The inherent atrocity of “border security”

Jun 24 JDN 2458294

By now you are probably aware of the fact that a new “zero tolerance” border security policy under the Trump administration has resulted in 2,000 children being forcibly separated from their parents by US government agents. If you weren’t, here are a variety of different sources all telling the same basic story of large-scale state violence and terror.

Make no mistake: This is an atrocity. The United Nations has explicitly condemned this human rights violation—to which Trump responded by making an unprecedented threat of withdrawing unilaterally from the UN Human Rights Council.

#ThisIsNotNormal, and Trump was everything we feared—everything we warned—he would be: Corrupt, incompetent, cruel, and authoritarian.

Yet Trump’s border policy differs mainly in degree, not kind, from existing US border policy. There is much more continuity here than most of us would like to admit.

The Trump administration has dramatically increased “interior removals”, the most obviously cruel acts, where ICE agents break into the houses of people living in the US and take them away. Don’t let the cold language fool you; this is literally people with guns breaking into your home and kidnapping members of your family. This is characteristic of totalitarian governments, not liberal democracies.

And yet, the Obama administration actually holds the record for most deportations (though only because they included “at-border deportations” which other administrations did not). A major policy change by George W. Bush started this whole process of detaining people at the border instead of releasing them and requiring them to return for later court dates.

I could keep going back; US border enforcement has gotten more and more aggressive as time goes on. US border security staffing has quintupled since just 1990. There was a time when the United States was a land of opportunity that welcomed “your tired, your poor, your huddled masses”; but that time is long past.

And this, in itself, is a human rights violation. Indeed, I am convinced that border security itself is inherently a human rights violation, always and everywhere; future generations will not praise us for being more restrained than Trump’s abject and intentional cruelty, but condemn us for acting under the same basic moral framework that justified it.

There is an imaginary line in the sand just a hundred miles south of where I sit now. On one side of the line, a typical family makes $66,000 per year. On the other side, a typical family makes only $20,000. On one side of the line, life expectancy is 81 years; on the other, 77. This means that over their lifetime, someone on this side of the line can expect to make over one million dollars more than they would if they had lived on the other side. Step across this line, get a million dollars; it sounds ridiculous, but it’s an empirical fact.

This would be bizarre enough by itself; but now consider that on that line there are fences, guard towers, and soldiers who will keep you from crossing it. If you have appropriate papers, you can cross; but if you don’t, they will arrest and detain you, potentially for months. This is not how we treat you if you are carrying contraband or have a criminal record. This is how we treat you if you don’t have a passport.

How can we possibly reconcile this with the principles of liberal democracy? Philosophers have tried, to be sure. Yet they invariably rely upon some notion that the people who want to cross our border are coming from another country where they were already granted basic human rights and democratic representation—which is almost never the case. People who come here from the UK or the Netherlands or generally have the proper visas. Even people who come here from China usually have visas—though China is by no means a liberal democracy. It’s people who come here from Haiti and Nicaragua who don’t—and these are some of the most corrupt and impoverished nations in the world.

As I said in an earlier post, I was not offended that Trump characterized countries like Haiti and Syria as “shitholes”. By any objective standard, that is accurate; these countries are terrible, terrible places to live. No, what offends me is that he thinks this gives us a right to turn these people away, as though the horrible conditions of their country somehow “rub off” on them and make them less worthy as human beings. On the contrary, we have a word for people who come from “shithole” countries seeking help, and that word is “refugee”.

Under international law, “refugee” has a very specific legal meaning, under which most immigrants do not qualify. But in a broader moral sense, almost every immigrant is a refugee. People don’t uproot themselves and travel thousands of miles on a whim. They are coming here because conditions in their home country are so bad that they simply cannot tolerate them anymore, and they come to us desperately seeking our help. They aren’t asking for handouts of free money—illegal immigrants are a net gain for our fiscal system, paying more in taxes than they receive in benefits. They are looking for jobs, and willing to accept much lower wages than the workers already here—because those wages are still dramatically higher than what they had where they came from.

Of course, that does potentially mean they are competing with local low-wage workers, doesn’t it? Yes—but not as much as you might think. There is only a very weak relationship between higher immigration and lower wages (some studies find none at all!), even at the largest plausible estimates, the gain in welfare for the immigrants is dramatically higher than the loss in welfare for the low-wage workers who are already here. It’s not even a question of valuing them equally; as long as you value an immigrant at least one tenth as much as a native-born citizen, the equation comes out favoring more immigration.

