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? Partially it’s 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 countries 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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Electoral Reform Fantasies

It’s been a particularly divisive…month? year? presidency?  Maybe you could even argue this last decade or so has been increasingly polarizing. Last election cycle specifically was unlike anything we’ve seen in the modern political era in terms of highly unpopular candidates running against each other, just look at the numbers:

Trump won with the lowest popular vote percentage of any president since Bill Clinton in 1992, when Ross Perot ran as a third party candidate getting 19% of the vote. In fact, Trump won the lowest percentage of any president in US history when no third party got more than 5% of the vote. Actually, we can go further; every case in which a US president was elected with less than Trump’s 46.1% had a third party getting over 8% of the vote that year. Except 2016.

Thus, we should first acknowledge that political frustration with political parties is nothing new in American politics. The only difference is that this time, there are no other parties to turn to.

This is a problem. Organizations acquire rules and absorb ideas over time. Sometimes those ideas are toxic to the organization, and it is out-competed. I’m mostly imagining the creative destruction of the market, but the same logic can apply to religions, non-profits, and political parties. However, the Republican and Democratic parties have constructed excellent barriers to entry, helped along by American electoral rules. Perhaps these barriers to entry have always existed, but they seem particularly effective at present.

I believe this lack of competition has resulted in two parties that are having difficulty providing a platform for new political ideas or approaches. Without competitive pressures, there is a lack of popular outlet and political advocacy, resulting in frustration. With only two political parties to work with, the idea of a political dichotomy seems inescapable, with every single culture battle melding together to become one gargantuan struggle between two fiercely divided tribes.

This is by no means the only problem we face: sluggish postindustrial economic growth, cost disease, shrinking populations, etc, are all issues. However, it’s quite possible our outdated political system may be stifling any solutions. Thus, I’d like to provide some ideas to fix the way we run our democracy.

Primaries

Presidential primaries seem to be the toughest to fix, but primaries themselves would become much less important with other reforms. Primaries today tend to favor more extremist candidates, while general elections (and, by definition, most people) favor more centrist ones.

One way to solve this is with an open primary, which some states have. California even has an “open blanket” primary, where the top two vote-getters in the primary are on the ballot in the general election, regardless of party. Of course, California does not use such a system for president (Donald Trump would have likely not been on the ballot if they had). There are drawbacks here, as theoretically several centrist candidates could split the “centrist” vote and leave two extremists running in the general election.

One possible way to help improve the presidential primaries might be to rotate the order in which states are the “first” primary. Iowa has often been the first state, but New Hampshire actually has a law that it must be the first presidential primary by a week (Iowa has caucuses, so New Hampshire has decided those don’t count). New Hampshire isn’t a great bellwether: going back to 1980, in election years where a candidate won a competitive primary and then won the presidency (i.e. not 2012, 2004, 1996, 1984 when a sitting president was re-elected), New Hampshire got Donald Trump in 2016, George H. W. Bush in 1988, and Ronald Reagan in 1980. It wrongly selected Hillary Clinton over Obama in 2008, John McCain over George W. Bush in 2000, and Paul Tsongas over Bill Clinton in 1992.

Iowa isn’t any better. It selected Obama in 2008 and George W. Bush in 2000. And it wrongly selected Ted Cruz over Donald Trump in 2016, Tom Harkin over Bill Clinton in 1992 (Harkin was from Iowa, but Paul Tsongas came in second, not Clinton), Bob Dole over George H. W. Bush in 1988, and George H. W. Bush over Reagan in 1980.

So in our first two primary states over the last 30+ years are 3/6 and 2/6 respectively when picking a president from a competitive field. Not great.

There’s some merit to simply holding a national primary all at once. The argument against it is that this may bias the primary system against discovering good lesser known candidates who can campaign in small states more easily than a national stage. However, there’s no evidence indicating such a system of candidate discovery functions with the small states at present. Maybe we need other states that better represent a microcosm of the country. Maybe such states don’t exist.

Ballot Access

Did you wonder why there wasn’t a well-known centrist Republican candidate running as a third party in the race last year? It seemed to be the perfect storm. A significant minority of Republicans were not a fan of the party’s nominee; the party’s previous nominee had called out Trump in an aggressive speech earlier in the year, and the Democrats had nominated a fairly progressive, well known candidate that most conservatives disliked.

