Streetwise Professor

January 29, 2019

Bo Knows Hedging. Not!

Filed under: China,Commodities,Derivatives,Economics,Energy — cpirrong @ 7:42 pm

Chinese oil major Sinopec released disappointing earnings, driven primarily by a $688 million loss at its trading arm, Unipec. The explanation was as clear as mud:

“Sinopec discovered in its regular supervision that there were unusual financial data in the hedging business of Unipec,” it said in a statement. “Further investigations have indicated that the misjudgment about the global crude oil price trend and inappropriate hedging techniques applied for certain parts of hedging positions” resulted in the losses.

Er, the whole idea behind hedging is to make one indifferent to “global . . . price trend[s].” A hedger exchanges flat price risk–which, basically, is exposure to global trends–for basis risk–which is driven by variations in the difference between prices of related instruments that follow the same broad trends. Now it’s possible that someone running a big book could lose $688 million on a big move in the basis, but highly unlikely. Indeed, there have been no reports of extreme basis moves in crude lately that could explain such a loss. (There were some basis moves in some markets last year that were sufficiently pronounced to attract press attention but (a) even these did not result in any reports of high nine figure losses, and (b) nothing similar has been reported lately.)

The loss did correspond, however, with a large downward move in oil prices. Meaning that Unipec probably was long crude. Some back of the envelope scribbling suggests it was long to the tune of about 17 million barrels ($688 million loss at a time of an oil price decline of about $40/bbl.) Given that Unipec/Sinopec is almost certainly a structural short (since Sinopec is primarily a refiner), to lose that much it had to acquire a big enough long futures/swaps position to offset its natural short, and then buy a lot more.

One should always be careful in interpreting reports about losses on hedge positions, because they may be offset by gains elsewhere that are not explicitly recognized in the accounting statements. That said, as the Metalgesellschaft example cited in the article shows, for a badly constructed hedge, or a speculative position masquerading as a hedge, the derivatives losses may swamp the gains on the offsetting position. In the MG case, Merton Miller famously argued that the company’s losses on its futures were misleading because daily margining of futures crystalized those losses but the gains on the gasoline and heating oil sales contracts the futures were allegedly hedging were not marked-to-market and recognized and did not give rise to a cash inflow. I less famously–but more correctly ;-)–did the math and showed that the gains on the sales contracts were far smaller than the losses on the futures, and what’s more, that the “hedged” position was actually riskier than the unhedged exposure because it was actually a huge calendar spread play: the “hedge” was stacked on nearby futures, and the fixed price sales contracts had obligations extending out years. This position lost money when the market flipped from a backwardation to a contango.

Mert did not appreciate this when I pointed it out to him, and indeed, he threw me out of his office and pointedly ignored me from that point forward. This led to some amusing lunches at the Quandrangle Club at UC.

So perhaps the losses are overstated due to accounting treatment, but I think it’s likely that the loss is still likely a large one.

The Unipec president–Chen Bo–has been suspended. I guess Bo didn’t know hedging.

Bo wasn’t the only guy to get whacked. The company’s “Communist Party Secretary” did too. So Marxists don’t understand hedging either. Who knew?

January 22, 2019

Regulating Carbon Emissions: Efficiency vs. Redistribution

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 8:01 pm

Bloomberg reports that New York state’s plan to eliminate its few remaining coal power plants has caused power prices for delivery in 2020, 2021, and 2022 to increase. Eyeballing the chart, the impact of the proposed regulation is on the order of $7/MWh, or about 25 percent of the 2019 price.

Coal represents a dwindling fraction of New York’s generation. The EIA reports 0 electricity from coal in October, 2018. As of 2014, the last full year for which I could find data on the EIA website, coal accounted for 4.6 million MWh, out of a total of 137 MWh of generation.

The efficiency impact of this depends on (a) the estimated social cost of carbon, (b) the kind of generation that will replace the shuttered coal plants, and (c) the non-energy costs that this replacement generation creates.

If you believe that the cost of carbon is $40/ton, if coal is replaced by zero emissions generation, the move is efficiency enhancing. A coal plant with a heat rate of a little more than 10 implies a carbon cost per MWh of $40. This is well above the price increase of around $7.

If coal is replaced by natural gas, with a carbon cost of about $20/MWh, the call is closer, but still comfortably in favor of eliminating coal.

