If you’re in the vicinity of the University of Rochester this coming Tuesday (October 4) at 5PM, you are invited to come by Goergen Hall Room 101 to hear Jamie Whyte‘s public lecture on the topic “Regulating Rudeness: The Social Cost of Offensive Speech”.
Jamie’s talks in the past have been generally dazzling. I expect no less of this one.
I’m getting a little tired of presidents of the United States repeating things that could only be spoken by an idiot or a liar, and then trying to intimidate people out of contradicting them.
The latest (though of course not the most egregious) offender is one Joseph R. Biden, who told the country today that he can raise corporate income taxes without imposing any additional tax burden on anyone who earns less than $400,000 a year. Because in the United States of America, nobody with an income under $400,000 owns any stocks or mutual funds. And if you disagree, he’ll stare you in the face and repeat himself. Like I said, this is getting old.
Let’s try to make the best possible case for restricting abortion and see how far we get.
To make that case as strong as possible, let’s start from the presumption that we care about the interests of the unborn in just the same way as the interests of the born.
Now caring about someone’s interests is not a sufficient reason to defer to those interests, because there are usually competing interests that have to be weighed in the balance (in this case the interest of the mother). Often, competitions between interests play out in the marketplace, so that policymakers are unnecessary — if you and I both want the same house, we settle that conflict by bidding for it.
But sometimes markets don’t work very well, and then there’s a policy problem to resolve. For example, suppose your boat happens to be in the vicinity of my dock when it springs a leak and starts to sink. The only way to save the boat is to tie it to the dock. If I happen to be out sunning myself on that dock, we can strike a bargain. But if I’m nowhere to be found, the law enforces the outcome that we presumably would have reached and allows you to tie up to my dock.
The same fundamental problem applies in the case of abortion. You might be willing to pay a substantial fraction of your lifetime income to prevent yourself from being aborted, but at the time of the abortion decision, those negotiations are quite impractical. So by analogy with the boat and the dock, one might argue that the law should enforce the outcome that we presume those negotiations would have led to, by prohibiting the abortion.
But if that argument is correct, it applies to the unconceived as well as to the unborn — that is, it seems apparent that most adults who are glad they were not aborted are equally glad that they were conceived in the first place, and would have agreed to pay just as much to bring about the conception as to prevent the abortion. This suggests that if the law should strive to prevent abortions, it should also strive to bring about a considerable number of additional pregnancies.
But even if you accept that argument, it is not an argument for involuntary impregnation; it is at best an argument for subsidized impregnation. It’s a general principle of cost-benefit analysis that taxes and subsidies are almost always better than mandates, because they allow for different individuals to make different choices that account for circumstances invisible to the policymaker. That’s why it’s better to tax carbon than to mandate gas mileage. And likewise, even if you accept the anti-abortion argument, it is not an argument for banning abortion; it’s at best an argument for taxing abortion.
How big should the tax be? Another principle of cost-benefit analysis is that everyone’s interests should count equally. So if we take all of this seriously, then one additional pregnancy compensates for one additional abortion — one potential life is lost; another potential life is gained; and that’s a wash. Therefore the policy implication is that abortion should, at most, be taxed at a rate necessary to fund the subsidization of one additional pregnancy.
In other words — if A has an abortion but simultaneously coughs up enough money to induce B to become pregnant and carry a baby to term, then even if you buy the market-failure rationale for restricting abortion, the world as a whole is no worse off than before — and in fact better off, because the pregnancy has been voluntarily transferred from A to B. If A is willing to pay that price, I can’t find any reason to disallow it.
(In fact, one could well argue that the mere fact of A’s pregnancy is no reason to impose a tax burden on A — if A has an abortion, the rest of us can perfectly well pick up the tab to enlist B as a substitute, so that A doesn’t need to be taxed at all. I’m putting that argument aside only because I’m trying to bias the outcome in favor of a large deterrent.)
That sets a maximum penalty for abortion. If you’re skeptical of the initial premise that we care about unborn people the same way we care about everyone else (or skeptical of the market-failure argument) then the penalty should be lower — maybe a lot lower. In no case would you want to impose a ban.
To avoid those conclusions, you’d need (for starters) a clear reason to favor the conceived-but-unborn over the not-yet-conceived. Unless you’re prepared to descend into deontology, I think that reason is going to be hard to come by, again because I am exactly as happy to have been conceived as I am to have been unaborted. And even if you find that reason, you might be able to use it to argue for a higher tax but still not, I think, an infinite one.
Edited to add: The more I think about this, the more it seems to me that the correct conclusion is that if we, as a society, care about preventing abortions then we, as a society, should be subsidizing births, and the cost of those subsidies should be spread widely, so that the right tax on abortion should in fact be zero.
Dear National Review:
1) Your Android app no longer works. I click on ‘magazine’, which brings up images of covers of past and present issues. If I click on any past issue, everything is fine. If I click on the current issue, all I see is a list (in red capital letters): SECTIONS, ARTICLES, FEATURES, etc. — but none of these are clickable and the content is not accessible.
2) I thought this might be because my subscription had expired, so I clicked on ‘Subscribe’ and paid for an extended subscription. I see that you still have my expiration date as September 2022, so apparently you took my money but did not extend the subscription.
3) I clicked on subscription help, got back an email telling me to try a few obvious things like “log out and log back in again”, responded by saying I’d already tried those things and none of them worked, and then never heard another word from you. I emailed again, asking what to do next. After several days I’ve heard absolutely nothing.
4) I went to your customer care website, typed in the above, and was told I could not submit the above message because it is “too long”.