Well, it turns out there was one, Evan McMullin, but he was only on the ballot in 11 states, accounting for 84 possible electoral votes.  Why? Because it costs hundreds of thousands of dollars to get onto the ballot in most states. The Libertarian Party candidate Gary Johnson was the only third party candidate on the ballot in all 50 states. In fact, he was the first third party nominee to be on all 50 ballots since 1996. Johnson did better than previous Libertarian Party candidates, and so the LP will not have to spend as much money for ballot access in the coming cycle…yet they are still looking to raise $130,000 this year just for ballot access costs.

This needs to change. There can be no serious competition to the current parties without fixing the ballot access problem.

Take a look at the Wikipedia article on the topic for a good overview. One problem is that major political parties are often exempted from ballot access requirements entirely. Other times, parties that get over a certain percentage of the vote are not required to gather signatures. The signatures are often rejected, so in reality the signature requirements are really 20-30% higher than actually stated. Ohio is an interesting example, as it requires a candidate to file in March, before they are actually nominated at their party’s convention. To get around this, the LP of Ohio filed a placeholder candidate in 2016, and then changed it to Gary Johnson later in the year. Of course, he had to file as an independent candidate since Ohio’s independent requirements are much less burdensome than trying to get the Libertarian Party be recognized as a state political party.

A possible solution would be to at least even the playing field by having a federal law forcing all qualification rules to apply to all parties running for federal office, including the Republican and Democratic parties. This would require them to waste resources on gathering signatures as well. Of course, the major parties could handle large numbers of signatures more easily since they have more resources available, but it still might be difficult enough to push them to reduce the total number of signatures to more practical levels.

More direct reductions in the ballot access requirements would be great as well, but perhaps not as directives from the federal government for the sake of federalism. Of course, none of this will happen, as there are no third party members in office at the national level, and thus no interest in reforming third party access at the state level.

House of Representatives – Single Transferable Vote

This one is totally crazy I know. It would definitely require a change in law, as it’s currently against the rules to have more than one representative from a district. However, I don’t suspect it would be unconstitutional, as each state creates their own districts and runs their own elections.

An STV system is unambiguously better than our current system. Single Transferable Vote is a voting system where you rank several candidates in a multi-member district. The candidates that reach a threshold of support (something like 33% for a three seat district, 25% for a four seat district, etc) are elected. If not enough candidates reach the threshold, unpopular candidates are eliminated with voters’ next choices receiving their votes instead, until all seats are filled. This helps achieve a proportional representation while maintaining local legislators. Currently all Representatives are elected in single member plurality elections, also known as First Past The Post (FPTP). For an easily digestible explanation of STV, watch CGP Grey’s video on the system.

STV systems do well when there are many seats available in a single district. Ireland has used as many as six seats in a single district, Tasmania has used as many as seven. Given the US population of 320 million, the average congressman represents over 700,000 people, with the median being even higher. However, many Americans live in cities much larger than 700,000, and so there are many cities that could support single citywide districts with five or ten congressional seats filled by STV. These could much better reflect the diverse viewpoints of those living in cities. Of course, cities wouldn’t be the only ones who benefit from this, as gerrymandering can also be done to disenfranchise rural voters depending on who’s drawing the boundaries.

Gerrymandering is itself much harder with STV multi-member districts. This itself is an indication that an STV system is better than what we have now. Even if STV is poorly implemented with districts that only have three or four seats, it would be a vast improvement in representation and political competition than what we have today.

This reform is certainly the most important reform for third parties. I don’t think third parties will solve all our problems; other countries have plenty of third parties with little to show. But it’s certainly a necessary step in providing alternatives to the duopoly people are obviously very sick of. Moreover, even if third parties aren’t super successful, the threat of competition will force the two major parties to react. We need a diversity of opinions and new ideas, and without third parties, everything has to be filtered through a party system with vested interests and previous baggage.

President – Approval Voting

The electoral college system is supposed to select a candidate from a wide range of possible candidates, with the college of electors itself imagined as acting as a bulwark against the excesses of democracy. This didn’t really pan out the way the founders of the United States might have hoped. Instead, several elections have resulted in presidents being elected despite other candidates actually receiving a plurality of the popular vote.