Lower social costs of carbon of course affect the math. The other thing to keep in mind, though, is that the price is for energy only. Changing the generation mix also affects the need for ancillary services to maintain grid stability. In particular, substituting diffuse and intermittent renewables for coal increases the non-energy costs of supplying electricity. These costs can be appreciable, though again it’s difficult to see them being so large as to overcome the approximate $160 million in carbon cost savings from eliminating coal, based on a $40/MWh CO2 cost, ~4 MWh of coal fired generation, and replacement of coal by zero carbon emissions generation sources.

What’s truly startling about the numbers, though, is the redistributive impact. Price is driven by marginal cost, and the price impact suggests that the cost of the marginal megawatt hour from coal replacement generation is about $7/MWh above that of the eliminated coal units. Note: that $7/MWh price increase benefits every single MWh generated by inframarginal units (e.g., combined cycle NG). Coal represents (as noted before) ~3 pct of NY generation, but the remaining 97 percent will see a big increase in margins.

This is a crude calculation, but roughly speaking the regulation will result in a transfer of about $1 billion/year from consumers to owners of generation (~140 million MWh x $7/MWh). The vast bulk of this $1 billion will be a quasi rent for inframarginal generating assets. (About $28 million–4 mm MWh/year x $7/MWh–will cover the cost of the more expensive generation that replaces coal plants.)

As is often the case with regulation, the wealth transfers swamp the efficiency effects (which total at most $130 million=~4 MM MWh x $33/MWh in social cost savings). (Since coal generation has probably dropped from the 4 million in 2014, and the price impact reflects the elimination of the remaining coal generation, the total efficiency effects now are probably substantially smaller than $130 million.)

Thus, although this regulation is sold as one benefitting the environment, I strongly suspect that the political coalition that has given it birth is strongly supported by incumbent generation operators selling into the New York market. That is, it smacks of the typical special interest regulation that benefits a small concentrated group at the expense of a large diffuse one (i.e., the consumers in New York), all dressed up in pretty green (environmental green camouflaging Benjamins green, as it were).

Yes, in this instance perhaps–depending on one’s assumptions about the cost of carbon and the incremental uplift costs created by the regulation–this bargain has produced an efficient outcome. But the redistributive nature of this regulation, and those like it, creates a great risk that such regulations will be introduced even when they are inefficient.

Those harmed include ordinary New Yorkers lighting their homes, and commercial and especially manufacturing firms (and their employees) who pay higher power costs. (Employees will pay in lost employment and lower wages, due to a decline in derived demand for labor driven by higher costs of other inputs.) In France, a seemingly small imposition on a similar group sparked widespread social unrest. It hasn’t happened in the US yet (or in places like Germany, where consumers and employers are paying steeply higher electricity costs due to anti-carbon regulations), but US states should be aware that such policies could trigger resistance here as well–especially if and when the hoi polloi realize that the biggest winner from these policies is not the environment, but companies that are pretty unpopular to begin with.

January 21, 2019

Two falsehood fly, and the truth comes limping after it

Filed under: Politics — cpirrong @ 9:56 pm

Two events over the weekend illustrate the utter depravity of modern media (especially social media) and political culture. (These really cannot be separated.) The first is the BuzzFeed story that Mueller had evidence that Trump had instructed Cohen to lie to Congress. The second is the confrontation between a group of Catholic high school students and some activists in front of the Lincoln Memorial in DC.

It is hard to say which is the most egregious. The Trump-Cohen story’s claim for precedence is its obvious political importance, given that if true it would provide a justification for impeachment, with all the potential for political chaos and strife that entails. The Covington High story is appalling because it set off a frenzy of hatred, doxing, physical threats, and threats to the future prospects of a group of high school kids, that went on for hours–and still continues to some degree. Orwell blushes that he only conceived of a Two Minute Hate.

Both stories share a common thread: virulent hatred, mainly on the left, but not exclusively so, that makes the haters believe any anti-Trump, or anti-conservative story (especially if the conservatives are white males), without reservation, and to repeat it, without reservation. Despite the fact that so many previous stories have proven completely false. These are stories that are not only too good to check, but which must be repeated relentlessly in reckless disregard of the truth, and callous indifference to the effects that defamatory lies have on the targets, or on the country, or on the fabric of civil society.

The Covington High story was fueled by (a) a highly biased account from a clearly partisan and interested man, Indian activist Nathan Phillips, and (b) an video that presented a snippet of the interaction between Phillips and the Covington students, edited to reinforce Phillips’ claim that he, a lone and beleaguered protestor, had been set upon by a group of racist high schoolers bedecked in MAGA hats.

