Public Mindlessness

Now did you read the news today?
They say the danger's gone away
But I can see the fire's still alight
Burning into the night
--Genesis

One month later and Ten Year rates still climbing. Why no allergic reaction in markets yet?

I suspect that market participants collectively believe that the Fed will not allow rates to continue to rise. They think the Fed heads will initiate yield curve control or some other monetization measure to buy down rates.

Has American belief in central planning ever been this high? In all policymaking areas. Monetary. Fiscal. Health. Perhaps only during the Great Depression has confidence in bureaucratic prowess matched current levels.

Theory and history suggest that the public mind is in for a big let down.

Public Property and Liberty Lost

I don't know where to start
Or where to stop
My luck's like a button
I can't stop pushing it
--General Public

If you're a socialist, then how do you advance your agenda in a society that values private property rights but also tolerates some public ownership? Simple. Gradually push for more public ownership in order to gain more control and authority over people's lives.

The possibilities of this strategy have been well demonstrated over the past months. A primary justification for the coronavirus lockdowns was that we needed to 'flatten the curve' so that hospital capacity would not be overwhelmed. Trends toward 'socialized medicine' have increasingly framed hospitals as utilities that must be managed as open access public goods rather than as private enterprises subject to natural laws of supply and demand.

Consequently, rather than a dynamic system where hospital managers would work in creating more supply (e.g., flexible capacity) in the face of a spike in forecast demand and having the pricing system ration scarcity, socialist planners were able to convince citizens that everyday behavior had to be forcibly restricted to preserve a static institution incapable of dynamic response.

And people have largely bought into it.

The more property placed in public sphere, the greater the loss of liberty.

Avoidance Behavior

Every time I think of you
I always catch my breath
And I'm standing here
And you're miles away
And I'm wondering why you left
--John Waite

In an early April paper (full paper here), Jeffrey Harris, an MD and PhD Economist at MIT, presented evidence that the COVID-19 epidemic curve was already flattening in NYC. After disposing of several alternative explanations of why the flattening curves was a mirage (e.g., lack of testing, not accounting for asymptomatic cases, inhabitants fleeing the city, etc), he proceeds with a discussion of what was making the curve flatten.

He notes studies of social distancing measures, including a comparison of containment policies enacted by various cities during the 1918 Spanish Flu epidemic (Markel et al., 2007), suggest merits of spacing between people, particularly for prolonged periods of time.

Policymakers, of course, will be quick to credit their coercive lockdown measures with putting the necessary distance between people to reduce the threat of infection.

But Harris notes, "there is, however, another strand in the economics literature suggesting that people voluntary engage in avoidance behaviors once they fully perceive the risks of contagion." (p. 13) He notes various studies of past epidemics, including the 2009 H1N1 Swine Flu epidemic when there were no quarantines or lockdowns, where "economists could see no other explanation for their finding that the incidence of new cases fell well below the exponential path predicted from epidemiologists' classical models."

Harris suggests that, "in all of these cases, the critical ingredient in the public policy mix may have been the successful communication of consistent, clear, accurate and timely information to millions of individuals, who responded by taking action without government coercion. Put bluntly, what flattened the curve was no more than the naked truth."

This time around, policymakers who want to take credit for flattening the curve by draconian lockdown need to answer this question first: How do you know that what occurred was not primarily due to voluntary avoidance behavior? Once they understood the risks, why didn't people social distance themselves as they saw prudent?

Imagine where we'd be today if policymakers had merely shared information all along the way and then let the people decide what to do.

btw, Harris recently completed another interesting paper analyzing the subway's role in seeding the virus epidemic in NYC. Perhaps we'll discuss in an upcoming post.

Reference

Harris, J.E. (2020). The coronavirus epidemic curve is already flattening in New York City. National Bureau of Economic Research Working Paper No. 26917. April 3, 2020.

Markel, H., Lipman, H.B., Navarro, J.A., Sloan, A., Michalsen, J.R., Stern, A.M., & Cetron, M.S. (2007). Nonpharmaceutical interventions implemented by US cities during the 1918-1919 influenza pandemic. JAMA, 298: 644-654.

Mass Transit Exodus

Sam Campagna: Frank, the president sent his limo for you.
Lilly Raines: That's the least he could do.
Frank Horrigan: Good. I love public transportation.
--In the Line of Fire

Implication is that less desire going forward to ride mass transit is bullish for oil.

No one wants to ride packed trains = relatively more driving.