Those were:

  • 1824, when Andrew Jackson won 41% of the vote in a split election that was thrown to the House of Representatives since no one had an electoral college majority. The House picked John Quincy Adams, who lost in 1828 to Andrew Jackson. This one is less concerning because there was no clear majority, so while Jackson didn’t like it, the system “worked”.
  • 1876, when Samuel Tilden handily won an outright majority of the popular vote, and probably won the electoral college, but a “bipartisan” commission gave 15 “disputed” electoral votes to Rutherford Hayes instead. I’m still bitter.
  • 1888, when sitting President Grover Cleveland won a close popular vote victory, but lost in  the electoral college to Benjamin Harrison. Cleveland would win the rematch (both popular vote and electoral college) in 1892.
  • 2000, when Al Gore won a plurality of the vote, but lost Florida by a few hundred votes, and so George W. Bush became president.
  • 2016, when Hillary Clinton won a plurality of the popular vote, but Donald Trump won the electoral college.

If we set aside 1824, which I think is reasonable, we have 4 elections out of 58 total in American history in which the electoral college has selected against the popular vote winner, despite only two major candidates in those elections. This is an error rate of 6.9%.

But how to fix this? There have been several times when the electoral college was helpful in sorting out a multi-candidate election.  In 1860, Lincoln won a plurality with only 39.8% of the vote, but the electoral college gave him a majority. From a voting system perspective, this may not be seen as a victory, as Lincoln’s election was so divisive, it precipitated southern secession. However, in 1912, Woodrow Wilson won the electoral college with only 41.8% of the vote in a three way race. 1968 and 1992 may also be considered elections where the electoral college helped establish a winner when the plurality winner only had vote totals in the low 40s.

Moreover, any debate about the electoral college, especially after this most recent election must necessarily have political implications. Nonetheless, I believe I have a system that is strictly better than our current system, preserving any usefulness it has. The proposal is as follows.

Ballots for president will ask two questions, one asking the voter to select all candidates which they will be ok with being president (approval voting) and one asking voters to select their single favorite candidate (first past the post/ our current voting system).

The president will be chosen based on who receives the highest percentage in the approval voting ballots, as long as the percent total is above a threshold. Here I’m recommending 55%. In the case of no candidate receiving above 55% of the vote, the system simply defaults back to the electoral college system using the second, first past the post / favorite candidate vote.

I suspect this would encourage much more positive campaigns, as candidates try to attract as many voters as possible rather than scare voters away from voting from their opponents. It would also make third party campaigns much more useful, as there is less strategic voting with approval voting. If a popular centrist party had a candidate with broad appeal across the spectrum, they could get votes without causing right or left wing voters to fear their votes are “wasted”. Moreover any candidate that wins the approval vote would have a strong mandate with a super-majority of voters supporting them. This is what the electoral college was supposed to bring us, a wide base of support for the president, but this system will guarantee it outright.

In the worst case scenario, if I am wrong about these predictions, the system is simply what we have right now, today. There is no way for it to do worse than our current system since it’s fall back is our current system. In this way, it is also conservative and gradual in its reform, in ways other voting systems are not.

Conclusion

These reforms are likely long shots, but I think it’s undeniable that our current system of government is deeply flawed. These are just my current best ideas, so if you read this and have some voting systems that you think would be more politically palatable or mathematically accurate, be sure to let me know on Twitter, Reddit, or email.

 

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Picture Credit: Vote here, vote aqui. Erik Hersman. Licensed under CC BY 2.0.

Twitter Distractions

The U.S. military launched drone strikes on Libya on Friday, the first in Libya since January.  Trump has yet to mention these airstrikes as he’s been too busy fighting with professional athletes about how they protest.  If I’m counting correctly, there have been six Middle Eastern countries Trump has authorized military strikes in despite no authorization from Congress (and seven if you include Somalia): Libya, Syria, Yemen, Iraq, Afghanistan, Pakistan. Not to mention Trump has praised Saudi Arabia, a state that directly funds Wahhabism and an oppressive war in Yemen that does nothing to reduce radicalization.

Important criticisms of Hillary Clinton last year included her foundation receiving millions of dollars of support from the human rights disaster Kingdom of Saudi Arabia. But I’m not sure which is worse: taking bad people’s money or actively praising them. In fact, in what meaningful way is Trump’s Middle Eastern policy different from Clinton’s? Clinton was for a two state solution, while Trump didn’t seem to know what that meant–is that it?

Trump’s foreign policy has been pretty incompetent in other areas outside the Middle East. He’s failed to provide appointments for many ambassador positions, including South Korea. Speaking of which, Trump said he would control North Korea, but the DPRK has conducted more missile tests during his presidency (that’s 7 months) than any presidency in history. Even by using his own stated (terrible) goals of renegotiating NAFTA, tearing up the Iran nuclear deal, and reducing sanctions on Russia, he has failed to do what he said he would. In the case of Russia sanctions, this came at the hands of his own party overruling him in Congress.