The deference to Phillips is truly nauseating. We are supposed to accord some moral standing to “activists”–especially minority ones. Especially those with drums! So authentic! This to a large extent reflects white liberal guilt, which operators like Phillips are past masters at exploiting.

I, on the other hand, hear the word “activist” and immediately suspect a manipulator, and a con. I suspect a guy who has figured out that whites fall for the Magical Indian shtick, and who plays it for all it is worth.

Once the field of vision was extended beyond Phillips and the video edited to substantiate his story, the narrative fell apart. The Covington boys had been harassed by a small group of “Black Israelites”, who hurled racist and homophobic slurs at them. The N-word was lobbed liberally at black Covington students. Phillips saw an opportunity, and waded in, banging his idiotic drum in the faces of the students. They didn’t get in their grills: he got in theirs.

Phillips made claims (e.g., the students shouted “build the wall”) that are not supported by the full video. He also neglects to say that his followers told the students to “go back to Europe.”

Insofar as the Black Israelites are concerned, to call them fringe lunatics would be to understate matters. I can only say that if a group of white fringe lunatics were to harangue people at the Lincoln Memorial, you’d be hearing about them 24/7. The Black Israelites, however, are merely bit players in the mainstream narrative about this event.

But the falsehood had already flown, and continues to fly. And the hatred–truly virulent hatred–has taken wing with it.

I’m so old, I remember when “rush to judgment” was a bad thing. Now its de rigeur, indeed mandatory, if the judges are left and the judged are right.

This illustrates another axiom of mine. There is no better tool for manipulation and distortion than a cleverly edited or shot video, in which the filmmaker or editor evokes verisimilitude by presenting actual visuals–the camera doesn’t lie, right? In reality, however, by controlling the range of vision or the events portrayed (and those not portrayed), the filmmaker/editor can lie outrageously by presenting a grotesquely incomplete and hence misleading portrayal of events.

There is always the Rashomon problem: even honest observers will disagree on what happened during a particular event. But when there is a political agenda at play, things are far worse. A dishonest filmmaker or editor can lie outrageously while only presenting things that actually happened–but only some of the things. In the wrong hands, the camera is the biggest liar of them all.

In court you have to swear to tell the whole truth. Because the most vicious lies can be partial truths. And much of the art of filmmaking is to tell partial truths.

I therefore suggest: the more viral and provocative a video appears, the more skeptical you should be.

Visuals–photos, but especially video–are the most effective form of agitprop. If you see visuals that advance a prevailing social/political/media narrative, you should immediately suspect agitprop. The more powerful the visuals are, and the more that they conform with the narrative, the deeper your suspicion should be.

One thing truly atrocious about the Lincoln Memorial fiasco was the haste with which ostensibly conservative figures joined the condemnation of the Covington students–they foolishly and seemingly eagerly ignored my advice of caution. Methinks this reflects a form of Stockholm Syndrome, combined with a craven desire for acceptance by a mainstream media and political culture that hates their guts. These alleged conservatives apparently feel compelled to bend over backwards to to prove they are not hypocritical, and that they will call out their own. Better to kill the innocent with friendly fire, than–heaven forfend–be seen as reluctant to castigate the guilty. They have their minds right, boss!

I can guarantee that the left has no such scruples. This is an asymmetry that repeatedly cripples the right, and advantages the left.

The Diocese of Covington in particular deserves scorn. It bought the BS shoveled out by the media hook, line, and sinker, and offered condemnation and an abject apology.

Note to the Catholic Church: those attacking the students hate your church with a particular virulence. The Diocese were craven fools empowering their sworn enemies.

Another suggestion: never believe the narrative pushed by the media. If you do, you are a sucker, and worse–a useful idiot. All of those conservatives who did so in this instance should be deeply ashamed.

Insofar as the BuzzFeed story is concerned, the “publication” claimed to have seen (or not seen, depending on which of the two bylined reporters you ask!) documents showing that Trump had suborned Cohen’s perjury. CNN and MSNBC repeated this over 200 times, breathlessly intoning that this foretold Trump’s doom.

Then Mueller’s office denied it. Stated that the story was inaccurate. When a desperate media claimed that the denial was equivocal, the special counsel’s office made an adamant denial.

You know this story was shopped (most likely by someone within Mueller’s office) to every other major publication–which didn’t touch it. But after BuzzFeed (which should be renamed BottomFeed) ran it, the rest felt liberated to repeat it. (By the way, what do you call those who live off the excrement of bottom feeders? The MSM, I guess.)

