Chocolate and Gold Coins

Wednesday, November 30, 2005

The Tyranny of the Status Quo

What ever is the situation you happen to be in, there will those in society who will insist on maintaining that system, even if it is obviously flawed. Why is this?

One reason is that many people have learned to adapt to the system, with all of its flaws. People who have managed to do all right in the current system will fight to keep things as they are.

But even people who don’t have any interest in the status quo are reluctant to change things. People are always suspicious of change. They fear it even though most change in the last century has probably been for the good. People are comfortable with things as they are and risk-averse about the prospect of a new society.

These thoughts occurred to me as I was reading some comments the Indian Economy blog and elsewhere justifying a mixed economy for India. It would seem to me that nothing was so obvious as the incompetence of the Indian government, and people would be happy to see it get out of as many areas as possible. This should be especially apparent since the only prosperity India has seen in the last thousand years has come as a direct result of some modest market liberalization. But people fear change. So right now, India has made less progress in transitioning to a market economy than several Eastern European nations.

I am reminded of this when thinking of the U.S. medical system. It is really a strange mixture of market forces, regulation, and de facto socialism. It covers some people and not others. It is extremely expensive but it does provide good care to those lucky enough to have it. No one would have designed such an odd system, but no one seems too intent on really changing it either. The only reason anyone would support the current system is that it is the current system.

Bureaucracies are essential unchangeable since all of the people who work for a bureaucracy owe their jobs to the status quo. Anyone who was really bothered by the status quo probably became frustrated and left. People with a lot of energy and bright ideas about how to make things better soon figure out that bureaucracy is not the place to be – the market is the place.

We should understand that one of the costs of creating a system is that it will be hard to impossible to ever destroy it if we later discover this system has outlived its usefulness. I read somewhere that the U.S. still had a strategic helium reserve for our blimps until a few years ago, (maybe we still have it).

The free market’s greatest virtue is that it has no tyranny of the status quo. It reinvents itself daily to provide the goods that people want today, not years ago. Old established firms that have been around for ages still have to prove themselves against new ones that have just come into the market a year ago.

But this constant requirement to “prove yourself” applies to people as well as firms. Maybe that is why people aren’t so enthusiastic about the market. They hate to think that they might be poor when their old because their skills have become obsolete. Or maybe they just wish that life would give them the goodies without having to earn them in some way. Whatever the reason, we should back ourselves a little more. I know that when I’m 60, I’ll easily beat any 25-year-old at my game. Luckily for me, I don’t play cricket.

Tuesday, November 29, 2005

How Marriage Saves Money

“I’m sorry, my wife doesn’t allow me to make spending decisions like that.”

That phrase has saved me thousands of dollars from telemarketers.

Monday, November 21, 2005

A Free Market in Public Goods

I have been going over my archives trying to find old posts that contained ideas that I could submit to this contest. I figure that it costs very little for me to submit an idea and, who knows, maybe I’ll win. It would kill me to read the winning post and say, “I had an idea better than that. I should have submitted it.”

Of all of the ideas that I have written about on my blog, the single biggest idea that I had was my Leveraging Charity post. I really thought that this idea would be the one that “catch fire” in the blogosphere but it didn’t. In fact, I will say that if you want to write a post that everyone reads and changes people’s lives in a small way, you would be better off coming up with a new recipe for chutney than to figure out a way to fundamentally change the way government operates. Nevertheless, I will attempt to rephrase this idea in a way that maybe some people might appreciate.

I think that most reasonable people understand that there is a need for public goods. Everyone understands the need for national defense. Almost everyone sees the benefit of having more roads. Most see the need to make sure that poor people have access to quality education, (education is not a public good but a well-educated society is a public good in a democracy). Of course we can have more of these things if we want: just let the government tax and spend. But government provision of public goods has many of the same problems of government provision of private goods: the government is an inefficient producer and it offers no choices. Another problem is tyranny of the majority: we only get the public goods that the majority approves of.

An alternative to government provision of public goods is charitable provision of public goods. In theory, competing charities should be just like competing corporations: they will be efficient producers and provide us will lots of choices. In practice, charity is a small player in the public goods market because governments have a supreme advantage in producing public goods: they can compel people to pay. Without compulsory payment, people will free-ride: they will enjoy the public good but let others pay for it. I will take it as given that people need to be compelled to pay for public goods and that these people are really better off being compelled to pay for these goods on average than they would be if they were free to free-ride.

Just because only government has the right and the duty to compel us to pay for public goods, does it follow that only government has the right to decide on what goods will be produced? Couldn’t we imagine a system in which the government compelled us to fund public goods but allowed us a lot of freedom to decide which public goods we wanted to fund?