Trump is a loud, robust failure in foreign policy. And rather than spend any energy actually trying to end military involvements like he said he would, or even do routine things like appoint ambassadors, he is igniting culture wars on Twitter. I think he prefers these to actual policy because there are no metrics to success when engaging in a cultural flame war online. It’s just “our tribe” vs “their tribe”, and no one can win because we’re not actually discussing anything. I think there are nuances to be had in this week’s particular flare up with the NFL and the national anthem, but they’re not worth teasing out because it’s so easy to get bogged down in an emotional fight.

So rather than engage with Trump’s culture war cage match this week, I think it’s more productive to point out that there are real issues he’s supposed to be dealing with, and he’s failing miserably. We’ve been at war for 16 years now. Soon, recruits will be traveling to battlefields that Americans have been fighting in since before these soldiers were born. But Trump would rather tweet about football players protesting.

 

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Bitcoin Hard Fork Predictions

Tomorrow there is scheduled to be a hard fork of the Bitcoin blockchain and network. There’s a fair amount of uncertainty over what will happen. The hashrate is unknowable until the fork occurs. The price seems to be around 10% of the price of Bitcoin. However, there aren’t too many exchanges that will be accepting this currency, and there are even fewer places you can actually spend it.

I’m going to make some predictions about it to put on record what I think is going to occur and to see how correct or incorrect I end up being.

  1. There will be a Bitcoin Cash block mined before 12 AM August 2, US Eastern time: 80%
  2. The price of Bitcoin Cash at 12 AM August 2, US Eastern time will be <10% of Bitcoin’s price: 70%
  3. The price of Bitcoin Cash on August 5 will be < 10% of Bitcoin’s price: 90%
  4. The price of Bitcoin Cash on September 1 will be < 10% of Bitcoin’s price: 90%
  5. The value of all transactions of Bitcoin Cash around September 1 (maybe averaged over a week?) will be < 10% of the value of all transactions in Bitcoin: 95%

I have mixed hopes for the success of Bitcoin Cash. On the one hand, I wrote previously that if the two factions in Bitcoin split, we could have a competitive market showing which rules were better. However, due to network effects, I still don’t think it could happen and be very successful. Supposing it did succeed though (had a pretty high market price), what would that mean? I suppose it would mean forks would become more common. That might be better for competition, but not for stability of the currency.

Ultimately, the idea that it would be fairly easy to make a successful hard fork of Bitcoin would be pretty devastating to Bitcoin’s health. It would mean consensus doesn’t mean much, it would mean the Bitcoin community could splinter pretty easily, which would therefore mean Bitcoin’s usefulness as a currency decreases as each part of the community would be using their own forked blockchain and coin. Something like sidechains seems like a much better implementation of this idea.

I should probably also disclose that I do not have much faith in the current governance model of Bitcoin Cash, and that does concern me a bit as well. I hope that hasn’t clouded my judgment of the actual technological and economic implications, but only time will tell if my predictions are true.

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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Links 2017-7-16

The Libertarian Web Directory has been updated with some more interesting people, notably Ben Shapiro and Kmele Foster.

At the end of June, the libertarian academic world was alight in condemnation of Duke Professor Nancy MacLean’s book, Democracy in Chains. The book tries to tie James Buchanan, the Nobel laureate economist who essentially founded Public Choice Theory (an important part of how I’ve defined postlibertarianism) to racist segregationists, the Koch brothers, and Donald Trump. It’s poorly researched, takes quotes out of context, and implies guilt by several degrees of separation. As it turns out, Duke University’s Political Science Department is perhaps the world’s best place to learn about Public Choice Theory with several presidents of the Public Choice Society teaching there, including James Buchanon’s frequent co-author Geoffrey Brennan. Professor MacLean decided against talking to any of them, favoring instead to try and fabricate a grand right-wing conspiracy. The reason I know this is because Duke Political Science Professor Michael Munger wrote a devastating response to MacLean’s book that I highly recommend reading. It’s not just great for inter-academic drama, but the piece does excellently summarizes and discusses the important parts of Public Choice Theory, and how James Buchanan created and utilized this model of government.

Speaking of defining postlibertarianism, I’ve amended my explanatory article to be version 2.0, since technically former blogger Joshua Hedlund defined postlibertarianism pretty well 6 years ago. We’ll call that 1.0.

The Economist has a nice short piece on the benefits and deficiencies of Medicaid, which apparently covers some 80 million Americans, and about 100 million people some time during each year. Republican efforts to target Medicaid back towards actual poor people now makes much more sense to me.