5) I called your customer service number (which took some digging to find because it does not appear on your website) and spent twenty minutes talking to a representative who insisted that I re-try everything I’ve already tried, none of which worked. She finally connected me to a supervisor. The supervisor came on the line and said “I understand you’re having trouble logging into our app”. I said that I’m logged in just fine; the app just doesn’t work. The call suddenly ended.
6) I called back, explained I’d been in the middle of a call with a supervisor that got cut off, and was connected to a new supervisor. I started to explain the problem, and the call ended.
7) I am now on hold trying for a THIRD time to reach a supervisor.
8) Here is what I need from you: First, fix your app and/or tell me how to make it work. Second, extend my subscription consistent with the money I just sent you, or refund the money. Third, please be more responsive in the future.
9) Because this message is “too long” for you to accept on your website, I am posting it here and sending you a link to this blog post.
Everyone else can safely ignore this post.
A couple of weeks ago, I was in Las Vegas for the annual meeting of the Association for Private Enterprise Education, where I was honored to give an invited plenary address.
From there, I went directly to Atlanta, where I gave a short talk at the Gathering for Gardner, honoring the legacy of Martin Gardner. There were a lot of other really cool talks too.
I am sorry that the Las Vegas talk was not recorded and that the recording from the Atlanta talk won’t be available for a few months. Therefore I sat down in front of my webcam and repeated both talks, sticking as close to the original words as my memory would allow. Unfortunately there is no way to recreate the audience reaction or the question and answer periods.
Click below to view either or both of those re-creations.
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The second talk is essentially a six-minute excerpt from the first. It surely benefited from the discussions here, here and here, and most especially from the comments of Bennett Haselton.
A few more words about escalators for those who care about this kind of thing:
Continue reading ‘Where I’ve Been’
Economists, like everyone, should admit to their mistakes and correct them. That’s what this post is for.
The argument against taxing capital income runs like this:
1) Current and future consumption should be taxed at the same rate.
2) A tax on capital income is equivalent to a tax on current consumption coupled with a higher tax on future consumption.
Conclusion: Capital income should not be taxed.
I made this argument several years ago in a talk at the Cato Institute. I recently got a complimentary note from someone who had just watched the video of that talk, which caused me to go back and watch a few snippets to remind myself of what I’d done to earn this compliment. And I was mortified to see myself stating not point 1) above, but this far more general point:
1′) All things should be taxed at the same rate.
The status of 1′) is complicated. It is true that in an ideal world, all things including leisure would be taxed at the same rate. But in a world where you can’t tax leisure, the ideal tax system is far more complicated, with the optimal tax on each consumption good varying according to various elasticities and cross-elasticities of demand and supply. So 1′) is true in an ideal world, but surely false in our world, where leisure is very difficult to tax.
Fortunately the full generality of 1′) was not needed for my argument; all I actually used was 1). But in the video, I very clearly stated 1′) as if it were gospel, and even devoted an entire slide to it. This mistake doesn’t overturn the conclusion, but it’s still surely egregious enough that if, say, Paul Krugman had made a mistake like this, I’d have been all over him.
So: Mea culpa.
A subsidiary point: The word “should” in these statements can be interpreted in (at least) two ways — from the point of view of efficiency and from the point of view of fairness. In the few paragraphs above, and in the bulk of my Cato talk, I was using the word “should” in the first sense. But I also tried to address fairness issues in the Cato talk, and from that angle, I’m less sure that 1′) is wrong.
There’s been a lot of chatter lately, in print and on the web, about whether hospitals should refuse to treat unvaccinated Covid patients. Among other things, it’s been pointed out that there are potential logistical nightmares in trying to ascertain whether a patient is vaccinated before treating him, especially in emergency situations.
But it seems to me that the hospitals never were the right institutions to making these decisions in the first place — the insurance companies are. Why haven’t the insurance companies announced that they won’t cover the costs of Covid care unless you’re vaccinated? If you show up at the hospital unvaccinated and accept treatment, you’d be on the hook for the costs — at least up to the point where you’re left bankrupt.
Creating appropriate incentives is, after all, a large part of what we pay our insurance companies to do. Nobody wants to buy insurance from a company that approves every claim (and charges commensurate premiums). When you buy insurance, part of what you’re buying is the company’s promise to exercise due diligence and not fritter away its resources. There’s a pretty good argument that subsidizing people to remain unvaccinated counts as frittering.
It seems to me that “no coverage if you’re unvaccinated” would be both good social policy and clearly a win for the insurance companies themselves (because it’s a win for their customers). So the question is—why isn’t it happening?
And here’s where I hit the limits of my knowledge — is there some law that’s preventing this? Or some regulation? Or is it not happening for some other reason that I haven’t thought of?
John Tyler was born during George Washington’s administration. From 1841 to 1845 he served as the tenth president of the United States.
His grandson is alive!
Proof-of-work crypto mining generates a lot of externalities. Yesterday’s post was about how not to measure those externalities. Today’s is about how to deal with them.
When miners use vast amounts of power, there are two broad categories of externality to worry about. One is environmental damage associated with power usage. Insofar as that’s a social problem, the way to deal with it is to tax power usage. That is the government’s job.
But the other kind of externality is more interesting from a crypto-design point of view. Miners are engaged in an arms race. Each miner makes the system a little more secure. Each miner earns an expected reward for that contribution. But there’s no reason to think that the miner’s reward is commensurate with the social value of the extra security that miner brings, and in fact there are plenty of reasons — at least plausible and possibly compelling — to believe that miners are over-rewarded. Currently, if you complete a Bitcoin block you earn a block reward of 6.25 bitcoins plus transaction fees that seem to be running somewhere around a tenth of a bitcoin, adding up to something in the vicinity of $300,000. It’s a fair guess that miners earn pretty close to zero economic profit, so their costs should be about $300,000 per block or roughly $45 million per day. Society is certainly getting something of value for that $45 million, but if it only takes, say, half as many miners to provide the same value, then we’re overpaying by $22.5 million every day (that being the value of the essentially wasted energy).