This is for two reasons: One, most native-born workers already are unwilling to do the jobs that most immigrants do, such as picking fruit and laying masonry; and two, increased spending by immigrants boosts the local economy enough to compensate for any job losses.

 

But even aside from the economic impacts, what is the moral case for border security?

I have heard many people argue that “It’s our home, we should be able to decide who lives here.” First of all, there are some major differences between letting someone live in your home and letting someone come into your country. I’m not saying we should allow immigrants to force themselves into people’s homes, only that we shouldn’t arrest them when they try cross the border.

But even if I were to accept the analogy, if someone were fleeing oppression by an authoritarian government and asked to live in my home, I would let them. I would help hide them from the government if they were trying to escape persecution. I would even be willing to house people simply trying to escape poverty, as long as it were part of a well-organized program designed to ensure that everyone actually gets helped and the burden on homeowners and renters was not too great. I wouldn’t simply let homeless people come live here, because that creates all sorts of coordination problems (I can only fit so many, and how do I prioritize which ones?); but I’d absolutely participate in a program that coordinates placement of homeless families in apartments provided by volunteers. (In fact, maybe I should try to petition for such a program, as Southern California has a huge homelessness rate due to our ridiculous housing prices.)

Many people seem to fear that immigrants will bring crime, but actually they reduce crime rates. It’s really kind of astonishing how much less crime immigrants commit than locals. My hypothesis is that immigrants are a self-selected sample; the kind of person willing to move thousands of miles isn’t the kind of person who commits a lot of crimes.
I understand wanting to keep out terrorists and drug smugglers, but there are already plenty of terrorists and drug smugglers here in the US; if we are unwilling to set up border security between California and Nevada, I don’t see why we should be setting it up between California and Baja California. But okay, fine, we can keep the customs agents who inspect your belongings when you cross the border. If someone doesn’t have proper documentation, we can even detain and interrogate them—for a few hours, not a few months. The goal should be to detect dangerous criminals and nothing else. Once we are confident that you have not committed any felonies, we should let you through—frankly, we should give you a green card. We should only be willing to detain someone at the border for the same reasons we would be willing to detain a citizen who already lives here—that is, probable cause for an actual crime. (And no, you don’t get to count “illegal border crossing” as a crime, because that’s begging the question. By the same logic I could justify detaining people for jaywalking.)

A lot of people argue that restricting immigration is necessary to “preserve local culture”; but I’m not even sure that this is a goal sufficiently important to justify arresting and detaining people, and in any case, that’s really not how culture works. Culture is not advanced by purism and stagnation, but by openness and cross-pollination. From anime to pizza, many of our most valued cultural traditions would not exist without interaction across cultural boundaries. Introducing more Spanish speakers into the US may make us start saying no problemo and vamonos, but it’s not going to destroy liberal democracy. If you value culture, you should value interactions across different societies.

Most importantly, think about what you are trying to justify. Even if we stop doing Trump’s most extreme acts of cruelty, we are still talking about using military force to stop people from crossing an imaginary line. ICE basically treats people the same way the SS did. “Papers, please” isn’t something we associate with free societies—it’s characteristic of totalitarianism. We are so accustomed to border security (or so ignorant of its details) that we don’t see it for the atrocity it so obviously is.

National borders function something very much like feudal privilege. We have our “birthright”, which grants us all sorts of benefits and special privileges—literally tripling our incomes and extending our lives. We did nothing to earn this privilege. If anything, we show ourselves to be less deserving (e.g. by committing more crimes). And we use the government to defend our privilege by force.

Are people born on the other side of the line less human? Are they less morally worthy? On what grounds do we point guns at them and lock them away for the “crime” of wanting to live here?

What Trump is doing right now is horrific. But it is not that much more horrific than what we were already doing. My hope is that this will finally open our eyes to the horrors that we had been participating in all along.

Intellectual Property, revisited

Mar 12, JDN 2457825

A few weeks ago I wrote a post laying out the burden of proof for intellectual property, but didn’t have time to get into the empirical question of whether our existing intellectual property system can meet this burden of proof.