Here is my idea: some portion of your tax bill is to fund compulsory public goods that are not necessary but are nice to have. We allow people who put up some of their own charitable money the right to spend a portion of their compulsory public goods money in any way that they think is reasonable. For example: suppose your taxes include $3000 in money for goods that are nice but not necessary. We will allow people a choice: either give $3000 to the government or pay $4000 to private charity (or any convex combination). The extra $1000 is to pay for the right to spend this “public money” and to make sure you don’t waste the public money. But I would consider it your money. I would say that you have more moral right to decide how that money is spent than any elected official by virtue of the fact that you earned it. We are simply compelling you to spend on public goods but giving you full freedom to decide what public goods to buy.

There are two obvious objections to this plan: one is practical and one is moral.

The practical objection is that it wouldn’t work: people will give to “bad charities” and the money will be wasted. Or people will figure some way to scam the system and we will lose out on public goods. The scam objection would be reasonable unless we put a few restrictions that ensure the money doesn’t go back to the donor. First the money must be donated anonymously. Second the donation must be a small piece of the total pie for that charity: maybe one-tenth of one percent of the total revenues. These restrictions will make sure you cannot scam the system. The rule that you must match some of you own money to buy the right to spend the “public money” is there to make sure that people are motivated to shop around and not waste precious money on scams.

However, I can guarantee that people will donate to charities that others do not approve of. Many people will donate to religious charities including some unpopular religions (druids, witches, and some bigger ones). Many others will find that very objectionable. But I firmly believe that freedom means allowing people to make their own choices and that includes choosing which public goods to fund. Just because we must compel people to fund public goods it does not follow that we must compel them to fund the public goods that the majority approves.

The second objection is closely related to the idea in the paragraph above: that only the public collectively has the moral right to spend public money. I understand this argument but reject it. It seems to me that this is like saying that since only the government can create a property right then only the government can decide what people can do with property. It is a simple non sequitur. I believe that government has the moral duty to compel us to fund a portion of our income for public goods but it does not have the authority to decide which public goods. If you want to fund stem-cell research, as long as it isn’t illegal, it should be your right to choose.

Anyway, I hope this idea provokes at least a little thought and maybe you could share them with me. Maybe we could make this a workable plan.

By the way, I know of another major objection to this plan, but I do not have the easy solution to it. What is that objection?

Friday, November 18, 2005

Personal Tax Cut

Some people always vote for candidates who promise tax cuts. Others worry that tax cuts will lead to deficits and bankrupt our children. This is a classic conflict. But maybe we can please both types of voters.

We can allow for personal tax cuts. People who don’t want to pay so much tax this year can push some of this liability to future years. Of course, this debt will collect interest, but that would be their choice. The government would know that these people could pay the money back later, so why not let them be happy for a while?

For the people delaying taxes, it might be great if they use the money to invest in a new business or to avoid a temporary crunch in finances. For everybody else, this will reduce their taxes because the tax delayers will end up paying these taxes with interest.

This enables all of America to take advantage of what credit card companies have learned: there is good money in letting others get deep in debt.

Another one with little chance of winning.

Thursday, November 17, 2005

Replace Medicare with HSAs


Medicare for the elderly is growing at an alarming rate. People with medical conditions have absolutely no incentive to shop around and reduce health care expenses. Comparison-shopping is necessary to drive costs down.

We can change incentives by creating Health Savings Accounts (HSAs) for the elderly. This is just like a savings account that earns interest and people can use it for their health care needs. The only insurance people will have is catastrophic insurance with a high deductible from a private insurer.

The size of HSAs will be large enough to cover 100% of the lifetime health needs for about 95% of the people. For those few who run though their money, they should have savings, family, friends, or some backup.

When a person dies, the money in the HSA goes to the charity of choice or the HSAs of their children. So every dollar wasted is a dollar less to their children. This is incentive to be frugal.

The HSAs will be a huge upfront cost but a great long-term investment.

Torture the Torturers

This one won't win but I had fun writing it (9475):

Many argue that the war on terrorism requires that the U.S. should have a free hand in dealing with dangerous prisoners. Should we allow torture?

If we make torture legal, it is quite likely that the Secretary of Defense (SecDef) will misuse this privilege. How do we know when there is really a “ticking time bomb”?

How about if we allow torture under the condition that the SecDef would have to be tortured in the identical fashion? In a true “ticking time bomb” scenario, any patriotic SecDef would gladly suffer any torment to save the nation. If he dies, there are plenty of replacements.