[it’s also entirely possible in principle that there is too little mining, in which case you can interchange all the implicit plus and minus signs in what follows.]
If you subsidize something and you get too much of it, the solution is to lower the subsidy. In this case that means lowering the block reward. If you don’t subsidize something and you get too much of it, the solution is to tax it. In this case that means a negative block reward. I don’t see any reason in principle why you couldn’t have a proof-of-work system with negative block rewards, and I think it’s at least plausible that such a system could be optimal. [The way this would work in practice is that the block reward would be subtracted from the transaction fees and then burned.]
A potentially nice side benefit is that you’d be taxing that environmental damage we talked about at the outset. You might believe as I do that if there’s a case for taxing that damage, it ought to be done by the government, not by the Bitcoiners. But if you believe your elected officials are falling down on the job, and if doing part of their job for them is an automatic side benefit of getting your own house in order, that’s a good thing.
I haven’t thought about any of this quantitatively — meaning that I have nothing to say about estimating the optimal tax rate, but there is, I think, a moral — namely:
It is often said that proof-of-work systems inevitably lead to a lot of social waste. The “inevitable” part can’t be true. It’s easy for the system to levy a tax that brings private rewards in line with social benefits.
Of course one possiblity is that with the optimal tax, transaction fees would not be enough to support the miners, in which case the system would collapse. But with such a small transaction demand, the system should collapse, so that’s not a problem.
I am sure that a lot has been thought, and a lot has been written, about optimal block rewards, and equally sure that I’m unfamiliar with most of it. So maybe a reader or two will contribute to my education here.
On New Years Eve, two people were arrested for stealing soap from the Walgreens in my neighborhood. If you think that’s a pretty minor crime, consider this — one of the perpetrators was the exact same height as the Unabomber!
Now wait a minute, you might say. Height is not a measure of criminal impact. If that strikes you as obvious, you are smarter than the readership of the fellow who calls him “Digiconomist” and tweets stuff like this.
Now, if you chortled at the notion of measuring the serious of a crime in units of feet and inches, I trust you are chortling doubly at the notion of measuring economic impact in units of terawatt-hours. Bitcoin miners tend to gravitate (either physically or via the cloud) to where power is cheapest. Argentinians tend to use whatever power is available in Argentina. There’s no reason to think that the cost of a Terawatt-hour generated by a hydroelectric dam in Turkey is comparable to the cost of a Terawatt-hour generated by burning fossil fuels in Buenos Aires.
So why does Digiconomist report this kind of claptrap? Maybe he’s a smart guy who doesn’t always think before he posts. Maybe he’s an idiot. Or — and this is where I’d put my money if I had to — he figures his readers are idiots who are easily dazzled by shiny nonsense.
134 Terawatt Hours is a lot of power. But with not even a guess as to the (internal and external) costs of generating that power, we are left with absolutely no basis for even beginning to think about whether those costs are acceptable. And the comparison to Argentina, where costs are likely to be very different, does not help even a whit. Digiconomist appears to hope his readers won’t notice that.
I’m going on a bit about this because I happen to have just come from a conversation with a pack of idiots of just the sort who I’m sure the digiconomist finds useful. The tweet above happened to come across our desks; I pointed out that it was pretty stupid, and the general reaction was that this just goes to show that economists are living in some crazy fantasyland, where they deny obvious truths like “Everything anybody cares about can be measured in Terawatt Hours”.
Suddenly we were back in first grade where I was explaining that the reason we care about energy use is because it consumes resources and therefore denies us other things, like haircuts and tractors and fresh produce and clean air — and that if you want to think about whether the tradeoffs are worth it, you have to measure everything in a common unit, of which the most readily available is the dollar. That was taken as more evidence of how out of touch economists are. Nobody even suggested an alternative way to think about tradeoffs, having decided, apparently, that thought serves no purpose.
Usually I’m pretty good at ignoring this kind of stuff, but this one really pissed me off. Possibly that was because I was in kind of a bad mood to begin with. But I think it was also this: The idiots in this pack are not full-time idiots. They’re professional people who do their jobs well. I’m sure that if I had to take over any of their jobs, I’d be laughably incompetent. Surely they know how to process information. Surely they’re capable of spotting an obvious fallacy, or an attempt to pull the wool over their eyes. But given an opportunity to hoot and jeer at a simple and obvious point that they happened not to think of themselves, they shut down all of their critical thinking skills in order to grab that opportunity. That’s partly a reflection of how human beings are wired, and partly, I think, a reflection of the times we’re living in, where tribalism and mockery seem to perpetually trump reason and thought. And what it means is that in these times, even many of the best of us have chosen, at least intermittently, to join the pack of idiots. It’s pretty scary. In fact, I’d say it’s even scarier than the number of animals in the National Zoo.
I thought the whole rationale for taxing capital gains in the first place was that we want to discourage inefficiently frequent trading.
If you buy that rationale, then the last thing you want to do is tax unrealized gains. If you don’t buy that rationale, then why tax any gains?
Unless, of course, you’re more into thuggery than rationales….
I’ve blogged about this before, but probably less clearly than I should have. A “Why aren’t you blogging?” email from Bob Murphy inspired me to try to boil this down to a few paragraphs:
Let’s imagine a future where cryptocurrency (or more specifically Bitcoin) is widely accepted, and we have infrastructure in place that makes it very easy to exchange Bitcoin for other assets.