Again, the story was too good to check, or to question. It advanced a narrative detrimental to the media’s main enemy. So go with it!

I don’t like to be pessimistic, but I think the point of no return has been reached. The utter lack of prudence, discretion, and basic fairness appears to be too deeply entrenched to be displaced. Worst, respect for truth has become obsolete, replaced by the basest political relativism: whatever advances my cause is right, the truth be damned. It is far more important to crush one’s political and social enemies, than to attempt to learn the truth, or to be cautious about reaching erroneous conclusions no matter how damaging those errors may be to ordinary people or political or civil society.

I don’t think it is an exaggeration to say are pre-revolutionary conditions. When honest disagreement is impossible, and a desire to seek truth is sacrificed to political expediency and political or social advantage, force is all that remains to arbitrate difference. We are rapidly reaching that point, if we have not already done so.

January 16, 2019

Don’t Bother Me With the Facts! I Have a Narrative I Need to Flog!

Filed under: History,Military,Politics,Russia — cpirrong @ 7:20 pm

US ambassador to Germany Richard Grenell recently tweeted that the Trump administration had been tougher on Russia than any of its predecessors. The reflexive anti-Trumpers wouldn’t stand for this. Not for a second.

NYT columnist Bret Stephens leaped into the lists to tilt at Ambassador Grenell:

And let’s play no word games about the difference between USSR and “Russia.” Putin’s Russia is the USSR reborn under the exact same management.

That’s what’s called “projection”, Bret, for you are playing word games by transmogrifying Putin’s Russia into the USSR.

Today’s Russia “is the USSR reborn” only in Putin’s wildest dreams. By any objective measure, Russia today pales in comparison to the USSR as a threat to the US (or the West generally). From 1945 through 1991, the Soviets had millions of men and thousands of tanks poised on the borders of western Europe. Today the men do not exist and the tanks are rusting away in storage–and all are hundreds of miles to the east of the Elbe. The Soviet Union had a very credible navy: Russia’s navy is back from the utter decrepitude of the 1990s and early 2000s, but is still a pale shadow of what it was under Admiral Gorshkov. Whereas the Soviet Union posed an extreme conventional threat to the US and the west, Russia poses no threat at all.

Oh, by the way Bret–where is Putin’s Warsaw Pact? Oh, that’s right–they are all Nato members.

The USSR was also a formidable ideological adversary, and its ideology was aggressive and expansionist. Especially prior to the 1980s, the Soviet ideology had substantial international appeal, especially in the Third World. The Cold War was as much intellectual and ideological, as it was military and economic.

Putin tries on new ideologies like a teenage girl tries on new clothes. But his ideological fashion choices are primarily for domestic political effect, and have no appeal outside Russia’s borders. Zero. Zip. This is in large part because most of Putin’s ideologies are nationalist and insular. His embrace of Russian Orthodoxy is a particularly telling in this regard. It only has very limited appeal even within Russia, and none whatsoever outside it.

Russia is not an ideological nation. It is a kleptocratic regime.

Yes, Putin laments the demise of the USSR. But his efforts to rebuild it are pathetic in the extreme. In his nearly 20 years in power, his efforts to reconstitute the USSR have succeeded in reclaiming–wait for it–Abkhazia and South Ossetia, and some rather decrepit bits of Ukraine. These are the offal of the USSR. He is now putting the squeeze on Belarus–but Lukashenko has no desire to go back to the Soviet Union.

And even these “accomplishments” have succeeded primarily in isolating Russia, with one of the consequences being economic stagnation that leaves Russia even further behind the US in the wellsprings of military power. After a brief splurge in defense spending, the realities of Russia’s parlous economic condition have forced Putin to cut back again, and announce new weapons with great fanfare–but not to produce them in meaningful numbers. Potemkin revisited.

In sum, Putin’s Russia is at best a pitiful simulacrum of the USSR. To equate the two, as Stephens does, is beyond farcical.

So after dispensing with Stephens’ sleight-of-hand turning 2019 Russia into 1979 USSR, let’s evaluate Ambassador Grenell’s statement on the merits, administration by administration post-USSR.

The Clinton administration was all in propping up Yeltsin. When Yeltsin shelled the Duma in 1993, Clinton said: “I guess we’ve just got to pull up our socks and back Ol’ Boris again.” When Yeltsin was in grave peril of losing the 1996 election, Clinton said: “I know that means we’ve got to stop short of giving a nominating speech for the guy. But we’ve got to go all the way in helping in every other respect.” (Can anyone say “interfering in an election”? I knew you could.) The Clinton administration also supported Russian policy in Chechnya.