"In Berlin, among the first European cities to relax its lockdown, public transit use remains down 61% while the number of people driving has recovered to 28% below normal normal."https://t.co/Zg1XOWKm5I

— Morgan Housel (@morganhousel) May 11, 2020

More cars, more gas.

Getting Constructive

"I'm starting to feel a little better about this whole thing."
--John Tuld (Margin Call)

Another ugly day yesterday with the Dow down -3000. The 13% loss in one day ranks third all time. Dow is off more than 30% in a month.

Fund manager equity allocations and economic outlook:

As fund managers have reduced equity allocations most this month, they’ve also turned most pessimistic on global growth in history of @BofAML’s Global Fund Manager Survey @SoberLook pic.twitter.com/wGcGkuRigf

— Liz Ann Sonders (@LizAnnSonders) March 17, 2020

Nasdaq sentiment index:

Nasdaq sentiment has never been this pessimistic @SoberLook @BofAML pic.twitter.com/oPYIjC1pA4

— Liz Ann Sonders (@LizAnnSonders) March 17, 2020

While there is good cause to be bearish, I'm growing increasingly constructive. The COVID 19 situation is driving emotional, fast thinking processes that are prone to overreaction. As time progresses, human reasoning is likely to kick back in and recognize the dynamic responses--many of them well underway--that enable adaptation to the health situation. I sense that this point of recognition may be sooner rather than later.

While a whoosh or two lower may be necessary to clear things out, it seems entirely possible that a sustainable low is quickly approaching. As such, I continue nibbling here and there.

Gloves Off

They stack the odds 'til we take to the street
For the kill with the skill to survive
--Survivor

The monetary policy gloves are officially off. Last night, the Federal Reserve and other central banks announced extreme measures aimed at combating economic and financial consequences of coronavirus countermeasures worldwide. Three separate announcements were released.

In the first announcement, the FOMC preempted policy actions anticipated at its previously scheduled mid-week meeting by dropping the fed funds rate 100 bips to the 0 - 0.25% range (essentially zero). It also announced programs of additional asset purchases by $700 billion (a.k.a. 'quantitative easing') and further expansion of overnight repo and money market activities.

The second announcement signaled Federal Reserve intentions to keep credit systems functioning under conditions of curtailed business activity, It encouraged financial institutions to tap the Fed's discount window for credit to meet demands for households and businesses. To encourage activity, the primary credit rate was dropped 150 basis pts to .25 percent. It also reduced bank reserve requirement ratios to zero percent (!) to encourage more bank lending within the regulatory framework.

The third announcement concerned coordinated action among central banks worldwide to improve US dollar liquidity via swap arrangements. This addresses concerns arising last week that USD were increasingly hard to find for trades among institutions.

All of these policies are clearly inflationary. I would expect even more extreme measures should the public health measures persist or escalate.

Markets not impressed, btw. US stock futures traded limit down last night and circuit breakers went off with the opening bell this am with Dow off nearly 10%. Many stocks not even on the board when breakers kicked in.

Pyramid of Ridicule

Slide your feet up the street, bend your back
Shift your arm, then you pull it back
Life's hard you know
So strike a pose on a Cadillac
--Bangles

Problems with the Cincinnati streetcar 'pyramid' continue. This article not only documents the continued decline in ridership as well as the reliability issues, but also the possibility that the streetcar's primary corporate sponsor, Cincinnati Bell (CBB), may pull its support.

In 2016, CBB signed a 10 year contract worth $3.4 million to put its name on the streetcar. The contract allows for CBB to terminate the deal if problems with the streetcar cause harm to the business interests of the company.

Having your name on the side of what has amounted to a pyramid of ridicule would seem to qualify.

Security Clearance

Charlotte Blackwood: What happened to your father?
Pete 'Maverick' Mitchell: I guess I kind of figured with your security clearance...that you'd know more about him than I do.
--Top Gun

'Security clearance' is a privilege granted by government officials to select people, who may be government employees or not, that allows those people access to information that the government considers 'classified' for 'national security' purposes. These are government secrets that government officials deem sensitive enough to be kept from the citizenry for their own protection.

Whether withholding certain information from the citizenry actually improves security while preserving liberty is a subject for another day. Consider instead the notion of security clearance.

Security clearance is clearly a political good. It is granted to some but not to others. It can be given and it can be taken away. It grants access to information that some consider valuable. As such, in markets for political favor, security clearance will be bought and sold.

Security clearance will therefore be subject to mischief among those with political interests.

Boycotts and Political Economy

Ali Mills: What's wrong?
Daniel LaRusso: It's coming around!
The Karate Kid

A growing thread of political economy involves pleas to boycott sellers who act in ways deemed politically incorrect. These pleas come from politically active groups almost exclusively from the left.