I’ve seen many people — both journalists and economists — suggest that in that future, Bitcoin will be quite valuable. (That is, one Bitcoin will be worth a great many dollars, or a great many Teslas.)
But it seems to me that the opposite is more likely to be true. Here’s why:
1) Both today and in that hypothetical future, if I want to send a million dollars to a guy in, say, London, and have him know with certainty, within an hour, that the transaction is irreversible, then I am definitely going to use Bitcoin.
2) Today, if I think I *might* want to send that million dollars to London sometime this week, I am going to hold a million dollars worth of Bitcoin for a while, just in case. That’s precisely because acquiring a million dollars worth of Bitcoin at the last minute is kind of complicated and I don’t want to deal with it.
3) But in that hypothetical future, I will keep my million dollars in an interest-bearing asset, and then, using that marvelous future financial infrastructure, trade the interest bearing asset for Bitcoins about ten seconds before I want to send them to London.
This means that as Bitcoins become easier to use, the demand to hold them should go down, not up, and the value of the Bitcoins themselves should go down, not up, accordingly.
Am I missing something?
In the days following the 2020 presidential election, fears ran rampant that Donald Trump, having lost the election, would try to do something truly crazy like launch a missle strike or deploy troops to prevent an orderly transition. But among the grownups at the Pentagon, there was one even bigger fear:
For the Joint Chiefs, the biggest worry was the revival of one of Trump’s hobbyhorses: pulling troops out of Afghanistan, what he had called the “loser” war. A long line of advisers—Mattis, McMaster, Kelly, Mike Pompeo, and former secretary of state Rex Tillerson among them—had repeatedly discouraged this idea from the first time Trump brought it up in 2017. American intelligence units in the region needed military support to keep up their work. The United States had hundreds of millions of dollars’ worth of equipment and vehicles on the ground that would have to be methodically removed, or else they could be confiscated by the Taliban and make enemy forces that much better equipped to terrorize civilians and attack the Afghan government. Even if Trump decided to dramatically reduce forces in the region, his generals and top advisers warned him that pulling out of Afghanistan wasn’t as simple as putting a bunch of soldiers on a bus and heading out. Withdrawal had to be executed carefully and in stages, protecting each flank and helping the Afghan government remain stable.
…
Pentagon leaders worried about a Saigon situation, with a chaotic last-minute exit and desperate people rushing to a rooftop to catch the last helicopter out. The Joint Chiefs began preparing for the possibility. If the president ordered a military action they considered a disaster in the making, Milley would insist on speaking to the president before passing on the order, so he could advise against it. Under this plan, if the president rejected Milley’s counsel, the chairman would resign to signal his objections. Then, with Milley out of the picture, the Joint Chiefs could demand in turn to give the president their military advice. This would buy time. In informal conversations, they discussed what would happen if they, too, got the brush-off from Trump. They considered falling on their swords, one by one, like a set of dominos. They concluded they might rather serially resign than execute the order. It was a kind of Saturday Night Massacre in reverse, an informal blockade they would keep in their back pockets if it ever came to that.
— Carol Leonnig and Philip Rucker
I Alone Can Fix It: Donald J. Trump’s Catastrophic Final Year
I continue to struggle with the question of where cryptocurrency gets its value.
(Note: When I say “value”, I mean private value, as reflected in the price. Social value is a whole separate question, for a separate blogpost.)
To be fair, I also struggle a bit with the question of where gold and dollars get their value. So let’s consider some of the reasons various assets might be valuable, and ask which arguments apply to other assets.
1. Gold is valuable because you can use it to make jewelry and electronics. I have no doubt that this is true (which is not the same thing as saying that this is the only reason gold is valuable.)
2. Dollars are valuable because (at least if you are an American) you can use them to pay your taxes. One hears this all the time, and I plead guilty to parroting it from time to time in the past. But it’s stopped making any sense to me. Here’s why: Taxes are foreseeable. In order to pay my taxes on April 15, I don’t need to hold dollars on April 13, let alone in January, February or March. Instead, I either borrow from a home equity line or sell off some bonds on the morning of April 15, and hold the money until the government cashes my check a week or so later. That’s a pretty small contribution to the annual demand for money.
To put this another way, one billion people paying $100 tax bills does not create a demand for a stock of 100 billion dollars. Instead, it creates a demand for 100 billion dollars for about 2% of the year.
Notice then, that despite the superficial similarity, argument number 1 (for gold) and argument number 2 (for dollars) are crucially different, because in order to have gold jewelry or gold electronics, you’ve got to have gold pretty much permanently employed as jewelry or electronics, whereas in order to pay your taxes with dollars, you can hire your dollars on the spot market and then be rid of them.
3. Dollars are valuable because you can use them to make small unexpected purchases. Yes, this makes sense. I have a $20 bill in my pocket right now precisely in case I want to buy some ice cream on a whim. When I go to a street fair, I carry even more.
4. Dollars are valuable because you can use them to make large, planned, and (if you care about this) anonymous transactions. Presumably this is why a lot of dollars spend a lot of time in suitcases traveling back and forth between the United States and Colombia. I buy this one.
5. Crypto (e.g. Bitcoin) is valuable because you can use them to make large, planned, and (if you care about this) irreversible transactions. I buy this one, but as you’ll see below, I don’t think it can explain a high price for Bitcoins.
Now: How does all of this apply to understanding why people hold dollars, gold and crypto?
1. There is, I think, no good analogue of jewelry/electronics when it comes to Bitcoin (or for that matter when it comes to dollars). That’s one step toward understanding gold and zero steps toward understanding Bitcoin.
