An Education In Tolerance

I have been doing a series of posts about the Drug War at Classical Values. Here is one. If you follow the links back you can read them all.

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In what appears to be an ongoing series commenter Thomas was spouting some popular misconceptions about drugs. I wanted to make more public my reply. With a few additions.

Thomas,

There is no such thing as addiction. If you are in pain you will take pain meds. When the pain goes away so does the desire for the meds.

Tolerance arises from two things: when you fill the receptors taking more drugs does no good. If you keep the receptors filled the body grows more. Thus the need for ever increasing doses. It is also why most people can't get addicted. Their receptors are sufficiently filled by the body's natural heroin - endorphins. Or in the case of pot annamides.

For habituation (the body’s need for continuous replacement of used drugs) we know how to fix that. It is called detox. For heroin it can be done in a few days to a few weeks. For barbiturates the treatment can run six months. But if you don’t fix the underlying pain you get what are euphemistically called “relapses”.

Seriously. Where did you learn your science? On a street corner?

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Sadly the street corner is where most people get their knowledge about addiction. And surprisingly it seems DEA propaganda predominates. That and refer madness movies from the '30s.

So let me make this prediction: the drug war will end once people's superstitions about drugs are educated away. I think it will take about 4 or 5 more years.

Cross Posted at Classical Values

The Trap

The trap is simple: some really smart managers with really good tools can greatly reduce the "waste" of the system to the profit of all. That is the essence of communism, socialism, fascism and every kind of despotism known to man.

And don't forget envy. i.e. "Share the wealth"

F. A. Hayek in his nobel lecture entitled The Pretence of Knowledge discusses the error of the first assumption. About envy? I don't expect to see an end to it anytime soon. It may be a bug but it is also a feature.

The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.

That sounds like it was written yesterday. It was actually presented in December of 1974.

Then he lights into the notion that government spending can cure mal distribution of resources.

Let me illustrate this by a brief sketch of what I regard as the chief actual cause of extensive unemployment - an account which will also explain why such unemployment cannot be lastingly cured by the inflationary policies recommended by the now fashionable theory. This correct explanation appears to me to be the existence of discrepancies between the distribution of demand among the different goods and services and the allocation of labour and other resources among the production of those outputs. We possess a fairly good "qualitative" knowledge of the forces by which a correspondence between demand and supply in the different sectors of the economic system is brought about, of the conditions under which it will be achieved, and of the factors likely to prevent such an adjustment. The separate steps in the account of this process rely on facts of everyday experience, and few who take the trouble to follow the argument will question the validity of the factual assumptions, or the logical correctness of the conclusions drawn from them. We have indeed good reason to believe that unemployment indicates that the structure of relative prices and wages has been distorted (usually by monopolistic or governmental price fixing), and that to restore equality between the demand and the supply of labour in all sectors changes of relative prices and some transfers of labour will be necessary.

I didn't know he was a Tea Party guy.

He goes on at length as is the custom of worthy Nobel recipients. But let me give you the short version alluded to above. There is no way by general rules to obtain an optimum general functioning of a machine with 300 million pieces which are only loosely constrained by the rules imposed. In other words it is impossible to figure out the right general rules (beyond a very limited set). i.e. "subsidize here and limit investment there" can't work. OK. Suppose you tell the 300 million exactly what to do and give them each detailed instructions. Who is going to write those instructions - every day. How will you co-ordinate the necessary adaptations? An ice storm in Florida. A tornado in Nebraska. An earthquake in Missouri? And what if the predicted ice storm doesn't happen.

So macro policies are inefficient at best and micro policies are impossible. What does that leave?

Liberty is the best way for economies to adjust. The more government encourages monopoly the worse the outcome. Government Motors? Crisis Motors? Bank takeovers. Green jobs? It is not going to work well. In fact it may well work in reverse.

Well Congress spends the money. I think we need a new one.

Cross Posted at Classical Values

Added Risk

The US Treasury Department says that bailouts add risk to the financial system.

WASHINGTON – The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

And guess what? He is not the only one saying that.

From a November 2009 report we get the word that more stimulus creates more unemployment.

"Stimulus" is in the process of turning a nasty recession into a genuine depression. The evidence is in the "Employment Situation" report released by the Bureau of Labor Statistics (BLS) on November 6th. The "headline" unemployment rate shot up to 10.2%, the highest in more than 26 years. But the report was much worse than most people realize.

The "household survey data" showed that 589,000 jobs vanished during October. This is bad enough, but the three-month moving average of changes in total employment (current month and prior two months) shows that job losses are actually accelerating.

The three-month moving average (TMMA) of changes in total employment began a serious decline in February 2007. It went into negative territory two months later. This indicator has now been negative for the past 21 months. During this time, total employment has declined by more than 8 million jobs.

I have to admit that recently the rate of job loss appears to have slowed. But that may only be a temporary respite. And why is our recovery from problems so off track?