Towards the end of the month, developments will happen in Bitcoin. Either BIP 91 will be activated through the SegWit2x agreement, or SegWit2x will fail and BIP 148 will start to orphan blocks on August 1. Either way, it seems Segregated Witness has a high chance to be activated. If you have no idea what I’m talking about, this is a useful guide to the upcoming months.  If you have no idea why Bitcoin would need activate anything, read my last post on Bitcoin here.

Google has collected a group of “classic papers”, which are papers that were highly cited in the subsequent 10 years. These papers are from a vast array of subjects and areas. Whatever area you are interested in is there.

I’m sure I’ve been one of the libertarians disappointed by Rand Paul’s support of many of President Trump’s initiatives and ideas. Matt Welch writes for Reason both acknowledging that politicians will always disappoint us, but also arguing that we should not give up on libertarian politicians when they drop a small bit of ideological purity.

This post at the blog Otium defending individualist culture was really long, but very good.

Scott Alexander discusses whether elections are decided by turning out your own base or by winning over voters from the other side. There isn’t a ton of good data on it, but he still makes a pretty compelling case that a small but important segment of the population are really “swing” voters that switch sides. One of the more interesting studies simulates RCTs by looking only at elections where a politician wins a primary by a very small percentage (like less than 0.1%). This means the chances of the more extreme candidate having won the primary are essentially random. In those cases, there is a significant difference between general election popular vote percentage depending on whether the moderate or more extreme candidate won the primary. Very cool.

The Fifth Column podcast from the week Donald Trump Jr.’s Russia emails came out is excellent. I recommend listening every week, but this episode is especially good. Besides my own blog about it, Politico has a nice summary by Jack Schafer, The LA Times had an interesting point about how Robert Mueller’s investigation pushed this information out in the open, and the Washington Post points out that the President approved of Trump Jr.’s Sunday statement which blatantly lied about the meeting last June.

Julia Galef has a good rundown of the most important disagreements between NIMBYs and YIMBYs, specifically on whether San Francisco should allow more housing to be built.

Trump Junior and Russia

This weeks’ Fifth Column Podcast had an excellent discussion of Donald Trump Jr. and his attempt to get opposition research from the Russian government.

I have been pretty skeptical that the Trump administration and campaign actually did anything wrong with regard to Russia. I thought Trump was a poor candidate because he seemed very comfortable with authoritarians like Putin, which together with many positions he’s taken made me concerned about authoritarian policies he’d implement. Some of that concern has been well founded (e.g. appointing Jeff Sessions, removing an FBI Director he didn’t like), but in other places it has not. Trump seems to be bothered by criticism and a free press, but it’s clear the press is as robust and independent as ever.

I also thought Trump surrounded himself with really bad people, some of them with obvious terrible connections to the Russian government, like Paul Manafort, Roger Stone, and Michael Flynn (all of whom were fired). Again, this points to his friendliness with authoritarians and perhaps his incompetence with whom he surrounds himself with, not that he’s had contact with the Russian government itself.

I thought the intense media scrutiny over Russia wouldn’t provide anything, and it was dragging on for far too long. I thought the worst thing we would find would be that Trump fired FBI Director Comey for investigating his ties to Russia, not for any connections to Russia itself. But I was wrong. The New York Times reporting on this was so impressive that Donald Trump Jr., the target of the Times‘ article actually felt it would be better if he published these emails himself!

Thus, I’m literally typing these word for word from Trump Jr.’s twitter account. He got an email saying “…and in their meeting offered to provide the Trump campaign with some official documents and information that would incriminate Hillary and her dealings with Russia and would be very useful to your father. This is obviously very high level and sensitive information but is part of Russia and its government’s support for Mr. Trump”

Trump Jr’s response: “…if it’s what you say I love it especially later in the summer”.

I don’t know if this is illegal, as Trump Jr. has some amorphous relationship with the Trump campaign and allegedly isn’t involved in the administration at all, despite regularly going on TV to defend the administration. However, it’s at the very least unpatriotic and seems pretty unethical. If agents of a foreign government are reaching out to you to attack political opponents, your response should be to forward it to the FBI, not to set up a meeting as soon as possible. Trump was elected to “drain the swamp”.  I thought that meant that many legislators are too close to special interests or are lobbied by large companies to pass favorable legislation. This is certainly problematic, but actively trying to get help from foreign governments to get into office seems at least as bad. Donald Trump Jr. is a swamp monster if ever there was such a thing.