Bush II famously gazed into Putin’s eyes, and his administration got on rather well with Russia. Even the 2008 invasion of Georgia did not trigger a vigorous response.

And Obama. Where to begin? Of course there’s the Reset, complete with Hillary grinning like a buffoon standing next to Lavrov, holding an idiotic button (mislabeled in Russian, no less). Then there was Obama paling around with Medvedev–they were burger buddies, remember? Oh–can’t forget the hot mike statement that Medvedev should tell Vladimir to be patient, as Obama would have more flexibility after the 2012 election. In the 2012 campaign, Obama mocked Romney saying that Russia was a threat.

Given this, it’s not surprising that Putin smelled weakness, and that his peak aggressive phase occurred during the Obama administration.

Obama’s response was 90 percent petulance and condescension about Putin not following the arc of historical progress, and 10 percent rather ineffectual measures.

It is against this standard–not that of Cold Warriors facing an existential threat–that the Trump administration should be measured. And as Grenell said, by this standard Trump has indeed been far more robust. He has provided Ukraine with weapons (which Obama steadfastly refused to do). He has embarked on rebuilding the US military. He has implemented more vigorous sanctions than the Obama administration. And the US military smoked 200+ Russians who tried to throw their weight around against US forces in Syria.

Further, look at other news involving Grenell. The Germans are in apoplexy over Grenell’s threat to sanction any company that cooperated with the Nordstream II pipeline that will bring Russian gas to Europe. Merkel’s party spokeswoman huffed: “The American ambassador operates in a, shall I say, somewhat unusual diplomatic manner. He’s shown that not only through this letter [on Nord Stream 2 sanctions] but also from when he took office.”

And this is not a new thing. Trump has been bashing Nordstream since he took office–and the Germans have been reacting with outrage every time.

Trump’s notorious criticism of Nato is also hardly pro-Russian. His main criticism is that Nato countries–especially Germany–don’t do enough to counter Russia, but expect the US to do it for them.

This is not a hard call. The Trump administration has objectively been far harder on Russia than its predecessors–including most notably its immediate predecessor, whom people like Bret Stephens now lavish praise on. It isn’t even close. To claim that US policy towards the USSR is the appropriate yardstick by with to measure US policy towards the decrepit, dissolute successor state of Russia requires breathtaking intellectual dishonesty. But Bret Stephens is obviously up to the task

January 12, 2019

A Great Passes: Harold Demsetz

Filed under: Economics,Regulation — cpirrong @ 1:40 pm

Last week, the great economist Harold Demsetz passed away at age 88. Harold (whom I knew slightly) was truly a giant, who made seminal contributions to industrial organization, property rights economics, transactions cost economics (especially his early recognition of the bid-ask spread as a cost of transacting, well before it became a focus of research in finance), information economics, and the theory of the firm.

He also coined the memorable phrase “nirvana economics,” which skewered the then-prevalent (and alas, too often currently prevalent) tendency to compare imperfect market outcomes with perfect ones, soon followed by a prescription for regulation to correct the “market failure.” He noted–and this can not be emphasized enough–that the true “relevant choice is between alternative real institutional arrangements.” That is, there are government failures too, and it is necessary to evaluate those in order to make policy choices. Nirvana is not a choice.

Like many great economists of his era (e.g., Coase), Demsetz’s work was literary rather than formal, but that definitely does not mean it lacked rigor. Demsetz wrote well, and could present tightly reasoned and impeccably logical theoretical arguments without resorting to a single equation. His article on entry barriers is a great example of this. There was a great deal more economic logic and insight in a typical Demsetz paper than in the typical modern densely mathematical work.

Demsetz’s biggest contribution to my economic education was his work that confronted, and largely demolished, the prevailing structure-conduct-performance paradigm in industrial organization, and the related empirical work on the relationship between industrial concentration and profits, which concluded that a positive correlation was the result of market power. End of story.

Demsetz demonstrated (as Sam Peltzman formalized shortly afterwards) that cost-concentration correlations could give rise to profit-concentration correlations even in the absence of market power. A simple story that illustrates the point is that a firm that experiences a favorable cost shock when its competitors do not will expand at their expense, and earn a profit commensurate with its greater efficiency. This tends to increase industry profitability and concentration.