The massive sales of U.S. Treasury bonds to finance "stimulus", bailouts, and other government spending is sucking capital out of the private sector and destroying jobs.

And there are still problems with other sectors of the economy.

The smaller banks are carrying the burden of the commercial real estate problems and consumer debt and mortgages still present these banks with problems because these loans represented “Main Street” and were not all packaged and sold to investors in Finland. Remember there are 552 banks, all small- and medium-sized banks that are on the FDICs list of problem banks and this is expected to grow this year before declining, generally do to actual failures.

There are more dislocations throughout the economy that point to persisting problems. For example, in manufacturing, since the 1960s the unused capacity of United States industry has continually declined from peak usage to peak usage of that capacity The latest peak utilization of capacity still saw that about 20% of the industrial capacity of the United States remained unused. Unused capacity for the past thirty years seems to average around 23% to 24%.

We see unused capacity in the labor force as well. Since the 1970s under-employment of labor has grown quite consistently. Attention is focused upon the unemployment rate, but this measure does not include those individuals that have left the labor force because they are discouraged and those that are only working part time but would like to work more. We have seen estimates that 17% to 20% of the employable people in the United States are under-employed. Another dislocation that is not comforting.

Then we hear about the problems in state and local governments. Reports indicate that there are more than 30 states that are currently experiencing fiscal difficulties. We hear most about California and New York, but there are many other states particularly in the west and southwest that are having real problems. One estimate is that the states will have a combined budget shortfall of at least $350 billion in the fiscal years of 2010 and 2011. And, this doesn’t even get to the difficulties that are being faced by local governmental bodies.

Illinois where I live is in bad shape. Very bad shape.

And, there are the dislocations being created by the federal government. Budget deficits for the next ten years have been placed in the range of $15 trillion. The United States is fighting three wars throughout the world. The government is passing health care legislation that has been justified fiscally by postponing start dates of programs from three to five years. There is climate control efforts being considered along with regulations, like anti-pollution controls, that will just exacerbate the economic and fiscal problems of the country. Then there are other changes in the rules and regulations that apply to industry that will further change the playing field and create greater uncertainty about what management’s should do.

There is the problem of unemployment, the number one issue among the American voter. (And you thought the number one issue was health care or pollution or terrorism or the war in Afghanistan.) But, there is a dislocation problem relating to federal government stimulus programs.

For fifty years or so the federal government has attempted to stimulate the economy to put people back to work in the same jobs from which they were released from. The government has sought to put unemployed people back to work in the steel industry, in the auto industry and in other jobs that are the backbone of American industry (according to the labor unions and others). As a consequence, the steel industry lost competitiveness, the auto industry lost competitiveness and so did many other industries.

This effort to stimulate the economy and put people back into the jobs that they lost has contributed greatly to the increase in the unused industrial capacity and to the increase in the under-employed in this country. The effort to constantly maintain a low unemployment rate by putting people back into the jobs they have lost has resulted in a massive slide in the competitive position of the United States.

And the funny thing is that we did not lose those jobs to foreign competition. We lost them to computers and robots.

...the news about the manufacturing sector gets a little better. According to the Federal Reserve, the dollar value of U.S. manufacturing output in November was $2.72 trillion (in 2000 dollars), which translates to $234,220 of manufacturing output for each of that sector’s 11.6 million workers, setting an all-time record high for U.S. manufacturing output per worker (see chart below). Workers today produce twice as much manufacturing output as their counterparts did in the early 1990s, and three times as much as in the early 1980s, thanks to innovation and advances in technology that have made today’s workers the most productive in history. So at the same time that manufacturing employment has been declining to record low levels, manufacturing output keeps increasing over time, and the amount of output that each manufacturing worker produces keeps rising almost every month to new record high levels.

So despite Stupid Government Policies the economy is getting rationalized. The reason it is so painful this time is that we have 50 years of accumulated dead weight to shed.

Which brings me to a book. This Time is Different: Eight Centuries of Financial Folly and a book review.

Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.

So should we, as Paul Krugman suggests, spend another trillion in stimulus if it helps growth? No, because, as I have written for a very long time, and will focus on in future weeks, increased deficits and rising debt-to-GDP is a long-term losing proposition. It simply puts off what will be a reckoning that will be even worse, with yet higher debt levels. You cannot borrow your way out of a debt crisis.

While I was in Europe, and flying back, I had the great pleasure of reading This Time is Different, by Carmen M. Reinhart and Kenneth Rogoff,...

The thesis of the book is that this time it is the same as it ever was.

Let's lead off with a few quotes from This Time is Different, and then I'll add some comments. Today I'll focus on the theme of confidence, which runs throughout the entire book.

"But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."

"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government's policies, a financial institution's ability to make outsized profits, or a country's standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget."

And it not just the US. It is a problem world wide.