Additionally, just like Hillary Clinton lied constantly about her email scandal (she didn’t have a private server; ok she did but there was nothing classified; ok it was classified but it was secure…), it turns out Trump Jr. and many other campaign members just straight up lied about having pursued Russian opposition research. Trump Jr. stated in a March interview that he had met people that were Russian but not meetings “…that were set up. None that I can think of at the moment. And certainly none that I was representing the campaign in any way, shape or form.” Here’s a full timeline, it’s pretty damning. This is the undermining of democracy that I thought Trump supporters claimed he was there to fight.

I wish all presidents were subjected to this sort of scrutiny. We had wall to wall media coverage for months with very few real stories until this week. The Obama administration crushed leakers and transparency, blocking FISA requests in an unprecedented manner. They brought government secrecy to a new level, while waging wars in several middle eastern countries without Congressional approval. Trump has only been in office for 6 months, and so it’s not hard to argue that the Obama administration was much worse in terms of doing illegal things, murdering civilians, spying on Americans and journalists, etc. Yet, media coverage has been much more aggressive on Trump (at least from the left, while the right-leaning media has often been at least as sycophantic as anything we saw under Obama on the left).  I guess it’s better late than never, but the media needs to be far more adversarial in the future long after Trump is gone.

 

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.

Unpopular Net Neutrality Opinions

Net neutrality has benefits, and regulation has a role in ensuring its continuing existence, but there are several problems inherent in FCC telecom policy and the debate about net neutrality.

History

The new FCC chair (and Trump appointee) Ajit Pai has proposed reclassifying internet service providers as not “common carriers” under Title II of the 1934 Communications Act, thus reducing the available regulatory options for the FCC.

Net neutrality is the concept that all internet traffic should be treated identically by Internet Service Providers (like cable companies) or governments regardless of content, protocol, users, destination, sources, etc. It means that loading a webpage from this blog would not cost you more than loading a webpage from a large company, assuming the content size is similar.

The FCC has broadly promoted net neutrality in the past. Around 2008, the FCC blocked Comcast from slowing the speed of its users who were utilizing BitTorrent to download videos. Comcast appealed and won, with an appellate court ruling that the FCC did not have the anciliatory jurisdiction over Comcast’s network (Comcast v FCC). The FCC next tried to issue an Open Internet Order in 2010, but in Verizon v FCC, that order was largely vacated, as the same appellate court ruled that the FCC could not regulate ISPs unless it classified them as common carriers under Title II of the 1934 Communications Act. In 2015, the FCC classified ISPs as common carriers under Title II and enforced net neutrality rules.

Problems with Title II

A big problem with Title II is that it was written in 1934, 21 years before Tim Berners-Lee, the inventor of the world wide web, was born. In fact, the vast majority of Title II is so useless that when Tom Wheeler proposed ISPs be classified as common carrier, he said that of the 61 Title II sections, the FCC would forebear from applying the entire title except six sections (201, 202, 208, 222, 254, and 255).

One question I cannot answer without more specific legal expertise is whether Wheeler’s rule only allows the application of those sections, or if in the future the FCC can unilaterally decide (without a vote) to apply other sections of Title II, now that ISPs are seen as common carriers. For example, Section 224 of Title II relates to pole attachments. Can the future FCC regulate broadband providers’ pole attachments if they wanted to under Wheeler’s rule? Even if they cannot, they can certainly write a new rule that applies all of Title II with a full vote of the commission.

Perhaps a better solution would be for Congress to pass a new law allowing the FCC to regulate net neutrality, but bar the FCC from regulating ISPs under Title II otherwise. This would narrow the FCC’s focus officially to what consumers care about. Of course, that would require nuanced Congressional action which is likely impossible given the many competing interests in both houses.

Is Title II regulation overwhelming and innovation killing? Ajit Pai has argued so. The New York Times editorial board disagrees, but their argument seems quite lacking.  They dismiss Pai’s claim that broadband capital investment declined since Title II classification as “alternative facts”, but a simple Google search reveals why they found numbers that conflict with Pai. The source, the Free State Foundation, calculated a trend line of broadband capital expenditures since 2003. They calculated the expected expenditures after the Title II regulation as compared with the actual. So while capital expenditures actually increased after the regulation, they increased less than the trend line indicates they should have.