2. There is also no good analogue of paying taxes when it comes to Bitcoin. On the other hand, as noted above, I’ve stopped believing this explains much of anything anyway, so I’ll count this as zero steps toward understanding anything.
3. For small unexpected purchases, at least with current technology, dollars seem to clearly dominate Bitcoin, for a variety of reasons including (most crucially) the lack of transaction fees. So I’m going to count this as one step toward understanding dollars and zero steps toward understanding Bitcoin.
4,5. That leaves large, anonymous transactions, and/or transactions that you want to be irreversible. For this, I believe Bitcoins are often far better than dollars. But (you might say paradoxically), this very feature should make Bitcoins less valuable, not moreso. Here’s why: If I want to move a lot of wealth around the world using dollars, I need to hold a lot of dollars for a substantial period of time. If I and my trading partners want our transactions to stay anonymous, we might hold on to those dollars for a much longer time, rather than facing the trouble of re-acquiring them the next time we need them. But if I want to move a lot of wealth around the world using Bitcoin, I can (not with perfect ease, but a lot more easily than with dollars) acquire them moments before I want to transfer them, and be done with them. There’s no reason for me to tie up my wealth in a non-interest bearing asset before it’s absolutely necessary — and with Bitcoin, relative to dollars, it’s not absolutely necessary until quite late in the game.
So — and again, call this a paradox if you want to: The better Bitcoin serves its purposes, the less it should cost (in terms of dollars). If Bitcoin (or some other cryptocurrency) improves to the point where nobody has any reason to hold it for more than a second, its price will be close to zero. One reason dollars are worth as much as they are is that dollars are relatively clumsy, so to use them, you’ve got to hold them a while.
That, then, is one small step for dollars and zero steps for Bitcoin.
I am not saying there’s no reason Bitcoin should be valuable. I’m saying that whatever the reason might be, I don’t get it. And I’m pretty sure that most of the things you hear on this subject are just plain wrong.
There is another reason why Bitcoin is harder to understand than dollars, and that’s this: Dollars have just one price (basically the number of apples or haircuts you have to sell to acquire a dollar). Bitcoins have two prices — the number of dollars you need to buy a Bitcoin and the dollar value of the fees you pay every time you transact. Any argument that starts with “demand is high (or supply is limited) so the price should be high” is instantly suspect until one sorts out which of the two prices is being explained here, and why. But that’s a separate topic, which I already blogged on last week, so I’ll stop here and end with a question:
Can anyone give me a plausible reason (not necessarily a slam-dunk correct reason, just a plausible one) why cryptocurrency should have any value at all, except during the course of a speculative bubble?
Can you spot the flaw in this argument?
1) Over time, Bitcoin will become increasingly important as a global currency.
2) Therefore, over time, the price of Bitcoin must rise.
The first is a statement of (alleged) fact and hence not (in its raw form) susceptible to logical analysis. This is not a post about whether it is true, probable, possible, improbable or false. I’m just going to accept it for the sake of argument.
The problem occurs at the word “Therefore”.
I suppose that what underlies the “therefore” in some people’s minds is some instinct like this: “Prices have to equilibrate supply and demand. With supply fixed and demand growing, the price must rise”.
Here’s exactly where that argument goes wrong: Bitcoin has two relevant prices: The price of the asset itself and the transaction fee you pay every time you use it. If the transaction fee rises to equilibrate the supply and demand for transactions, there’s no obvious reason for the price of the asset to rise.
In other words: Yes, it is true that fixed supply plus rising demand implies a rising price. But when there are two prices, it’s not immediately obvious which one must rise.
I can easily imagine a world like this:
1) The demand for Bitcoin transactions is extremely high.
2) Therefore the transaction fee is extremely high.
3) Therefore people use Bitcoin only for large transactions. Large transactions tend to be foreseeable. (I don’t buy a car without first thinking about it for a while.) Therefore there’s plenty of time to acquire Bitcoin just in time to make my transaction. Otherwise, there’s no reason to hold it. (And plenty of reason not to, just as there’s plenty of reason not to hold any other non-interest-bearing asset. For example, if you’re hedging against inflation, you can buy interest-bearing inflation-indexed bonds.)
4) Therefore, at any given moment, the demand for Bitcoin is quite low, although the demand for transactions is quite high.
It seems to me that much of what I read about the supply and demand for Bitcoin starts from the assumption that we can model the demand for Bitcoin the same way we model the demand for dollars or euros. But neither dollars nor euros have transaction fees, and that seems to me to make a world of difference.
Am I missing something?
If you’re a novice investor, looking to get into anything from the stocks to Bitcoin, someone is going to tell you that you can reduce your risk by Dollar Cost Averaging — that is, investing the same dollar amount every month. That way, this person will tell you, you are buying more of the asset when its price is low and less when it’s high.
Please do not take investment advice from this person.
I explained in The Armchair Economist why the above argument is just plain wrong, and why Dollar Cost Averaging is actually riskier than a Readjustment strategy where you invest (say) $1000 and then periodically adjust your total investment up or down as necessary to maintain its value. The logic is compelling. But the sort of people who Dollar Cost Average tend not to be the sort of people with much of an appetite for logic. So today let’s go down a different road. I’ve actually done some calculations to show you how the two strategies are likely to pan out.
Imagine a (very volatile) asset, currently selling for $1, which either doubles or halves in value each month, with equal probability. [I know, I know, the asset you’re looking to buy behaves very differently than this one. So feel free to make some other set of assumptions and re-do my calculations. You won’t get exactly the same outcomes, but you’ll probably get outcomes that are similar in spirit.]
Now let’s imagine one hundred Dollar-Cost Averagers, each investing one dollar per month for 10 months. At the end of that ten months, the average investor will be ahead by about $30. That’s not bad.