First of all, I want to make a very sharp distinction between three types of regulations that are all called “intellectual property”.

First there are trademarks, which I have absolutely no quarrel with. Avoiding fraud and ensuring transparency are fundamental functions without which markets would unravel, and without trademarks these things would be much harder to accomplish. Trademarks allow a company to establish a brand identity that others cannot usurp; they ensure that when you buy Coca-Cola (R) it is really in fact the beverage you expect and not some counterfeit knockoff. (And if counterfeit Coke sounds silly, note that counterfeit honey and maple syrup are actually a major problem.) Yes, there should be limits on how much you can trademark—no one wants to live in a world where you feel Love ™ and open Screen Doors ™—but in fact our courts are already fairly good about only allowing corporations to trademark newly-coined words and proper names for their products.

Next there are copyrights, which I believe are currently too strong and often abused, but I do think should exist in some form (or perhaps copylefts instead). Authors should have at least certain basic rights over how their work can be used and published. If nothing else, proper attribution should always be required, as without that plagiarism becomes intolerably easy. And steps should be taken to ensure that if any people profit from its sale, the author is among them. I publish this blog under a by-sa copyleft, which essentially means that you can share it with whomever you like and even adapt its content into your own work, so long as you properly attribute it to me and you do not attempt to claim ownership over it. For scientific content, I think only a copyleft of this sort makes sense—the era of for-profit journals with paywalls must end, as it is holding back our civilization. But for artistic content (and I mean art in the broadest sense, including books, music, movies, plays, and video games), stronger regulations might well make sense. The question is whether our current system is actually too strong, or is protecting the wrong people—often it seems to protect the corporations that sell the content rather than the artists who created it.

Finally there are patents. Unlike copyright which applies to a specific work of art, patent is meant to apply to the underlying concept of a technology. Copyright (or rather the by-sa copyleft) protects the text of this article; you can’t post it on your own blog and claim you wrote it. But if I were to patent it somehow (generally, verbal arguments cannot be patented, fortunately), you wouldn’t even be able to paraphrase it. The trademark on a Samsung ™ TV just means that if I make a TV I can’t say I am Samsung, because I’m not. You wouldn’t copyright a TV, but the analogous process would be if I were to copy every single detail of the television and try to sell that precise duplicate. But the patents on that TV mean that if I take it apart, study each component, find a way to build them all from my own raw materials, even make them better, and build a new TV out of them that looks different and performs better—I would still be infringing on intellectual property. Patents grant an extremely strong notion of property rights, one which actually undermines a lot of other, more basic concepts of property. It’s my TV, why can’t I take it apart and copy the components? Well, as long as the patent holds, it’s not entirely my TV. Property rights this strong—that allow a corporation to have its cake of selling the TV but eat it too by owning the rights to all its components—require a much stronger justification.

Trademark protects a name, which is unproblematic. Copyright protects a work, which carries risks but is still probably necessary in many cases. But patent protects an idea—and we should ask ourselves whether that is really something it makes sense to do.

In previous posts I’ve laid out some of the basic philosophical arguments for why patents do not seem to support innovation and may actually undermine it. But in this post I want to do something more direct and quantitative: Empirically, what is the actual effect of copyrights and patents on innovation? Can we find a way to quantify the costs and benefits to our society of different modes of intellectual property?

Economists quantify things all the time, so I briefly combed the literature to see what sort of empirical studies had been done on the economic impact of copyrights and patents.

Patents definitely create barriers to scientific collaboration: Scientific articles with ideas that don’t get patented are about 10-20% more likely to be cited than scientific articles with ideas that are patented. (I would have expected a larger effect, but that’s still not trivial.)

A 1995 study found that creased patent protections do seem to be positively associated with more trade.

A 2009 study of Great Britain published in AER found it “puzzling” that stronger patents actually seem to reduce the rate of innovation domestically, while having no effect on foreign innovation—yet this is exactly what I would have predicted. Foreign innovations should be largely unaffected by UK patents, but stricter patent laws in the UK make it harder for most actual innovators, only benefiting a handful of corporations that aren’t even particularly innovative.

This 1996 study did find a positive effect of stronger patent laws on economic growth, but it was quite small and only statistically significant when using instrumental variables that they couldn’t be bothered to define except in an appendix. When your result hinges on the use of instrumental variables that you haven’t even clearly defined in the paper, something is very fishy. My guess is that they p-hacked the instruments until they got the result they wanted.