Demsetz also showed in a famous paper (“Why Regulate Utilities?” that structural monopoly (e.g., a “natural monopoly” due to extensive scale economies) does not necessarily convey market power. Further, in
“Industry Structure, Market Rivalry, and Public Policy” he argued that competition for the market could be quite intense, and even thought it might result in a firm obtaining a large market share, (a) the firm’s ability to exercise market power might be limited, and (b) competition for the market could be an engine for progress, including notably product and process innovation.

In this work, and that of his contemporaries primarily at Chicago and UCLA, Demsetz undermined the prevailing paradigm in industrial organization, with its simplistic equation of market structure and market power. This resulted in a revolution in economic science, but also public policy, and in particular antitrust policy.

Alas, there is a counter-revolution afoot, and quite depressingly Chicago is one of the leaders in this. In particular, Luigi Zingales and the Stigler Center (!), and the Center’s Promarket blog, are among the leaders in resuscitating the notion that concentration is per se objectionable, and creates market power. In my perusal of this literature, and the voluminous writings about public policy it has spawned, I find no real intellectual advance, and indeed, perceive severe retrogression. In particular I find little effort to confront the Demsetz critiques (and the critiques of others that followed).

It is very sad that Harold Demsetz passed, although after a long and very productive life. It is sadder still that many of his most perceptive insights predeceased him.

January 8, 2019

Psychologists Should Be Humble: They Have a Lot to Be Humble About

Filed under: Uncategorized — cpirrong @ 7:49 pm

The American Psychological Association has determined that masculinity is indeed toxic:

Thirteen years in the making, [the APA’s new Guidelines for Psychological Practice With Boys and Men] draw on more than 40 years of research showing that traditional masculinity is psychologically harmful and that socializing boys to suppress their emotions causes damage that echoes both inwardly and outwardly.

. . . .

The main thrust of the subsequent research is that traditional masculinity—marked by stoicism, competitiveness, dominance and aggression—is, on the whole, harmful. Men socialized in this way are less likely to engage in healthy behaviors. For example, a 2011 study led by Kristen Springer, PhD, of Rutgers University, found that men with the strongest beliefs about masculinity were only half as likely as men with more moderate masculine beliefs to get preventive health care (Journal of Health and Social Behavior, Vol. 52, No. 2). And in 2007, researchers led by James Mahalik, PhD, of Boston College, found that the more men conformed to masculine norms, the more likely they were to consider as normal risky health behaviors such as heavy drinking, using tobacco and avoiding vegetables, and to engage in these risky behaviors themselves (Social Science and Medicine, Vol. 64, No. 11).

When evaluating documents like this, I find it useful to refer to Thomas Sowell’s Conflict of Visions. He argues that a particular dichotomy, between what he calls the constrained and unconstrained visions, can explain a large amount of the variation in opinions on seemingly disparate and unrelated subjects. Sowell does not oversell the idea, but to paraphrase George Box’s statement about theories, all dichotomies are wrong, but some are useful. Sowell’s is definitely useful.

The APA’s new Guidelines are firmly in the unconstrained vision. They consider most human behavior to be the product of social constructs, which are somewhat arbitrary and malleable. They can be deconstructed, and then reconstructed, by a gnostic elite–in this case, psychology researchers and therapists. The enlightened reconstruction results in better social outcomes.

In contrast, the constrained vision views most human traits as stubborn facts that are resistant to change, and believes that attempts to change them are likely disastrous. These traits are at root the result of millions of years of biological evolution, augmented in the more recent past by social and cultural developments that accommodate the evolved species to social life, including social life in modern “extended orders” (to use Hayek’s term, in contrast to more limited, tribal groupings). In the case of masculinity, biological imperatives relating to reproduction predispose men (and the males of many other species) physically and mentally towards competition and sometimes strife. Cultural and social conventions and norms constrain these impulses, and channel them into more social and socially productive directions.

Including, I might add, competition for status and prestige that results in extraordinary accomplishment. Men are high variance, with a greater frequency of outcomes at extremes than women, in almost any variable that you want to measure.

These phenomena are complex, and interact in deep and poorly understood ways. The constrained vision always keeps Chesterton’s Fence in mind. Men socialized into “stoicism, competitiveness, dominance and aggression” are “unhealthy”? Well, why did socialization take such a perverse turn? And why did it take such a perverse turn virtually universally, across cultures and across time? Could it be that perhaps these traits perform some deeper function, related to biologically selected male traits, and that undoing these cultural norms may lead to horrible outcomes?

In other words: how do you reconstruct testosterone? And, since you can’t, how can you be sure that the allegedly toxic traits that you presume that you can manipulate via therapy are not the very things that keep the testosterone in check? How do you know that you are not playing Sorcerer’s Apprentice when you meddle with these things?