Let’s also imagine one hundred Readjusters who each invest $11.83 up front and then, at the end of each month, either withdraw or deposit funds to bring their investment right back to $11.83. Why $11.83? Because that way, these hundred Readjusters will earn, on average, exactly the same $30 that the Dollar-Cost-Averagers earn over the course of ten months.
Okay, both strategies do equally well on average. But of course, if you’re one of these investors, you probably won’t be average. So I set my computer to calculating the distribution of outcomes for each group. Here is the result, with the DCA investors on top and the Readjustment investors on the bottom:
The blue guys have actually lost money. The green guys haven’t lost anything, but they’ve gained less than the average $30. The yellow guys have done better than average, and the red guys have done better still, earning over $90, which is three times the average.
Here’s the good news for the Dollar Cost Averagers: Nine of them have earned over $90, whereas only one Readjuster has earned over $90. That’s pretty much the end of the good news. In the money-losing blue category, there are far fewer Readjusters than Dollar-Cost-Averagers — about 17 versus 48. That’s right; almost half the Dollar-Cost-Averagers lose money, while only about 1/6 of the Readjusters do. 61% of the Readjusters are in the very happy yellow category, earning between $30 and $90. Only 13% of the Dollar-Cost-Averagers make it into that bracket.
Does that prove that Dollar-Cost-Averaging is inferior to Readjustment? Of course not. It all depends on what you’re looking for. Dollar-Cost-Averagers are more likely to lose money, and more likely to earn below-average returns, but in exchange, they get a 9% chance of extraordinary success while their Readjusting neighbors have only a 1% chance. Maybe that’s a gamble you want to take. That’s fine. In other words, it makes perfectly good sense to choose Dollar Cost Averaging in order to increase your risk. The guy who told you to use it to decrease your risk is still 100% wrong.
There are, of course, various real world considerations that got left out here. Different investment strategies, for example, have different tax consequences, and you might want to modify your strategy for that reason, but there’s no reason to think that after those modifications, you should be doing anything like Dollar Cost Averaging.
I want to reiterate that even before I did these calculations, I knew (at least roughly) how they were going to come out, because I trust the underlying logic (which, again, can be found in The Armchair Economist). The larger moral is that logic is trustworthy.
Okay, so according to the news, the FBI has recovered the bulk of the Bitcoins paid as ransomware by the Colonial Pipeline Company, by acquiring the private key to the address where those Bitcoins were stored.
No news source I’ve seen has offered anything approaching an answer to the question: How did the FBI get ahold of that private key? Did the criminal masterminds behind the ransomware attack just leave it, unencrypted, on a hard drive or a piece of paper in a place where the FBI was likely to look?
At first I thought the most likely answer was that the FBI must have traded something for that key — say some sort of immunity (either from prosecution or, maybe, from something like a beating). But on second thought, it occurs to me that maybe hiding a private key from the FBI is trickier than it sounds.
I know plenty of good ways to hide private keys from thieves. You can write your key on a piece of paper (or better yet, etch it in metal) and store it in a safe deposit box. Or, for extra security (say if you’re worried about bank employees accessing those boxes), put half of it in one safe deposit box and the other in another, at a different bank. Or, if you’re worried about one of those banks being reduced to rubble in an earthquake or a terrorist attack (in which case no criminal could get your key, but neither could you), you can break the key into three parts, store parts A and B at Bank One, parts B and C at Bank Two, and parts A and C at Bank Three. Any one bank can disappear and you can still recover your entire key.
That secures your keys and makes them safe from criminals, but it does not make them safe from the FBI, which has the power to issue subpoenas to all of your banks and recover the contents of your safe deposit boxes. So maybe hiding your keys from the FBI is harder than it appears.
So let me try again: After etching them on metal, store parts A and B at Location One, parts B and C at Location Two, and parts A and C at Location Three, where you expect to have access to all of these locations (and only really need access to two of them) but none is particularly tied to you — i.e. not your house, not your car, not your safe deposit box. Maybe underground locations in the woods, though that feels a little sketchy to me. And then of course you might want to keep some sort of written record of those locations, which the FBI can find when they search your house or safe deposit box, whereupon they might wonder what’s so interesting about those locations that you felt the need to keep track of them….
You might think the safest thing is to memorize your key (or a mnemonic English phrase from which the key can be derived) and leave no record of it anywhere except in your own brain. That’s fine until dementia starts to set in, or until you’re hit by a bus (in which case your heirs are out of luck, though you might or might not care about that). Or you can leave written clues to the mnemonic that only you will be able to decipher, like “Word 9: The secret nickname I had for the girl I had a crush on in third grade”. This is of course also subject to the dementia problem.
So. Suppose you’re a master criminal, storing your ill-gotten gains as Bitcoins, which you want easy access to at all times for yourself (and maybe your heirs), but you want to keep completely inaccessible from law enforcement agencies with unlimited subpoena power. What’s your plan?
Update: More recent news reports indicate that the coins were seized from a custodial account — based in the United States, no less. In other words, my sarcastic reference above to “criminal masterminds” was not nearly as sarcastic as it should have been. It’s not that these guys failed to think of a clever scheme for hiding their keys; it’s that they never even bothered to try. The more interesting question, then, is how does Bitcoin fall 10% on the “news” that if you let someone else hold your private keys, you can lose your Bitcoins. (“Not your keys, not your coins”, as the saying goes.) The best answer I have (not just for this event but for a lot of Bitcoin volatility in general) is that anything even slightly unsettling leads to a small drop in prices, whereupon heavily leveraged investors fail to meet their margin calls, which leads to big selloffs. But that’s not a full answer until someone fleshes out the part where more sophisticated investors fail to jump in and take advantage of this buying opportunity. So maybe the dip, despite the coincidental timing, had nothing to do with the seizure.