This other 1996 study is a great example of why economists need to listen to psychologists. It found a negative correlation between foreign direct investment and—wait for it—the number of companies that answered “yes” to a survey question, “Does country X have intellectual property protection too weak to allow you to transfer your newest or most effective technology to a wholly-owned subsidiarythere?” Oh, wow, you found a correlation between foreign direct investment and a question directly asking about foreign direct investment.

his 2004 study found a nonlinear relationship whereby increased economic development affects intellectual property rights, rather than the other way around. But I find their theoretical model quite odd, and the scatter plot that lies at the core of their empirical argument reminds me of Rexthor, the Dog-Bearer. “This relationship appears to be non-linear,” they say when pointing at a scatter plot that looks mostly like nothing and maybe like a monotonic increase.

This 1997 study found a positive correlation between intellectual property strength, R&D spending, and economic growth. The effect is weak, but the study looks basically sound. (Though I must say I’d never heard anyone use the words “significant at the 24% level” before. Normally one would say “nonsignificant” for that variable methinks. It’s okay for it not to be significant in some of your regressions, you know.)

This 1992 paper found that intellectual property harms poor countries and may or may not benefit rich countries, but it uses a really weird idiosyncratic theoretical model to get there. Frankly if I see the word “theorem” anywhere in your empirical paper, I get suspicious. No, it is not a theorem that “For economies in steady state the South loses from tighter intellectual property rights.” It may be true, but it does not follow from the fundamental axioms of mathematics.

This law paper is excellent; it focuses on the fact that intellectual property is a unique arrangement and a significant deviation from conventional property rights. It tracks the rise of legal arguments that erroneously equate intellectual property with real property, and makes the vital point that fully internalizing the positive externalities of technology was never the goal, and would in fact be horrible should it come to pass. We would all have to pay most of our income in royalties to the Newton and Faraday estates. So, I highly recommend reading it. But it doesn’t contain any empirical results on the economic effects of intellectual property.

This is the best paper I was able to find showing empirical effects of different intellectual property regimes; I really have no complaints about its econometrics. But it was limited to post-Soviet economies shortly after the fall of the USSR, which were rather unique circumstances. (Indeed, by studying only those countries, you’d probably conclude that free markets are harmful, because the shock of transition was so great.)

This 1999 paper is also quite good; using a natural experiment from a sudden shift in Japanese patent policy, they found almost no difference in actual R&D. The natural experiment design makes this particularly credible, but it’s difficult to generalize since it only covered Japan specifically.

This study focused in particular on copyrights and the film industry, and found a nonlinear effect: While having no copyright protection at all was harmful to the film industry, making the copyright protections too strong had a strangling effect on new filmmakers entering the industry. This would suggest that the optimal amount of copyright is moderate, which sounds reasonable to me.

This 2009 study did a much more detailed comparison of different copyright regimes, and was unable to find a meaningful pattern amidst the noise. Indeed, they found that the only variable that consistently predicted the number of new works of art was population—more people means more art, and nothing else seemed to matter. If this is correct, it’s quite damning to copyright; it would suggest that people make art for reasons fundamentally orthogonal to copyright, and copyright does almost nothing useful. (And I must say, if you talk to most artists, that tends to be their opinion on the matter!)

This 1996 paper found that stronger patents had no benefits for poor countries, but benefited rich countries quite a large amount: Increased patent protection was estimated to add as much as 0.7% annual GDP growth over the whole period. That’s a lot; if this is really true, stronger patents are almost certainly worth it. But then it becomes difficult to explain why more precise studies haven’t found effects anywhere near that large.

This paper was pretty interesting; they found a fat-tailed distribution of patents, where most firms have none, many have one or a few, and a handful of firms have a huge number of patents. This is also consistent with the distribution of firm revenue and profit—and I’d be surprised if I didn’t find a strong correlation between all three. But this really doesn’t tell us whether patents are contributing to innovation.
This paper found that the harmonization of global patents in the Uruguay Round did lead to gains from trade for most countries, but also transferred about $4.5 billion to the US from the rest of the world. Of course, that’s really not that large an amount when we’re talking about global policy over several years.