Because sellers depend on economic resources from buyers in order to flourish, the idea of the political action groups is to starve those sellers into submission--i.e., change behavior to align with politically correct norms or risk going out of business.

As long as they involve no aggression, these boycotts are perfectly legitimate. Buyers should be free to do business with whomever they wish.

But the same holds for sellers. If a seller does not care to do business with a buyer, for whatever reason, then they should be free to do so.

Because leftists overwhelmingly support laws that force sellers into contracts with buyers, I doubt they see the hypocrisy of their boycott strategy.

Streetcar Pyramid

"I was an overachiever. I'm settling into my natural groove now."
--Natalie Scheffer (Joe Somebody)

In his masterful 1932 work The Bubble That Broke the World, Garet Garrett draws analogy between the great pyramids of Egypt, often regarded as world 'wonders,' and wasteful public spending projects. The real wonder of the pyramids is how massive amounts of economic resources that could have been put to productive use were diverted for years to build an expensive ornament.

The city of Cincinnati's latest pyramid is the downtown streetcar. After progressives jumped on board the first few weeks to celebrate another completed public works project, ridership has been dwindling. Usage currently rests at about half the projected rate. Moreover, riders report long waits at stops.

Predictably, the city council has commissioned a downtown traffic study on the matter.

There is no rest for pyramid builders.

Trustworthy News

"Let's never forget. We're the real story, not them."
--Aaron Altman (Broadcast News)

Study shows US near bottom of pack for trustworthy news. Would be interesting to see a study of this over time.

The article suggests that higher trustworthiness associated with 'the presence of well funded public service broadcasters.' Ponder that for moment. The greater the resource dependence on government sponsored entities, the more trustworthy the news?

Perhaps the picture reflects US information consumers who are further along in the process of waking up to just how slanted the mainstream media complex is. Others are still asleep.

Elections and Expansion of Power

"And, when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, all the laws being flat?"
--Sir Thomas More (A Man for All Seasons)

Increasingly, presidential elections in America throw groups who supported the losing candidate into panic. The panic includes pointing fingers. The president elect is a marxist or fascist. People who voted for him are uninformed or just plain idiots. The election system is rigged or unfair.

An interesting thing about this phenomenon is that it is bipartisan. For example, eight (and four) years ago, Republicans went into hysteria when Barack Obama was elected. Today, it is Democrats' turn as Donald Trump prepares to take the reigns. Complaints only arise when their side loses.

One way to explain this behavior is that it aligns with social identity theory and the psychology of losing. People tend to identify with groups--sometimes very strongly. They can develop such an psychologically vested interest in their group being superior that, when their group loses or is put down, they cope with cognitive dissonance by blaming others.

Another way to explain it is that there is true reason to be terrified. Today's US president holds far more discretionary power than our founding ancestors intended. That may be ok with you if the person in charge shares your values. But if a sitting president does not like you or the group you belong to, then the nation's chief executive is in a position to trample your rights with, borrowing from the current administration's stated approach to lawlessness, with the stroke of a pen or a phone call.

The anti-federalists foresaw this situation long ago. Marry discretionary rule with democratic election processes, and you were likely to see at some point just what we're living through today.

But the proper source of blame isn't the other guy. It is with us when we support discretionary expansion of presidential powers when it suits our interests. Because, at some point, that discretionary power quite likely will be wielded by someone we don't like and who doesn't like us.

Social Networks and Election Hysteria

I wanna know what you're thinking
There are some things you can't hide
I wanna know what you're feeling
Tell me what's on your mind
--Information Society

Some have theorized that the hysteria on display following the presidential election, particularly among anti Trump types, demonstrates that extensive social networking can prompt many people to create virtual realities that are difficult to shed if facts that challenge their personal worlds intervene. Such individuals cope with election-related cognitive dissonance by retreating further into the comfort of the world defined by their social network connections.

A competing but not altogether unrelated theory is that people with extensive social network connections are too tightly coupled to their environments. In the social networking context, tight coupling can make it more difficult to think for oneself because of constant exposure to the thoughts of others. Time and attention that can be allocated to personal matters offline is reduced. Highly networked individuals are more subject to influence and control by others.

Tightly coupled individuals respond to every little stimuli--even those that do not demand response--thereby making highly networked types prone to overreact to their environments.

Because of its capacity to 'overconnect' individuals to their environments, social networking can be viewed as potential source of instability--one that is potentially maladaptive in nature.