The hubris in the unconstrained vision is particularly stunning in this case, as the APA itself criticizes heavily the previous “androcentric bias” of the psychology profession. So in other words, previous psychologists were deeply flawed. But you can totally rely on the current generation. Because research.

Well, the previous (now apparently discredited) psychologists based their claims on research too. But even more telling: the reproducibility crisis in psychological research is more acute than in any other subject (with over 50 percent of psychological studies being non-replicable). (If you Google “reproducibility crisis” top Google suggested fill-in is “reproducibility crisis psychology.”)

What’s more, many of the unreplicable studies involve relatively simple experiments, rather than those that purport to identify causal relationships in complicated social and behavioral phenomena.

In other words, perhaps the worst way to convince me of the correctness of a claim about psychology is to cite modern research.

Some blind spots are evident in some of the research cited in the link. It spends some time discussing the interactions between masculinity and race:

These dynamics play out in the prison system as well. As of 2014, black men made up 37 percent of the male state and federal prison population and were more than 10 times as likely to be incarcerated in state or federal prison as white men. Hispanic men were also overrepresented, making up 22 percent of the prison population despite making up only about 8 percent of the general U.S. population (U.S. Department of Justice, 2015).

Well, if you want to examine a society dominated by females and notably lacking in traditional male figures, just look at the minority inner city communities that supply the prison population discussed in this quote. These dots are, of course, not connected by the APA.

Relatedly, variations in things emphasized by the APA, such as murder and suicide, across countries, races, ethnicities, and time are huge, which suggests that many other factors are at work, and that a reductionist focus on the presence or absence of a Y chromosome is woefully inadequate.

The presumptuousness of this endeavor is breathtaking, and is therefore a particularly pronounced example of the unconstrained vision in action. As someone firmly rooted in the constrained vision, I say: don’t mess with what you don’t understand, and don’t pretend to understand when recent experience–which you recognize–demonstrates the fallibility of your discipline. Psychologists should be humble: they have a lot to be humble about.

January 7, 2019

Lost in Space? Some Musings on the Economics of an Independent Space Force

Filed under: Economics,History,Military,Politics — cpirrong @ 8:30 pm

One of the Trump administration’s (and really, Trump is the one pushing it) more interesting ideas is the creation of an independent military “space force” as a separate service branch, co-equal with the Army, Air Force, Marines, and Navy. Given that this proposal gores many, many political oxen inside the military and without, it’s hard to get an objective viewpoint. Everyone’s opinion is colored by their vested interest.

I have no answer as to whether it’s a good idea or not. But I do have some thoughts on the appropriate framework that could contribute to a more objective evaluation. Specifically, transactions cost economics and property rights economics (and organizational economics, which has some overlap with these) address issues of how formal organizational structure, and the ownership and control of assets, can affect the allocation of resources, for better or worse. And that is the issue here: can a reorganization involving the creation of a new entity that has control rights over assets heretofore controlled by other entities improve the allocation of defense resources?

I mused on this topic long ago, but have never really pursued it in a serious way. But I’ll muse some more given the newfound topicality.

It’s useful to divide the analysis into two parts. First, how does organizational structure, and in particular the assignment of rights of control over existing assets (e.g., artillery pieces, aircraft), affect military effectiveness and combat power? Second, how does organizational structure affect the choices regarding which assets to invest in?

With respect to the first issue, over the centuries militaries have devoted considerable effort and thought to organizational charts, and the allocation of control rights over military hardware and military units. Some simple examples: should each division have its own artillery, with all guns being under division control, or should some guns be assigned to battalions subject to control at a higher level (e.g., corps, army)?; should all tanks be concentrated in armored divisions, or should infantry divisions also have organic tank units?; should submarines be employed in support of fleets, or operate independently?

As with all resource allocation decisions, there are trade-offs, and militaries have struggled with these. There has been experimentation. There has been success and failure. Changes in technology have necessitated changes in organization, because the nature of specific weapons systems may affect the trade-offs. These are arguments that never end, as the incessant reorganizations of militaries (e.g., the U.S. Army’s recent shift to a brigade-based structure) demonstrate.

A couple of transactions cost economics insights. First, most decisions regarding the use of military assets are made subject to severe temporal specificity. If I am under attack, I need fire support NOW. Moreover, it may be the case that even in a large military only a few resources are available to provide that support. Temporal specificity creates transactions costs that can impede the allocation of resources to their highest value use.