What does all that mean? I don’t know. It’s a mess. There just don’t seem to be any really compelling empirical studies on the economic impact of copyrights and patents. The preponderance of the evidence, such as it is, would seem to suggest that copyrights provide a benefit as long as they aren’t too strong, while patents provide a benefit but it is quite small and likely offset by the rent-seeking of the corporations that own them. The few studies that found really large effects (like 0.7% annual GDP growth) don’t seem very credible to me; if the effect were really that large, it shouldn’t be so ambiguous. 0.7% per year over 25 years is a GDP 20% larger. Over 50 years, GDP would be 42% larger. We would be able to see that.

Does this ambiguity mean we should do nothing, and wait until the data is better? I don’t think so. Remember, the burden of proof for intellectual property should be high. It’s a fundamentally bizarre notion of property, one which runs against most of our standard concepts of real property; it restricts our rights in very basic ways, making literally the majority of our population into criminals. Such a draconian policy requires a very strong justification, but such a justification does not appear to be forthcoming. If it could be supported, that 0.7% GDP growth might be enough; but it doesn’t seem to be replicable. A free society does not criminalize activities just in case it might be beneficial to do so—it only criminalizes activities that have demonstrable harm. And the harm of copyright and patent infringement simply isn’t demonstrable enough to justify its criminalization.

We don’t have to remove them outright, but we should substantially weaken copyright and patent laws. They should be short-term, they should provide very basic protection, and they should never be owned by corporations, always by individuals (corporations should be able to license them—but not own them). If we then observe a substantial reduction in innovation and economic output, then we can put them back. But I think that what defenders of intellectual property fear most is that if we tried this, it wouldn’t be so bad—and then the “doom and gloom” justification they’ve been relying on all this time would fall apart.

Selling debt goes against everything the free market stands for

JDN 2457555

I don’t think most people—or even most economists—have any concept of just how fundamentally perverse and destructive our financial system has become, and a large chunk of it ultimately boils down to one thing: Selling debt.

Certainly collateralized debt obligations (CDOs), and their meta-form, CDO2s (pronounced “see-dee-oh squareds”), are nothing more than selling debt, and along with credit default swaps (CDS; they are basically insurance, but without those pesky regulations against things like fraud and conflicts of interest) they were directly responsible for the 2008 financial crisis and the ensuing Great Recession and Second Depression.

But selling debt continues in a more insidious way, underpinning the entire debt collection industry which raises tens of billions of dollars per year by harassment, intimidation and extortion, especially of the poor and helpless. Frankly, I think what’s most shocking is how little money they make, given the huge number of people they harass and intimidate.

John Oliver did a great segment on debt collections (with a very nice surprise at the end):

But perhaps most baffling to me is the number of people who defend the selling of debt on the grounds that it is a “free market” activity which must be protected from government “interference in personal liberty”. To show this is not a strawman, here’s the American Enterprise Institute saying exactly that.

So let me say this in no uncertain terms: Selling debt goes against everything the free market stands for.

One of the most basic principles of free markets, one of the founding precepts of capitalism laid down by no less than Adam Smith (and before him by great political philosophers like John Locke), is the freedom of contract. This is the good part of capitalism, the part that makes sense, the reason we shouldn’t tear it all down but should instead try to reform it around the edges.

Indeed, the freedom of contract is so fundamental to human liberty that laws can only be considered legitimate insofar as they do not infringe upon it without a compelling public interest. Freedom of contract is right up there with freedom of speech, freedom of the press, freedom of religion, and the right of due process.

The freedom of contract is the right to make agreements, including financial agreements, with anyone you please, and under conditions that you freely and rationally impose in a state of good faith and transparent discussion. Conversely, it is the right not to make agreements with those you choose not to, and to not be forced into agreements under conditions of fraud, intimidation, or impaired judgment.

Freedom of contract is the basis of my right to take on debt, provided that I am honest about my circumstances and I can find a lender who is willing to lend to me. So taking on debt is a fundamental part of freedom of contract.

But selling debt is something else entirely. Far from exercising the freedom of contract, it violates it. When I take out a loan from bank A, and then they turn around and sell that loan to bank B, I suddenly owe money to bank B, but I never agreed to do that. I had nothing to do with their decision to work with bank B as opposed to keeping the loan or selling it to bank C.