I had the honor of giving the commencement address to this year’s graduating economics majors at the University of Rochester, under circumstances that were trying in several ways.
First, I learned at 10:10 PM on Friday that I was giving this talk on Saturday morning. (It’s a long story. All the communication failures leading up to this were entirely my own fault.) I got to bed rather late that night.
Second, it was so ungodly hot that I chose to shed my cap and gown.
Third, there were, I think, only about 80 students present, spread evenly around a 967 seat auditorium (family and other guests were not allowed). Laughter and applause were therefore pretty sparse (though I suppose they might have been sparse for other reasons) and even what little could be heard was mostly not picked up by the microphones.
Other than that, I thought it was a good day. Those who have seen my 2017 commencement talk will recognize roughly the first quarter and the last tenth of this one, which I recycled. The intervening 65% or so is new.
Or click here.
I expect this is related to the phenomenon of apartment-hunters getting angry at landlords who won’t rent to them, even though those landlords are making their search easier by renting to someone and thereby reducing the competition for other apartments.
But in the case of the landlords, the psychology seems to be something like “Yes, you’ve helped me by renting to others but you could have helped me even more by renting to me!”. (Though this overlooks the fact that anybody could have made your life easier by becoming a landlord and renting to you, so maybe you should be equally angry at pretty much everybody.) Whereas with the HOV lanes, it seems like the cheaters have already done everything they could possibly do for you (unless you think they could do more by getting off the highway completely, making a little more room in the HOV lane, and thereby encouraging someone else to cheat).
People are odd.
Hat tips to my friends Gerry Sohan for point 2) and John Barry for point 3).
So I was clicking through the stations on Sirius XM and came upon a rebroadcast of an old Jack Benny radio program from 1953, with Bob Hope as the guest star. There is a live and apparently very appreciative audience that laughs expansively at all the “jokes”. (Yes, the scare-quotes are deliberate.) But one instance stands out from the rest: When Dennis Day informs Bob Hope that, having seen all the Road To… movies, he has something to say. And what, asks Hope, is that? The ensuing dialogue goes like this:
Dennis Day: You’re nothing without Bing Crosby!
Bob Hope: You E-flat idiot!
At this the audience laughs uproariously, out of all proportion to all previous laughter, and for what seems like approximately forever (though I now know that it was about 17 seconds).
Having absolutely no idea what an “E-flat idiot” is, I of course turned to Google, where I get several hits — all of them to pages with lists of something like “the longest laughs in the history of radio”, but not one of which leaves me any more enlightened about what an E-flat idiot actually is.
(I realize it’s probably too much to hope that I’ll ever understand why this was funny, but I’d at least like to know what it means.)
Anyone?
Shepherd.com is a brand-new website where authors recommend the five best books on a topic of their choosing. The topic of my choosing was The Biggest Questions, and while I doubt very much that I picked the five best books ever written in this category (by any standard you care to name), I am at least confident that I picked five well worth your attention.
Feel free to do any or all of the following:
The death of Bernie Madoff reminds me that I never understood why he was so vilified. He ran a Ponzi scheme. All of his investors knew it was a Ponzi scheme. They chose to get in, and gambled that they could time their exits just right. Some succeeded, some failed. So Madoff was the moral equivalent of a bookmaker (and not the kind of bookmaker who employs violence to enforce collections). He catered to a preference that some might call a vice. Where’s the problem?
There would be a problem if anybody had believed Madoff’s claim that he could earn a consistent 10% in any kind of market conditions, but it’s hard for me to imagine who that “anybody” might be — and if he or she does exist, then I don’t think it’s incumbent on the rest of us to protect an investor who is so willfully naive. The fact that he not only claimed to return 10% in every kind of market condition but actually did so constituted something like proof postive that he was running a Ponzi scheme, for anyone who cared to take notice.
So I think Madoff’s “lies” go into the same category as the alleged “lies” of Barack Obama when he said that under Obamacare, anybody who liked his/her old health insurance policy would be able to keep it. Nobody capable of arithmetic could have believed such an outlandish statement — unless they gave it no thought whatsoever, in which case even if they were fooled, they were fooled about something they apparently didn’t care about.
In other words: It’s not a lie if nobody believes it.
The scandal, I think, is that public resources were used to recover the losses of those who took the Madoff gamble and lost.
It’s always a pleasure to do a Podcast with a host who is thoughtful, understands the issues, and engages in meaningful dialogue instead of just mindlessly plowing through a list of prepared questions. Remarkably many fail to clear that bar. Alex Epstein clears it easily. My interview with him is here.
Note: This is strictly a post about Bitcoin as a payment system. If you have something to say about Bitcoin as a store of value, a bubble or a long-term investment, you are off topic.
That said, I want to think about the interaction between transaction fees, seignorage and the number of miners. I’m sure there are people who have thought far harder about this than I have, and I dare to expect that some of those people are reading this. I hope one or more of those people will let me know whether I’m thinking about it correctly.
It seems to me that at least in the short run, the following things are more or less fixed:
a) The cost of mining (call it C)
b) The maximum possible daily transaction volume (call it T)
c) The fee per transaction at which users demand exactly T daily transactions (call it F)
d) The daily seignorage earned by miners (that is the newly minted Bitcoins that a miner receives upon successfully completing a block). (Call it S.)
Now:
1) There is free entry into mining; therefore each miner has to earn C. If there are M miners, then the total revenue earned by miners is CM.
2) That total revenue breaks into two parts: Transaction fees, which total TF per day, and seignorage, which totals S per day.