As Prof. Alex Tabarrok (Marginal Revolution) points out:

“The torture victim faces incredible pain and perhaps death at the hands of his torturer. If these costs are to be born by the victim then we had better make damn sure that the benefits are also high and the only way we can do that is to make the torturer also bear some of the costs. Torture must not be cheap.”

Wednesday, November 16, 2005

Abortion Property Right

Another one of these (9353):

The nation has been divided by the abortion issue like no other issue since slavery. Liberals believe that conservatives want to take away women’s rights and conservative believe liberals want to sanction murder. There is no middle ground – or is there?

Suppose we offer all women an abortion property right. It would be like a patent right or a deed: it could be sold. Then the government would then offer to buy the property right from every woman who has never had an abortion and is at least 18. If the government offers a generous price – perhaps $10,000 – 99 percent of women will gladly accept. This will also stop “back alley” abortions and other country abortions because it would be fraud.

This way, the abortion right would be seen as a valuable right to all women, not just woman with loose morals. And abortion opponents would be able to achieve something that they have always wanted: eliminate almost all abortions.

We will never eliminate all abortions but this plan will come close.

My goal is to have twenty of these. I apologize if this is making my blog boring. I may have a regular post in here soon.

No one has submitted any ideas to me yet. You could win $80,000. I offer my expert editing services. Read other people's ideas (hit the randomizer button). Most of them are downright daffy.

Tuesday, November 15, 2005

Blogging for Peace

Another one, number 9289:

Blogging is a fun way for children to learn about writing. Blogging is also a great way for children to learn about other cultures and to make new friends.

Suppose classrooms around the world started blogs. Students would write about their lives. These stories would not be exciting in their own countries but they would be extremely informative to children in other countries.

The American children would read other kid’s blogs as part of their social studies classes. The Americans would comment on foreign blogs and these foreign students would comment on American blogs. Friendships between children worlds apart would form.

The children would learn several precious things: that all kids underneath are really similar. They all like games and jokes and just spending times with friends. They love their families and they love freedom – especially if they don’t have much.

Children would learn that it isn’t nice to make war with other countries and not to take this lightly. They would also learn that restricting trade isn’t nice either.

This one will easily beat the one about a better keychain that could hang on a refrigerator magnet.

Good Idea of the Day

First submission (and number 9145):

Federal spending has increased dramatically in the last century. Much of this money is wasted on unnecessary projects. Each congressman figures, “I’ll vote for yours and you’ll vote for mine.”

One way to limit the growth of federal spending is to limit Congress’s spending power. We can do this by insisting that projects receive multiple sources of funding. A project that benefits primarily a local area, like a highway, should receive at least half of its funding from the local community.

Another important source of public money should be charity. Suppose all projects required five percent charitable funding. People would see it as their duty to donate to worthwhile projects, but not to wasteful ones.

Charitable corporations would spring up to wisely fund and audit these programs. In a free market, if one charity funds wasteful spending, another charity would say, “Donate to us, we won’t waste your money like they do.” Since there is only so much charity, this would be a powerful check on public spending.

I hope I can be at least one of the top 21 entrants. Then my idea gets published in a book. That would be nice.

Monday, November 14, 2005

Outsourcing Good Ideas

My mother sent me a clipping from a newspaper article that pointed to this site: It is a contest for the best new idea for America. People submit their ideas in 175 words or less and the winner will receive $100,000.

This sounds like a lottery to me but I might as well throw in my ideas. I get to submit as many ideas as I like. In the coming days, I will blog my ideas and maybe your ideas as well (I will explain below).

Many of my readers live in India and the rules prohibit anyone other than a permanent resident or a U.S. citizen from applying. Bummer. Aren’t ideas from citizens of other countries just as valuable?

Here’s my idea: outsourcing these ideas. You submit your idea to me at with a note saying “idea”. If I like your idea enough to submit it, I will submit it in my name. If I win with your idea, I will give 80% to you and keep 20% for my troubles. Since the odds of winning are probably 1 in 100,000, my expected return on my effort is only 20 cents, so I think that I am not really being very greedy. And if I have to repair poor grammar or faulty economic reasoning, I am really being generous.

But you are certainly welcome to shop around for a better deal.

Wednesday, November 09, 2005

Arisi Upma

One of my wife’s favorite tiffin foods is Arisi Upma. Rava Upma is kind of like Cous Cous and I like it but my wife hates. Arisi Upma uses rice instead of wheat.