Current regulations prohibit banks from “changing the terms of the loan”, but in practice they change them all the time—they can’t change the principal balance, the loan term, or the interest rate, but they can change the late fees, the payment schedule, and lots of subtler things about the loan that can still make a very big difference. Indeed, as far as I’m concerned they have changed the terms of the loan—one of the terms of the loan was that I was to pay X amount to bank A, not that I was to pay X amount to bank B. I may or may not have good reasons not to want to pay bank B—they might be far less trustworthy than bank A, for instance, or have a far worse social responsibility record—and in any case it doesn’t matter; it is my choice whether or not I want anything to do with bank B, whatever my reasons might be.

I take this matter quite personally, for it is by the selling of debt that, in moral (albeit not legal) terms, a British bank stole my parents’ house. Indeed, not just any British bank; it was none other than HSBC, the money launderers for terrorists.

When they first obtained their mortgage, my parents did not actually know that HSBC was quite so evil as to literally launder money for terrorists, but they did already know that they were involved in a great many shady dealings, and even specifically told their lender that they did not want the loan sold, and if it was to be sold, it was absolutely never to be sold to HSBC in particular. Their mistake (which was rather like the “mistake” of someone who leaves their car unlocked and has it stolen, or forgets to arm the home alarm system and suffers a burglary) was not to get this written into the formal contract, rather than simply made as a verbal agreement with the bankers. Such verbal contracts are enforceable under the law, at least in theory; but that would require proof of the verbal contract (and what proof could we provide?), and also probably have cost as much as the house in litigation fees.

Oh, by the way, they were given a subprime interest rate of 8% despite being middle-class professionals with good credit, no doubt to maximize the broker’s closing commission. Most banks reserved such behavior for racial minorities, but apparently this one was equal-opportunity in the worst way.Perhaps my parents were naive to trust bankers any further than they could throw them.

As a result, I think you know what happened next: They sold the loan to HSBC.

Now, had it ended there, with my parents unwittingly forced into supporting a bank that launders money for terrorists, that would have been bad enough. But it assuredly did not.

By a series of subtle and manipulative practices that poked through one loophole after another, HSBC proceeded to raise my parents’ payments higher and higher. One particularly insidious tactic they used was to sit on the checks until just after the due date passed, so they could charge late fees on the payments, then they recapitalized the late fees. My parents caught on to this particular trick after a few months, and started mailing the checks certified so they would be date-stamped; and lo and behold, all the payments were suddenly on time! By several other similarly devious tactics, all of which were technically legal or at least not provable, they managed to raise my parents’ monthly mortgage payments by over 50%.

Note that it was a fixed-rate, fixed-term mortgage. The initial payments—what should have been always the payments, that’s the point of a fixed-rate fixed-term mortgage—were under $2000 per month. By the end they were paying over $3000 per month. HSBC forced my parents to overpay on a mortgage an amount equal to the US individual poverty line, or the per-capita GDP of Peru.

They tried to make the payments, but after being wildly over budget and hit by other unexpected expenses (including defects in the house’s foundation that they had to pay to fix, but because of the “small” amount at stake and the overwhelming legal might of the construction company, no lawyer was willing to sue over), they simply couldn’t do it anymore, and gave up. They gave the house to the bank with a deed in lieu of foreclosure.

And that is the story of how a bank that my parents never agreed to work with, never would have agreed to work with, indeed specifically said they would not work with, still ended up claiming their house—our house, the house I grew up in from the age of 12. Legally, I cannot prove they did anything against the law. (I mean, other than laundered money for terrorists.) But morally, how is this any less than theft? Would we not be victimized less had a burglar broken into our home, vandalized the walls and stolen our furniture?

Indeed, that would probably be covered under our insurance! Where can I buy insurance against the corrupt and predatory financial system? Where are my credit default swaps to pay me when everything goes wrong?

And all of this could have been prevented, if banks simply weren’t allowed to violate our freedom of contract by selling their loans to other banks.

Indeed, the Second Depression could probably have been likewise prevented. Without selling debt, there is no securitization. Without securitization, there is far less leverage. Without leverage, there are not bank failures. Without bank failures, there is no depression. A decade of global economic growth was lost because we allowed banks to sell debt whenever they please.