Is it misleading for Pai to say capital expenditures decreased? Yes, or at the very least it’s imprecise. Is it misleading for Title II proponents to say there has been no effect? Probably, although trend lines are tricky. Additionally, the Times argues that the pattern of increased consolidation in the telecoms industry is a symptom of a healthy economic sector. This is a non sequitur. Mergers and acquisitions could be symptoms of profitable or unprofitable companies, depending on who is buying who, but ultimately to me it seems more indicative that economies of scale exist. One possible explanation for recent increase in economies of scale could be an increased regulatory burden. I don’t know if that’s the case, but to suggest that Charter’s purchase of Time Warner is a symptom of a healthy telecoms sector is the Times projecting their own political views onto market actions.

Problems with Net Neutrality

Ajit Pai has argued (in this Reason interview) that ISPs were not favoring some internet traffic over others. This seems incorrect. Comcast v. FCC was specifically about Comcast reducing the speed of some types of traffic. John Oliver points out that Google Wallet was not allowed to function on phones on the networks of AT&T, Verizon, and Sprint since it competed with a joint electronic wallet venture of those companies. On the other hand, Google Wallet still out-competed the networks’ own payment system despite being banned on those platforms. Consumer response was so positive on other networks that the consumers demanded it on AT&T and Verizon. Eventually the joint venture folded and got absorbed by Google Wallet/Android Pay.

Moreover, a few phone networks have run afoul of net neutrality rules by giving consumers free data for certain services, e.g. T-Mobile allowing streaming music to not count against a customers’ data cap. If the service provided by the content producer is so profitable that it can afford to pay for its own bandwidth, is it wrong to give that bandwidth to customers free of charge?

The economics here is complicated. In a perfectly competitive market, content producers could only charge for the marginal cost of producing more content while ISPs could only charge the marginal cost of additional bandwidth. Consumers would pay each company for their respective consumption of their products.

But we don’t have a competitive market, either for content producers (only HBO has Game of Thrones, only Netflix has Stranger Things) and especially not for ISPs. Since cable ISPs are state granted monopolies, there is a solid argument for regulating them, as they have leverage over content producers. That argument does disappear though when there is competition, such as in the case of wireless broadband.

It is also worth pointing out that the importance of “neutrality” towards content is only narrowly valid. For example, bandwidth at certain times is more valuable. The Economist has suggested electric power be charged at different rates when used at different times. Similar arguments could be used for internet usage. It is also undeniable that some internet traffic really is more important, and consumers would be willing to pay more to have their bank notifications or business calls come through faster than YouTube videos, which they might be ok with allowing to buffer. Certainly we would want consumers making this decision and not ISPs, especially when there is little ISP competition for most end users. Additionally, such prioritization could be done by software on the consumer/LAN side of the router, and ISPs should likely just be dumb pipes that deliver what we tell them to.

Finally, we should be cautious about locking in rules even if they make sense today. Markets change over time, and there is a possibility that past rules will restrict innovation in the future. Since competition itself can defend against bad ISP behavior (perhaps even better than the FCC), having the FCC focus on increasing competition seems at least as vital as net neutrality. Interestingly, this is what Ajit Pai has argued for (see Reason interview above).

Conclusion

Today it seems likely that a policy of net neutrality by cable ISPs is more beneficial than not. It also seems likely that to protect that idea today, some form of regulation is needed on cable companies that are state granted monopolies in a given area. Such regulation is not as clearly necessary in wireless providers, and we should always be reviewing the importance of FCC regulations in order to avoid a curtailment of innovation. Additionally, any regulation should come from new Congressional legislation, not a law written 80 years ago. However, the benefits of net neutrality should not be taken as given. Variations in the consumer value of content priority as well as bandwidth scarcity during peak hours are perfectly acceptable ways to prioritize internet traffic. The problem arises when monopoly ISPs are doing the prioritizing rather than consumers.

 

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A Few Thoughts on Bitcoin

I have been aware of Bitcoin’s existence for a while, and while I was excited about it a few years ago, it had somewhat dropped off my radar. Perhaps because over the past few months, Bitcoin has seen a big increase in value, I started to revisit it and analyze it as a technology. My experience has been nothing short of breathtaking.

A few years ago, Bitcoin was pretty cool. I even wrote a paper about it, discussing the huge potential of the technology and decentralized, autonomous transactions could totally upend the banking industry. But back when I first got into Bitcoin, I was also interested in Austrian Economics, which I’m largely over now. Their focus on control of the money supply and dire warnings about the Federal Reserve weren’t really borne out by the rather mundane economic growth of the last few years.