The other day, I made this dish for her and she said that it came out really well, just like her Grandma’s. So what is the secret? I’m not sure but I suspect it has something to do with the special ingredient I added.

Now here’s the recipe:
Upma mixture:
4 cups rice
1 cups toor dal
Grind these in a mixer (like Sumeet) one at a time until they are each the consistency of beach sand, (don’t substitute beach sand). I sift it so that it comes out more uniform. Then mix the rice and toor dal together. You can store this mix for months.

1 1/3 cups Upma mixture
2 cups water
1 tbsp Channa dal
1 tbsp Urad dal
1 tsp black mustard seed
2 small red chilies
1 ½ tsp salt
1 tsp corn oil
pinch asophoetida
1 tbsp special ingredient

Heat 2 cups of water in a small pot. In another mid-sized pot, add oil and channa dal and roast until lightly brown. Then add urad dal and mustard seeds and red chilies. The mustard seed tend to pop like popcorn so I put a lid on and lower the heat and keep shaking the pot. Then I add the water (before thing really begin burning). Add salt and asophoetida and let simmer on low heat for 5 minutes.

Then add the Upma mixture and stir well. This is when I add the special ingredient. I only use extra virgin special ingredient (I doubt her grandmother used this).

Cook on medium low for 15 minutes. Then stir the top portion without disturbing the bottom crust. Then cook another 15 minutes. If it begins to smell burnt, reduce heat. After the second 15 minutes, remove from heat and let sit for 5 minutes.

Arisi Upma is excellent with Patak’s Brinjal pickle.

Here is a link to another recipe (a bit more complicated with ingredients that my wife would never approve) and a picture.

Tuesday, November 08, 2005

Perhaps Think Before Writing

Uday Damodaran writing at Rediff wonders why a strike rate (cricket) of 50.00000 is more likely than a strike rate of 48.93617.

Friday, November 04, 2005

Aphorism of the Day

"Don't steal, the government hates competition"

-From Vantage Point.

The whole article is excellent.

Entrepreneurs Needed

There is a classic economists’ joke that goes:

Two economists are walking down a sidewalk.

First economist: “Is that a $20 bill on the sidewalk?”

Second economist: “Couldn’t be. Otherwise someone would have picked it up by now.”

They walk on.

Economists often puzzle why there is no market for X. The answer may be that no one thought of it before. Or the people who did think about it were not in a position to pursue the idea. Entrepreneurs are needed to get markets going. And sometimes a market can wait many years for that special person.

I came across an excellent example of this very phenomenon just this week. Monday was Halloween, and on that day people traditionally set out jack-o-lanterns, which are hallowed-out pumpkins with a design (usually a face) and a candle to make it glow. Here is my son’s jack-o-lantern.

It may be a bit difficult to make out exactly what the design is but it is done very well if you take a close look. It is a picture of two bats flying in front of the Moon. It is extremely detailed and no one would have attempted such a design 30 years ago. But new technology has made this a very nice art project for kids (with some help from parents).

What is the new technology? Well the old technology was basically a felt pen and a knife. The new technology is a pattern on paper that the child cuts out and a hand jigsaw. This new technology is not very high-tech. It could have existed 100 years ago. Admittedly, the cost of producing tools has come down dramatically over the century but there was little reason why this technology could not have existed 35 years ago when I was a kid (I’m dating myself here). Here is a picture of the kit (with a link to the company - a free advertisement I might add).

But this product required an entrepreneur. It seems easy to believe that this was an obvious winner now but there are always a lot of questions to answer before a person with an idea becomes an entrepreneur:

  1. Is there a market here? In this case the market is extremely seasonal – this makes it risky.

  2. Do I have the lowest cost technology? If a competitor can make hand jigsaws for one-half the cost your supplier charges, you will be out of business quickly.

  3. Do I know how to market this product? Will supermarkets stock this item? You might produce a quality product that languishes in obscure shops for years until some bright fellow sees it, sees no patent, and makes a knock-off that he successfully markets in every supermarket.

So in this case, a nice product never came to market for a generation. The entrepreneur was needed. And maybe a million dollars was left on the sidewalk that no one bothered to pick up. It makes you wonder what money is left lying around us right now.

Thursday, November 03, 2005

Aphorism of the Day

When supporters of a law take the position that "This law is not necessary for me but for all those people who are not as smart as I am", it is a bad law.

From Coyoteblog.

Wednesday, November 02, 2005

Bureaucratic Reengineering

A troubling trend in developed nations is that over time the share of the GDP devoted to government spending tends to increase over time. Here is a graph of U.S. Federal Government spending over time, (too bad it ends in 1997 – it would be going way up past 2000).