I have heard the counter-arguments many times:

“But what if banks need the liquidity?” Easy. They can take out their own loans with those other banks. If bank A finds they need more cashflow, they should absolutely feel free to take out a loan from bank B. They can even point to their projected revenues from the mortgage payments we owe them, as a means of repaying that loan. But they should not be able to involve us in that transaction. If you want to trust HSBC, that’s your business (you’re an idiot, but it’s a free country). But you have no right to force me to trust HSBC.

“But banks might not be willing to make those loans, if they knew they couldn’t sell or securitize them!” THAT’S THE POINT. Banks wouldn’t take on all these ridiculous risks in their lending practices that they did (“NINJA loans” and mortgages with payments larger than their buyers’ annual incomes), if they knew they couldn’t just foist the debt off on some Greater Fool later on. They would only make loans they actually expect to be repaid. Obviously any loan carries some risk, but banks would only take on risks they thought they could bear, as opposed to risks they thought they could convince someone else to bear—which is the definition of moral hazard.

“Homes would be unaffordable if people couldn’t take out large loans!” First of all, I’m not against mortgages—I’m against securitization of mortgages. Yes, of course, people need to be able to take out loans. But they shouldn’t be forced to pay those loans to whoever their bank sees fit. If indeed the loss of subprime securitized mortgages made it harder for people to get homes, that’s a problem; but the solution to that problem was never to make it easier for people to get loans they can’t afford—it is clearly either to reduce the price of homes or increase the incomes of buyers. Subsidized housing construction, public housing, changes in zoning regulation, a basic income, lower property taxes, an expanded earned-income tax credit—these are the sort of policies that one implements to make housing more affordable, not “go ahead and let banks exploit people however they want”.

Remember, a regulation against selling debt would protect the freedom of contract. It would remove a way for private individuals and corporations to violate that freedom, like regulations against fraud, intimidation, and coercion. It should be uncontroversial that no one has any right to force you to do business with someone you would not voluntarily do business with, certainly not in a private transaction between for-profit corporations. Maybe that sort of mandate makes sense in rare circumstances by the government, but even then it should really be implemented as a tax, not a mandate to do business with a particular entity. The right to buy what you choose is the foundation of a free market—and implicit in it is the right not to buy what you do not choose.

There are many regulations on debt that do impose upon freedom of contract: As horrific as payday loans are, if someone really honestly knowingly wants to take on short-term debt at 400% APR I’m not sure it’s my business to stop them. And some people may really be in such dire circumstances that they need money that urgently and no one else will lend to them. Insofar as I want payday loans regulated, it is to ensure that they are really lending in good faith—as many surely are not—and ultimately I want to outcompete them by providing desperate people with more reasonable loan terms. But a ban on securitization is like a ban on fraud; it is the sort of law that protects our rights.

The Asymmetry that Rules the World

JDN 2456921 PDT 13:30.

One single asymmetry underlies millions of problems and challenges the world has always faced. No, it’s not Christianity versus Islam (or atheism). No, it’s not the enormous disparities in wealth between the rich and the poor, though you’re getting warmer.

It is the asymmetry of information—the fundamental fact that what you know and what I know are not the same. If this seems so obvious as to be unworthy of comment, maybe you should tell that to the generations of economists who have assumed perfect information in all of their models.

It’s not clear that information asymmetry could ever go away—even in the utopian post-scarcity economy of the Culture, one of the few sacred rules is the sanctity of individual thought. The closest to an information-symmetric world I can think of is the Borg, and with that in mind we may ask whether we want such a thing after all. It could even be argued that total information symmetry is logically impossible, because once you make two individuals know and believe exactly the same things, you don’t have two individuals anymore, you just have one. (And then where do we draw the line? It’s that damn Ship of Theseus again—except of course the problem was never the ship, but defining the boundaries of Theseus himself.)

Right now you may be thinking: So what? Why is asymmetric information so important? Well, as I mentioned in an earlier post, the Myerson-Satterthwaithe Theorem proves—mathematically proves, as certain as 2+2=4—that in the presence of asymmetric information, there is no market mechanism that guarantees Pareto-efficiency.

You can’t square that circle; because information is asymmetric, there’s just no way to make a free market that insures Pareto efficiency. This result is so strong that it actually makes you begin to wonder if we should just give up on economics entirely! If there’s no way we can possibly make a market that works, why bother at all?