One point I found fascinating, and we'll explore it in later weeks. First, when it comes to the various types of crises with the authors identify, there is very little difference between developed and emerging-market countries, especially as to the fallout. It seems that the developed world has no corner on special wisdom that would allow crises to be avoided, or allow them to be recovered from more quickly. In fact, because of their overconfidence - because they actually feel they have superior systems - developed countries can dig deeper holes for themselves than emerging markets.

Oh, and the Fed should have seen this crisis coming. The authors point to some very clear precursors to debt crises.

We hear of trouble in in Greece taking Europe down. Maybe down so hard that it will collapse the Euro market. And then there is China which I have been writing about for the last few days. They have yet to undergo the first stage of the world wide fall. And every one knows China will fall. No one knows just when. It could start this week. Or it could start two years from now. If I was a betting man I'd bet on sooner than later.

So what should the US Government do? Other than keep people off the streets - nothing. And by off the streets I don't mean in homes that are unaffordable. A roof - we have plenty of them - and a minimal diet. Then let the wisdom of 300 million people take over.

At the core of our problem is a secular decline. The easy gains from microprocessors (I have the equivalent of four or ten Cray 1s on my desk - not so micro any more. Except for size.) have been realized. So what is the next big thing? It could be a real breakthrough in fusion not one of those mega projects with big promises and small results. It might be in carbon nanotubes. Or it might be a breakthrough in materials that allows us to substitute cheap materials for much more expensive ones. Or it could be something in biotech. Or a new way to do business. Or probably something hardly any one knows about. Some unrealized potential.

The deal is, that what ever it is, Washington with its macro policies is more likely to hurt than help. So what could Washington do? Pour money (it need not be a lot) into micro policies. More fundamental research. And a big push into research is not expensive. A few tens of billions a year could reap us big dividends. If we are truly in a knowledge economy (we are) then what we need is more knowledge not more bail outs of dying sectors of the economy. What is unseen is more important than what is seen.

H/T Instapundit

Cross Posted at Classical Values

Everything You Know Is Wrong

Well not everything. But more than quite a lot. Eric at Classical Values was discussing that with respect to advertising and fads. Including medical and scientific fads. You know the deal. Trust but verify.

Before seeing Eric's post I came across Why Most Published Research Findings Are False.

Summary

There is increasing concern that most current published research findings are false. The probability that a research claim is true may depend on study power and bias, the number of other studies on the same question, and, importantly, the ratio of true to no relationships among the relationships probed in each scientific field. In this framework, a research finding is less likely to be true when the studies conducted in a field are smaller; when effect sizes are smaller; when there is a greater number and lesser preselection of tested relationships; where there is greater flexibility in designs, definitions, outcomes, and analytical modes; when there is greater financial and other interest and prejudice; and when more teams are involved in a scientific field in chase of statistical significance. Simulations show that for most study designs and settings, it is more likely for a research claim to be false than true. Moreover, for many current scientific fields, claimed research findings may often be simply accurate measures of the prevailing bias. In this essay, I discuss the implications of these problems for the conduct and interpretation of research.

He does discuss it. Several pages worth - with foot notes that include external links.

One point that should be made is that biases are hard to maintain indefinitely. One day you will meet Heidi Cline and it will all be over.

Cross Posted at Classical Values

A Convenient Fiction

There is a serious misunderstanding about the state of science today. People look at all this shiny new hardware and imagine some unified state of knowledge behind it all. We have no such thing. What we actually have are islands of good enough knowledge.

There is not some great monolithic body of knowledge that can be described in a few equations understood by physics geeks and people with advanced math degrees.

Let me illustrate the problem with a recent personal anecdote. I was designing a gas valve for a fusion test reactor and commenter Brent pointed out that I had not taken into consideration something called the Knudsen Number. It was true. I had never even heard of it. The short version is: if gas pressures are low enough and the holes are small enough, you design the valve with one set of equations. If the holes are big and the pressure high you use another set of equations. In the middle? It is why engineers get paid the big bucks.

So the point of all that is that we don't have a unified knowledge set about gas flow through holes. We know a lot about aspects of this. We have islands of good knowledge and places where all is fuzziness or worse darkness.

Which brings me to a comment I made at Lubos Motl's Reference Frame, where Lubos is doing a very interesting exposition on the philosophy of science.

There is a lot of interesting work going on in the plasma physics area.

There are a lot of previously hidden self organizing principles being either discovered, re-discovered, or given new emphasis. Not just in quasi-static plasmas but dynamic ones as well.

We are starting to look at not just the frequencies of particles, but also the frequencies of assemblages of particles under the influence of various fields.

The tokamak guys are really struggling with this. They want a nice flat Maxwellian plasma and the plasma is not co-operating. It turns out that a true or even-quasi Maxwellian plasma may be impossible.

I think if we start looking at the facts, the idea of a Maxwellian plasma is a total fiction. The slightest deviation from Maxwellian distribution causes forces to build up and currents to flow.

So what we really need to make all this work is to delve into the self organizing principles of plasma and look at it from the point of view that a Maxwellian plasma is a convenient fiction for a certain class of problems.