla’s stated purpose to bring down the cost of electric vehicle dramatically, by first charging people for high end cars, and using those profits to innovate the cost of cars down to affordable levels for the general public. It’s an admirable goal that combines the best intentions with good incentives, using idealism to drive profits.

Tesla has, confusingly, sold 3 models of cars prior to the Model 3: the early Tesla Roadster (all over $109k price), the ultra-luxury sedan Model S (starting price at $76k, but most sell at over $100k), and the newer Model X SUV (about $5000 more than the Model S).  Few Model X’s have been shipped, and only about 2500 Tesla Roadsters were ever built. The vast majority of Tesla’s automobiles have been Model S’s between 2012-2016. In that 4 year span, roughly 107,000 cars have been sold worldwide, with about 63,000 in the United States.

In the past couple weeks, Tesla has received 325,000 almost 400,000 Model 3 pre-orders.

Making matters worse, Tesla has said they expect to start shipping at the end of 2017. Some analysts say that Tesla will ship about 12,000 cars in 2017 and another 60,000 in 2018.  But this might be optimistic, since Tesla was supposed to start building the Model X last year, but only got a couple hundred out the factory before January.

Tesla will get better at manufacturing, but they are not ready to switch from the high end market to the mass market (or as mass market as a $35,000 base model). The Tesla “master plan” is not ready to attack this level of the market yet, but that’s not to say it isn’t successful in other ways; as Ben Thompson wrote: “The real payoff of Musk’s ‘Master Plan’ is the fact that Tesla means something.”  In fact it means so much that the demand for a $35k Tesla in 2017 is something like 10x predicted supply! Tesla should take advantage of this.

The obvious economic answer to quantity demanded outstripping quantity supplied is to raise the price.  Scaling Tesla’s manufacturing output to new heights is not going to be easy, but it will be easier with additional resources. And Tesla could use some additional resources (they lost about $300 million in 2014). Right now, people will be waiting around for their cars for years. Why not take some more from people who want a car sooner, so that more innovation can be done to help the people on the back-end?  That’s Tesla’s whole plan anyway.  Creating an affordable family car that you can only make 50,000 of every year doesn’t help many families!

Now, of course, it’s true that some of the appeal of Tesla is that they are trying to transform the auto industry, and if they charge more for the Model 3, one could argue they aren’t as transformational as they claim.  But I’d counter with Thompson’s comparison to Apple, in that the Tesla brand itself is drenched in cool. Tesla’s brand is quite valuable, and the best way to help humanity with that brand is to push harder for innovation.

An awesome, widely available $35,000 electric car will come, but for now, Tesla has the opportunity to marshal more resources to build a better future; it would be silly to not take advantage of that.


Photo Credit: “Candy Red Tesla Model 3”, is a derivative of this photo by Steve Jurvetson, used under CC BY 2.0. “Candy” is licensed under CC BY 2.0 by Mariordo.

Follow-up: Not that wrong about Obamacare

Anytime we see something that challenges our worldview, it’s important to acknowledge it, and investigate whether our model of the world is incorrect, or at least to acknowledge our mistake. Otherwise, we cease to be engaging in discussion and building on knowledge. About a year ago, Josh, one of the former authors on this blog, wrote an excellent piece about how his predictions of massive failure for Obamacare did not seem to be coming true:

I Was Wrong About Obamacare

But now, a year further along, it seems the healthcare system isn’t doing so hot. The Wall Street Journal wrote in October:

Among this population of the uninsured, HHS reports that half are between the ages of 18 and 34 and nearly two-thirds are in excellent or very good health. The exchanges won’t survive actuarially unless they attract this prime demographic: ObamaCare’s individual mandate penalty and social-justice redistribution are supposed to force these low-cost consumers to buy overpriced policies to cross-subsidize everybody else. No wonder HHS Secretary Sylvia Mathews Burwell said meeting even the downgraded target is “probably pretty challenging.”

Late in December, Reason reported:

United announced during an investor briefing Thursday that it was expecting a whopping $425 million hit on its earnings this year, primarily due to mounting losses on its Obamacare exchange business. “We cannot sustain these losses,” United CEO Stephen Hensley declared.

And also in January:

Aetna, for example, has already dropped out of the exchange market in two states. A dozen of the 23 non-profit co-op plans backed by the law have already closed up shop, causing about 600,000 people to lose health plans, and a Politico analysis indicates that most of the remaining co-op plans are in trouble. Blue Cross Blue Shield of Texas and North Carolina both lost a sizable chunk of money on its exchange business during the program’s first year. The financial outlook for a number of insurers participating in Obamacare, in other words, doesn’t look good. And there are few signs that it is set to improve in the near future.