One reason this might occur is that the technology for government-produced goods is not keeping pace with the technology for private sector goods, and as we wealthier, we spend an ever-increasing portion of our budget on relatively scare public goods. Note the public goods are scarce only because they lack a good technology for producing them efficiently.

So over time, the government sector becomes relatively inefficient and drags down growth in the economy. The way to prevent this growth decline is to improve the efficiency of government-produced goods so that they too grow when the rest of the economy grows.

But reforming bureaucracies is easier said than done. Bureaucracies resist change. The type of employee that tends to migrate to the bureaucratic sector of the economy is the type that really doesn’t want to innovate and rock the boat. These people tend to be comfortable with the status quo. If someone comes in with bright new ideas, the bureaucracy might produce some valid objections, some invalid ones, and a lot of indifference, but little in the way of support.

It isn’t practical to suggest simply eliminating the bureaucracy. Often, the bureaucracy is doing a few important tasks along with some less important tasks. Some organization will need to do those tasks in any case.

Another approach to reforming bureaucracy is to thoroughly understand what essential tasks the bureaucracy performs and find a better way to do those tasks. Outside contractors could help design a new bureaucracy that performs all of the essential tasks that the old bureaucracy did with fewer employees and at a lower cost. Then the government could create this second bureaucracy in parallel to the original bureaucracy. In this way, the transition from one bureaucracy to the other will be smooth.

I can give an analogy with a road. It is very hard to repair a road and let traffic flow at the same time. Perhaps it would be easier just to build a parallel road and then, once the new road is finished, destroy the old road.

I am not claiming that this would eliminate government inefficiency and make the public sector as efficient as the private sector. I am only suggesting that we could improve the efficiency of the government sector enough to prevent it from being a serious drain on the growth rate of the economy.

The first bureaucracy I would reform is the CIA.

Tuesday, November 01, 2005

Ockham’s Razor and The Blogger Who Must Not Be Named

Ockham’s Razor (sometimes spelled Occam’s Razor) is an important idea in the sciences and in other areas where deductive reasoning is important. Ockham said that if there are two plausible theories that could explain the evidence, the simpler theory is more likely to be true. In the sciences, including economics, this theory is called Maximum Likelihood. But this idea extends to other areas.

For example, suppose there is a small fire in a hotel and an employee puts it out. Then a year later another small fire starts in the same building and the same employee puts out the fire. At first glance, you think, “What an odd coincidence.” But a second theory emerges, “Maybe the employee started the fire.” You check for signs of arson and sure enough, you find out the fire had been set. Sure, Ockham’s Razor by itself proves nothing, but he’s been right too often to be ignored. And a corollary to Ockham's razor is that if you get caught starting a fire, you'll get blamed for every fire.

Now consider this: a blogger toils in anonymity for more than a year and gets almost no readers. Then he or she happens to be on the periphery of a major blog scandal and gets tons of visitors. That in itself is not so surprising. After all, it would be an odd life in which nothing interesting ever happened. But then two weeks later the same blogger happens to be there to witness another once-in-a-lifetime event. What a coincidence…or was it? A careful reading of the second incident raises questions. Maybe the blogger made the whole thing up.

Shivam Vij, who writes a very nice blog called Mall Road, alludes to this blogger here. This blogger could be called “The Blogger Who Must Not Be Named” because no one wants to point the accusatory finger just yet. But it will happen shortly.

In the IIPM brouhaha, the motive behind the bogus blogs with bland IIPM content and the words IIPM repeatedly in the title was clear: make sure that IIPM-friendly material would always remain high in a google search and not anti-IIPM blog posts (they also raise the pagerank of someone else). But some comments on blogs lead back to these IIPM blogs – and in Blogger this could only happen if the owner of the blog made the comment. Some of these comments were outrageous. Some of the bogus blogs had outrageous “please sue me” titles like drnoamchomskyonline. Why would the IIPM risk their reputation on immature comments and blog titles? I wondered about this point in this post. I thought at that time that one possibility was that a malicious blogger was creating some of these blogs leaving these comments purposefully to start a blog forest fire. But this theory was not the simplest theory simply because it assumed the existence of a malicious blogger who would post lies for the purpose of creating controversy. Sure, it could happen, but in the absence of any direct evidence, why assume this is likely?

But now The Blogger Who Must Not Be Named has walked onto center stage. What other fires has this blogger set? We have to wonder.

The Blogger Who Must Not Be Named is not Gaurav Sabnis and not Rashmi Bansal.