But this is not the appropriate response. First of all, Pareto-efficiency is overrated; there are plenty of bad systems that are Pareto-efficient, and even some good systems that aren’t quite Pareto-efficient.

More importantly, even if there is no perfect market system, there clearly are better and worse market systems. Life is better here in the US than it is in Venezuela. Life in Sweden is arguably a bit better still (though not in every dimension). Life in Zambia and North Korea is absolutely horrific. Clearly there are better and worse ways to run a society, and the market system is a big part of that. The quality—and sometimes quantity—of life of billions of people can be made better or worse by the decisions we make in managing our economic system. Asymmetric information cannot be conquered, but it can be tamed.

This is actually a major subject for cognitive economics: How can we devise systems of regulation that minimize the damage done by asymmetric information? Akerlof’s Nobel was for his work on this subject, especially his famous paper “The Market for Lemons” in which he showed how product quality regulations could increase efficiency using the example of lemon cars. What he showed was, in short, that libertarian deregulation is stupid; removing regulations on product safety and quality doesn’t increase efficiency, it reduces it. (This is of course only true if the regulations are good ones; but despite protests from the supplement industry I really don’t see how “this bottle of pills must contain what it claims to contain” is an illegitimate regulation.)

Unfortunately, the way we currently write regulations leaves much to be desired: Basically, lobbyists pay hundreds of staffers to make hundreds of pages that no human being can be expected to read, and then hands them to Congress with a wink and a reminder of last year’s campaign contributions, who passes them without question. (Can you believe the US is one of the least corrupt governments in the world? Yup, that’s how bad it is out there.) As a result, we have a huge morass of regulations that nobody really understands, and there is a whole “industry” of people whose job it is to decode those regulations and use them to the advantage of whoever is paying them—lawyers. The amount of deadweight loss introduced into our economy is almost incalculable; if I had to guess, I’d have to put it somewhere in the trillions of dollars per year. At the very least, I can tell you that the $200 billion per year spent by corporations on litigation is all deadweight loss due to bad regulation. That is an industry that should not exist—I cannot stress this enough. We’ve become so accustomed to the idea that regulations are this complicated that people have to be paid six-figure salaries to understand them that we never stopped to think whether this made any sense. The US Constitution was originally printed on 6 pages.

The tax code should contain one formula for setting tax brackets with one or two parameters to adjust to circumstances, and then a list of maybe two dozen goods with special excise taxes for their externalities (like gasoline and tobacco). In reality it is over 70,000 pages.

Laws should be written with a clear and general intent, and then any weird cases can be resolved in court—because there will always be cases you couldn’t anticipate. Shakespeare was onto something when he wrote, “First, kill all the lawyers.” (I wouldn’t kill them; I’d fire them and make them find a job doing something genuinely useful, like engineering or management.)

All told, I think you could run an entire country with less than 100 pages of regulations. Furthermore, these should be 100 pages that are taught to every high school student, because after all, we’re supposed to be following them. How are we supposed to follow them if we don’t even know them? There’s a principle called ignorantia non excusatignorance does not excuse—which is frankly Kafkaesque. If you can be arrested for breaking a law you didn’t even know existed, in what sense can we call this a free society? (People make up strawman counterexamples: “Gee, officer, I didn’t know it was illegal to murder people!” But all you need is a standard of reasonable knowledge and due diligence, which courts already use to make decisions.)

So, in that sense, I absolutely favor deregulation. But my reasons are totally different from libertarians: I don’t want regulations to stop constraining businesses, I want regulations to be so simple and clear that no one can get around them. In the system I envision, you wouldn’t be able to sell fraudulent derivatives, because on page 3 it would clearly say that fraud is illegal and punishable in proportion to the amount of money involved.

But until that happens—and let’s face it, it’s gonna be awhile—we’re stuck with these ridiculous regulations, and that introduces a whole new type of asymmetric information. This is the way that regulations can make our economy less efficient; they distort what we can do not just by making it illegal, but by making it so we don’t know what is illegal.

The wealthy and powerful can hire people to explain—or evade—the regulations, while the rest of us are forced to live with them. You’ve felt this in a small way if you’ve ever gotten a parking ticket and didn’t know why. Asymmetric information strikes again.