February:

Yet, the mandates aren’t working as planned. My colleague Brian Blase recently summed up the difference between the projected numbers of people who were expected to enroll in the ACA during this third open enrollment and the people who actually did. He notes a high estimate of 12.7 million people signing up for an exchange plan. But Blase actually thinks there will only be an average of 11 million enrollees this year. That’s 16 million fewer than the Rand Corporation predicted, 11.8 million fewer than the Centers for Medicare and Medicaid Services predicted, 12.1 million fewer than the Urban Institute predicted and 10 million fewer than the Congressional Budget Office projected.

It seems more likely than not that there will need to be some sort of change to the health system. Perhaps Josh’s predictions were too dire, but overall, I would retitle his post “I was still mostly right about Obamacare”.

 

Links 20160224

Marginal Revolution has a post about an event that occurred on Shark Tank. The pitch on the show was an alternative to bee honey, made from apples. Part of the pitch was that this would save the bee population by reducing the industrial demand for it (yes, really). Spoiler from Professor Tabarrok: “Reducing the demand for honey, reduces the demand for bees”.

Politico has a nice article about the potential of Bernie Sanders’ campaign, even if he doesn’t win a majority of delegates. The way the Democrats set things up, he will be in an excellent position to make demands on the party platform, possibly reshaping the Democrats’ economic policy for many years to come.

A recent Quinnipiac poll found that head-to-head, Sanders beats Trump by 10 points in a national survey (he does better than Clinton against Trump). Things could change of course, but it seems that Trump really isn’t who I should be worried about becoming president right now, as he’s still not likely to win the Republican nomination, and it seems the Democrats poll well against him.

SCOTUSblog has a nice write up on the next court nomination fight, now that Scalia is gone, what factors will be in play, and how can the Obama administration find a nominee with a spotless record that fires up the base and ensures a left-of-center court for a long time. I doubt they nominate a classical liberal.

Tyler Cowen writes about the benefits market monetary policy can bring, as well as the shortfalls of its approach when critiquing Fed policy.

Apple CEO Tim Cook posted a public letter to Apple customers detailing a demand made by the FBI. Law enforcement wants the company to create a new version of their operating system which they could then install on a criminal’s seized phone. The new OS would have a backdoor allowing the FBI to more quickly access it.  I liked Apple just fine as a company, but this is pretty awesome. This week, it turns out the FBI was lying about this being a one-time request as the DoJ is already pursuing orders to force Apple to unlock about a dozen other phones, according to anonymous sources.

Nostalgia Critic on Channel Awesome on YouTube has a great video detailing the absolutely horrible copyright abuse rampant on YouTube.   Claimants have no repercussions for false claims, even on self-evident fair use cases because YouTube’s system is entirely automated with no oversight.  Copyright battles are not something of the past, there are still huge problems today.

An NBER study from last year found government subsidies more than account for increases in tuition. H/t Slate Star Codex.

The German government gives us another example of how you can’t have government surveillance without fundamentally breaking security. Hacker News discussion.

Second link from Alex Tabarrok, this time on drug prices and the FDA. Apparently the US has the lowest generic drug prices of any developed nation. I feel like we should switch to a prize system where drug companies are awarded $X million for successfully passing approval, and then that drug is immediately released with no patent into the market. X could be set based on the amount of patients in the previous 5 years who could have used the drug.

People like to talk about the “Uber” of some industry, trying to say a company is disrupting their space like Uber did to taxis (also in the interest of fighting monopolies, Lyft is great too).   How about Uber for welfare? The left often opposes “workfare”, or ways which incentivize welfare recipients to work, since finding jobs for everyone isn’t practical “…but today the gig economy offers the solution: It can easily and quickly put millions of people back to work, allowing almost anyone to find a job with hours that are flexible with virtual locations anywhere.”  There’s also some data that working is a really good on a cultural level, teaching discipline and responsibility. This sort of goes against my attraction to a basic income, but could go hand in hand: you get a basic income allowance if you can prove you engaged in the gig economy recently. Really cool idea.

From EconLog, some praise for the Free State Project. Apparently they’ve already got over a dozen people elected to the state legislature? Tried to find somewhere else this is being tracked, but I didn’t see anything. If you have info on this, tweet at me.

Also from EconLog, Bryan Caplan finished his summarized his extended discussion of ancestry and long run growth literature.  In sum, we can’t say that people with more advanced culture thousands of years ago had that much better outcomes today. It’s likely other institutional decisions are more important (like having stable free markets).