Duverger's Law

"Son, this is a Washington DC kind of lie. It's when the other person knows you're lying, and also knows you know he knows. You follow?"
--Robert Leffingwell (Advise and Consent)

A previous post speculated that there must be research in political science suggesting that in democratic election systems grounded in majority rule (a.k.a. "first past the post") two political parties dominate the ballot. The theoretical principle, it turns out, is called 'Duverger's Law.'

Maurice Duverger was a French sociologist who wrote about the effect in several works in the 1950s (e.g., Duverger, 1954). A quick scan of academic reference databases that I have access to finds dozens if not hundreds of papers evaluating his theory.

After 60+ years of academic testing, Duverger's Law as a general predictor of two party dominance in majority rule election processes still stands.

References

Duverger, M. (1954). Political parties: Their organization and activity in the modern state. New York: Wiley.

Favor for Sale

Say that you'll never, never, never need it
One headline, why believe it?
Everybody wants to rule the world
--Tears for Fears

Evidence continues to mount that Hillary Clinton and her hubby have been huge sellers of political favor over the past decade or so. While the multi $100 million size is eye opening, that they have been sellers shouldn't be a surprise. Whenever government is capable of redistributing resources from some for the benefit of others, then markets for political favor will thrive.

As noted here, the solution is not to try to restrain the buyers of political favor. Whatever the rules might be limiting campaign contributions et al., those seeking to gain political favor will find a way to purchase it.

Instead, the solution is to prohibit government from forcibly taking property from some for the benefit of others. Then and only then would politicians have nothing to sell. The market for political favor would at that point be shut down.

Worker Exploitation

Standing in line marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & the Range

One of the many myths regarding capitalism is that it exploits workers. As discussed here, Marx's definition of exploitation involved the extraction of surplus value from workers. Because Marx's theory has been refuted over the years, sympathizers have broadened the definition toward the concept of taking unfair advantage of others' vulnerability.

This definition leads many to believe that capitalism is rife with opportunities for exploitation. In particular, powerful capitalists are often proposed to take unfair advantage of workers in order to maximize profit.

The video observes that many capitalists would indeed like to exploit workers in order to maximize profits, but competition with other capitalists prevents them from doing so. Competition forces employers to pay workers close to the value of their productivity whether they want to or not. If a capitalist tries to pay a worker below market wages, then there is incentive for other employers to hire that individual for a greater salary because the employer will profit by doing so. In competitive markets, wages reflect worker productivities.

What the video does not note is that workers would also like to exploit the capitalists. They would like to get paid more than they are worth in order to maximize their incomes. But competition also forces workers to offer their services close to their productivities, lest they would be let go in favor of individuals who offer their services at prices more reflective of realized productivity.

The video does go on to note that changes of exploitative practices in capitalistic systems are reduced because exchanges in unhampered markets are voluntary. No one puts a gun to the head of either employers or workers to contract with each other. Even in examples often presented by interventionists, such as payday loans and child labor, both parties expect to gain more in the exchange than they give up, lest they would not engage in trade.

Mutually beneficial exchanges are how wealth is created in society. The more wealth that is created, the lower the vulnerability for exploitation by those engaged in trade.

The alternative to capitalism, intervention by the state, leaves individuals much more vulnerable to exploitation--exploitation by politically connected interests--than unhampered markets ever could. By definition, forced exchange brought about by the strong arm of the state guarantees that exchanges will not be mutually beneficial.

Exploitation in labor markets is reduced by reducing interventionary forces and freeing people to make more voluntary exchange.

Third Parties

And the parting on the left
Is now parting on the right
And the beards have all grown longer over night
--The Who

There is talk among Republicans dissatisfied with developments in the current presidential campaign of forming a 'third party.' Implied they mean significant third party as there are, and have been, numerous other obscure political parties that have placed candidates on ballots.

Personally, I applaud the idea of numerous (i.e., beyond three) political parties as the competition should suppress markets for political favor.

I am not well-versed in political theory, but I suspect there has been research that demonstrates that, in a system governed by a decision rule that says that candidates with majorities of votes win (a.k.a. 'democracy'), then the tendency over time should be for only two significant political parties. This would seem particularly true when the system permits the winners to employ the strong arm of government to forcibly take resources from the losers for their benefit.

In the spirit of game theory, coalitions of special interests are likely to form to amass votes for their side. Because the goal is to get just over 50% of the vote, it seems that no coalition would be satisfied with, say, 5% of potential voters because they know that they would lose the game. Instead, special interests would keep combining until they get to what they think is a winning mass--about half the vote. Third parties would be 'acquired' or crowded out into obscurity.