3) So CM = TF + S, or M = (TF + S)/C , where everything on the right side of that equation is more or less fixed in the short run.
4) If the seignorage were to stop flowing (as it will on some fixed date in the near future), then the equation becomes M=TF/C.
5) Currently, the value of S is about 9 times the value of TF (these are my crude off-the-cuff estimates; see below). Therefore TF/C is about 10% of (TF + S)/C. In other words, when the seignorage disappears, the number of miners should fall to about 10% of the current number.
(Of course many of the things I am treating as more-or-less fixed can change, so this is a ceteris paribus calculation, not a forecast.) My questions (below the fold for those who are reading this on my website):
I’ve been a quite satisfied customer of Paypal almost since the very beginning, but I am now a mightily annoyed and frustrated customer and I wonder if anyone has any advice on how to deal with this:
1) I see a charge to my Paypal account for $35.63, with the payee listed as “Google — Automatic Payment”. Looking back, I see there was an identical charge (which I had overlooked) a month earlier.
2) I disputed the charge with Paypal. 24 hours later, I was informed that the transaction was authorized and the case is closed.
3) Google denies any knowledge of this. They claim that the last time they authorized any sort of automatic payment from me to them was in May, 2020 and the amount was $4.29. Edited to add: When I go to Paypal and look under “automated payments” and then click on Google, it shows that the last automated payment to Google was in fact this $4.29. The repeated $35.63 payments do not show up.
4) When I try calling Paypal, I tell the automated phone system that I’m calling to dispute a transaction. They ask me which transaction, I tell them, the voice says that’s already resolved, and they hang up on me.
5) When I try calling Paypal back and respond to all queries about why I’m calling with the word “agent”, the voice says that to speak to an agent, I must call back during normal business hours. But I’m *already* calling during normal business hours.
6) When I use the chat function on Paypal’s webpage, I get the same responses I get from the phone system.
Question 1:
How the hell do I get Paypal to talk to me? Failing that, how the hell do I get Google to inform Paypal that they did not authorize this charge? (Google appears to be completely unreachable by phone.)
Question 2:
It looks like the only way to stop this from happening every month is to close my Paypal account. Will it then be safe to open a new Paypal account, or will they just transfer the charges to the new account?
Help!
Technology marches on, and many of the flash videos I’ve posted here over the past fifteen years or so have become mostly unwatchable, because almost nobody uses flash players anymore. So I’ve just spent the better part of a day updating all of those videos to more modern formats. This means that if you have occasion to read old posts with videos in them, the videos will actually work now.
While I was at it, I updated this site’s video page, which you can get to by clicking on the menu at the top or by going directly here. This too had become unusable because of all the flash video. I updated the video formats and added several more items. Let me know if you have any special favorites you think I should add.
Just in case you thought the change of administration meant an end to stupid and evil trade policies, CNN reports that “President Joe Biden will sign an executive order Monday aimed at boosting American manufacturing, setting in motion a process to fulfill his campaign pledge to strengthen the federal government’s Buy American rules.”
I already knew this, but it’s nice to be reminded: Caitlin Flanagan is a national treasure.
Marty Makary, Professor of Health Policy at Johns Hopkins, as quoted by Alex Tabarrok:
Ironically, those in the Oxford-AstraZeneca trial who inadvertently received half the initial vaccine dose had lower infection rates
Makary and Tabarrok’s main point (with which I fully agree) is that it’s criminally stupid for the FDA not to approve the A-Z vaccine immediately — and their main argument would stand with or without the observation about infection rates.
But I’m quoting the same observation for an entirely different reason: To point out that sometimes you need economics to explain the medical data.
In particular: Half-dosed subjects will generally have fewer side effects. Subjects with fewer side effects will think it more likely that they’ve gotten the placebo. Subjects who think they’ve gotten the placebo are going to continue taking more precautions with masks, social distancing, etc. Therefore it’s entirely plausible that half-dosed subjects will have lower infection rates.
Thanks to Romans Pancs for pointing me in this direction, and reminding me of the Thanksgiving puzzle that I posted here.
Over four years ago, I published my answers to some frequently asked questions about Donald Trump. Here is some of what I said then:
…
Is Donald Trump batshit crazy? Obviously yes. He seethes with personal resentments, all of which loom larger in his mind than, well, anything, and appears genuinely incapable of fathoming the possibility that there are people who don’t particularly care whether someone high or low has been “unfair” to Donald J. Trump. He claims to believe that Hillary Clinton’s policies would be disastrous for the country, yet works to undermine the Republican congressional and Senate candidates who stand as a bulwark against those policies, because preventing a national disaster is less important than petty vengeance against those who have failed to pay Trump his due respects. Moreover, he seems genuinely baffled by the suggestion that anybody anywhere might prioritize things differently. He has, as I’ve said before on this blog (and as countless others have said, sometimes more poetically) the mental, emotional and moral maturity of a four-year-old, with an attention span to match.
Is being batshit crazy a disqualification for the position of Commander in Chief of the armed forces of the United States of America? Hell yes.
Summary: I do not know and I do not much care whether Donald Trump is a racist or a serial groper, except insofar as I wish nobody were a racist or a serial groper. When I’m deciding who to support for President, I care about things that will affect his or her performance in office. In Trump’s caase, I believe the xenophobia is a sufficient disqualification, though I think one could reasonably argue that, given the shortcomings of the alternatives, we should not be so quick to disqualify. But I do not think that one could reasonably say the same about the paranoia, narcissism, and all the related mental instability. The next time Trump goes off on an incoherent rant — and he will — try imagining him in command of the United States Army. Take that image into the voting booth.
I’m not always right, but I’m not always wrong either.