Nonetheless, the Bitcoin community has been working on without me, and it has paid off: you can now use Bitcoin to purchase from all sorts of retailers, including Dell, Overstock.com, Newegg, and more. You can also buy all sorts of internet specific services, which to me seems like the clearest use case. These include Steam credit, VPNs, cloud hosting, and even Reddit gold.

The price has jumped up to over $1000 at the end of April 2017 (that’s over $18 billion in total market value of all Bitcoins), and it was briefly even higher a month ago on speculation the SEC would allow for a Bitcoin ETF. The ETF was rejected, but the potential of the currency remains. And technologically, Bitcoin is far more impressive than it was, most notably with a concept called the Lightning Network.

This technology would allow for instantaneous Bitcoin transactions (without having to accept risky zero confirmation transactions). These transactions would have the full security of the Bitcoin network, and would also likely allow massive scaling of the Bitcoin payment network. Drivechain is another project with great potential to scale Bitcoin and allow for applications to be built on top of the Bitcoin blockchain. It would create a two-way peg, enforced by miners, that allowed tokens to be converted from Bitcoin to other sidechains and back again. This would allow experimentation of tons of new applications without risk to the original Bitcoin blockchain.

Hivemind is particularly exciting as a decentralized prediction market that is not subject to a central group creating markets; anyone can create and market and rely on a consensus algorithm to declare outcomes. If attached to the Bitcoin blockchain, it also wouldn’t suffer from cannibalization that Ethereum blockchains like Augur can suffer from.

Mimblewimble is another interesting sidechain idea. It combines concepts of confidential transactions with (I think) homomorphic encryption to allow for completely unknowable transaction amounts and untraceable transaction histories. It would also do this while keeping the required data to run the blockchain fairly low (the Bitcoin blockchain grows over time). It would have to be implemented as a sidechain, but any transactions that occur there would be completely untraceable.

And there are even more cool projects: Namecoin, JoinMarket, the Elements Project, and of course other cryptocurrencies like Ethereum, Monero, and Zcash. This really makes the future of Bitcoin and cryptocurrencies seem pretty bright.

However, we’ve skipped a big point, which is that most of these cool innovations for Bitcoin can’t be done with Bitcoin’s present architecture. Moreover, the current number of Bitcoin transactions per block has just about maxed out at ~1800. This has resulted in something called the Scaling Debate, which centers about the best way to scale the Bitcoin blockchain. Upgrades to the blockchain must be done through consensus where miners mine new types of blocks, institutions running nodes approve of those new blocks, and users continue to create transactions that are included in new blocks (or else find another cryptocurrency). Before any of that can happen, developers have to write the code that miners, validation nodes, and users will run.

Right now, there is a big political fight that could very briefly be described as between users who support the most common implementation of the Bitcoin wallet and node (known as Bitcoin Core) and those who generally oppose that implementation and the loose group of developers behind it. I certainly am not here to take sides, and in fact it would probably have some long term benefits if both groups could go their separate ways and have the market decide which blockchain consensus rules are better. However, there is not much incentive to do that, as there are network effects in Bitcoin and any chain split would reduce the value of the entire ecosystem. The network effects would likely mean any two-chain system would quickly collapse to one chain or the other. No one wants to be on the losing side, yet no side can convince the other, and so there has been political infighting and digging in, resulting in the current stalemate.

There will eventually be a conclusion to this stalemate; there is too much money on the line to avoid it. Either the sides will figure out a compromise, the users or the miners will trigger a fork of the chain in some way and force the issue, or eventually a couple years down the road another cryptocurrency will overtake Bitcoin as the most prominent store of value and widely used blockchain. A compromise would obviously be the least costly, a chain split would be more expensive, but could possibly solve the disagreement more completely than a compromise, while another cryptocurrency winning would be by far the most expensive and damaging outcome. All development and code security that went into Bitcoin would have to be redone on any new crytocurrency. Nonetheless, Litecoin just this week seems to have approved of Segregated Witness, the code piece that is currently causing the Bitcoin stalemate. If Bitcoin’s stalemate continues for years, Litecoin is going to start looking pretty great.

Obviously it’s disappointing that even a system built on trustless transactions can’t avoid the pettiness of human politics, but it’s a good case study demonstrating just how pervasive and pernicious human political fights are. Ultimately, because cryptocurrencies are built in a competitive market, politics cannot derail this technology forever. And when the technology does win out, the impact on the word will be revolutionary. I just hope it’s sooner rather than later.

 

Bitcoin featured picture is a public domain image.

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