In democracies, there seems little theoretical room for a third significant party. This suggests another way how democracy and diversity are opposed.

Palace Revolution

Everywhere I hear the sound of marching charging feet, boy
--The Rolling Stones

With Donald Trump's win last night in Indiana and Ted Cruz's subsequent drop from the race, it appears highly likely we are headed for another authoritarian president--whether the next elect be Republican or Democrat. While there is an argument to be made that the present disarray in the two mainline political parties is a long term positive, I have my doubts that the republic will be able to withstand another statist regime.

By definition, extreme events are low probability affairs--at least in the near term. However, that should not discourage vigilance in keeping an eye out for factors that might spawn such 'tail risk.'

As I see it, yesterday's development in the presidential race adds one more factor to an already growing list that increases the likelihood for a major socioeconomic meltdown over the next four years. This is not a prediction. I am merely saying that the chances of an extremely negative scenario unfolding have gone up significantly in my mind's eye.

In the spirit of scenario planning, I intend to manage this risk accordingly.

Vaccination by Force

"There will be a day when you will wish that you had done a little evil to do a greater good."
--Sybilla (Kingdom of Heaven)

A recent measles outbreak has once again raised the interesting question of the role of government in public health. During the ebola contagion last fall, these pages concluded that government might have legitimate power to quarantine people exposed to a deadly, contagious disease. When an individual is exposed to a deadly disease and then interacts with others understood to have been unable to take reasonable precaution against the disease, then the carrier can be seen as an aggressor.

Quarantining potential carriers, particularly when the mechanism of contagion is not well understood, can be seen as a valid power of government under such circumstances. Government's proper role is to help individuals protect themselves against aggression.

In the midst of the measles outbreak, we now hear outcries for mandatory (i.e., enforced by government) vaccination. While this situation may seem analogous to the ebola case above, it is not. With measles we have a case where the disease and its transmission are well understood. Vaccines against the measles have been available for decades. In fact, by the time vaccines were introduced, mortality from measles had already been drastically reduced:

Because of the broad availability of a vaccine, culpability of measles carriers is unlike the ebola case above, because people have attainable means to "self-defend" against measles infection. It is reasonable to assume that those who value the vaccine will choose to use it.

There is also reason to believe that measles vaccines might be harmful. As discussed here, vaccines might throw autoimmune systems out of balance, leading to allergies and chronic illnesses, particularly in children. As estimated here, 1970s kids like me received about 7 vaccines around the age of five or older. Today, kids receive about 25 vaccines by the age of two. Research seeking to connect vaccines to allergies and illness has been inconclusive although, surprisingly, it appears that basic randomized studies of vaccinated and unvaccinated populations have not been done. (The above graph, of course, suggests that the effect on measles mortality could be insignificant.)

The point is that some people may see vaccines as potentially harmful and not worth the risk. Opting out of the vaccine is a valid choice, as is electing the vaccine. What is not valid is forcing someone else to be vaccinated. Greater Good Accounting is a poor argument here. Public health officials and those seeking to vaccinate people against their wills become the aggressors.

Vaccination by force is analogous to war fought in the name of national security. Both are usually acts of preemptive aggression.

Narrative Journalism

"A journalist makes himself the hero of the story. A reporter is only a witness."
--Jim Cleary (Deadline U.S.A.)

Proposition that the mainstream media generally practices "narrative journalism" rather than "factual journalism." Narrative journalism is defined as devotion to preconceived storylines that fit a particular agenda or ideological view. Narrative journalism is a form of confirmation bias.

Therefore, a story where a white police officer who shoots a black person is preconceived as racism and reporting is slanted in that direction regardless of opposing views or evidence.

The author claims that narrative journalism is "almost always" a progressive phenomenon. While both theory and evidence suggest a left leaning bias, "almost always" understates bias present in conservative outlets.

For example, after this week's torture story broke, right-leaning outlets were predictably beginning their 'analysis' with the preconceived notion that, in unsafe times, torture keeps us safe, and then proceeded down a path that favored this view.

The point of the author seems to be that narrative journalism is "bad" while factual journalism is "good." The problem with this thesis is that, because all of us are prone to practice confirmation bias to some degree, then we will prefer to consume media that allows us to reinforce our own biases (i.e., pleasure of thinking that we are right over pain of suspecting that we might be wrong).

Stated differently, there is a market for narrative journalism. It is demand driven. Otherwise it would be starved of resources. It would not be as large and as persistent as it has become.