Second, trade is unlikely to be a viable option, especially given temporal specificity. “Hey. I need some artillery support on my position right now. Can you give me an offer on what that will cost me?” Yeah–that works. The prospects for spot exchange are almost non-existent, and intertemporal exchange is unlikely because (a) timelines are short (for a variety of reasons), making end game problems acute, and (b) potential parties to an exchange are unlikely to be interacting repeatedly over time with reciprocal needs.

Since voluntary exchange is out (except in very unusual circumstances) resources need to be allocated by authority. Which makes issues of organization and the allocation of authority (control rights) paramount.

With respect to space assets, the case for a space force relates to the fact that many space assets (a) offer value to air, naval, and ground forces, and (b) there are economies of scale and scope. Having each service invest in its own space assets likely sacrifices scale and scope economies, but eliminates the need for inter-service bargaining over access to these assets, and reallocation of these assets in response to shifting military needs.

Allocating space assets to one existing branch (e.g., the Air Force) would facilitate exploitation of scale and scope economies, but would require inter-service bargaining to permit the non-controlling service to get access. A specialized space force permits exploitation of scale and scope economies, but also necessitates inter-service bargaining. The key question here is whether a specialized force would have better incentives than an operational force. For example, the Air Force might favor itself over other services when deciding how to utilize space assets, whereas a separate space force would not be as parochial.

With respect to the second issue–which assets are procured–the impact of organization on the Congressional procurement process is paramount.

The services are highly politicized organizations, and certain specializations within a service may exercise disproportionate influence. For example, the “fighter mafia” in the Air Force is legendary. As another example, in the pre-WWII U.S. Navy, battleship admirals held sway. These factions within a service may warp and stifle the development of new technologies, new doctrines, or investment decisions: the stultifying effect of the dominant infantry branch within the pre-WWII U.S. Army on the development of armored forces (both hardware and doctrine) is an example.

Creation of a separate force that invests in assets provided by the other branches would tend to undermine the power that any faction in a particular branch could exercise. The branches would have to form coalitions to influence Congressional funding decisions. But the creation of a new entity with its own vested service interest and its own ability to influence Congress could prove problematic as well.

For example, in the immediate aftermath of the formation of the Air Force, beliefs that nuclear weapons made most conventional forces–including conventional air arms–obsolete, led the Air Force to try to persuade Congress to slash spending on conventional forces in order to focus on strategic forces, especially bombers. This led to the “Revolt of the Admirals.” It also led the Navy and even the Army to invest in nuclear capabilities in order to claim strategic relevance and maintain their share of the budget. These investments were almost certainly wasteful, and would not have been made but for the independent Air Force’s influence.

Perhaps the most important historical example that could shed some light on the desirability of an independent space force is the creation of a separate Air Force in 1947, and the Johnson-McConnell agreement of 1966, in which the Army ceded to the Air Force control over all fixed wing aircraft.

The effects of this reorganization were probably beneficial overall, but there certainly were problematic effects. In particular, it almost certainly attenuated the Air Force’s incentives to provide ground support, and resulted in the Army investing excessively in rotary wing aircraft (i.e., attack helicopters) to provide it.

Perhaps a better idea would have been to create a separate strategic air wing (first including strategic bombers, then strategic bombers and ICBMs, as well as air superiority fighters), and permit the Army to operate tactical aircraft for ground support. This was essentially what was done in in the immediate aftermath of WWII, with the creation within the Army Air Force of a Strategic Air Command, a Tactical Air Command, and an Air Defense Command.

The Marine Corps, and to some degree the Navy, provide a model. Each operate their own fixed wing air services, specialized to provide the kinds of air power each needs. Marine air is relentlessly focused on providing close air support. The Marine operational commander has control over these assets, and does not have to haggle with another service to get them. Moreover, the Marines’ acquisition decisions (notably the division between fixed and rotary wing aircraft) are oriented towards getting the optimal mix for the specific mission.

I have only touched upon some of the relevant considerations–there are no doubt others I have missed. Moreover, I have given only superficial attention even to the issues I raise. But this should be sufficient to show just how complicated this issue is. Organizational decisions, such as the creation of a separate space force, will have profound implications for how military resources are allocated, and what resources will be invested in in the first place. Crucially, the assets in question cannot be allocated by markets or the price system, so it is not a question of organization v. market, but the form of the organization(s). Further, military assets are complex, long-lived (and becoming more so–note that B-52s may be operational for more than a century), and can be extraordinarily specialized and hence specific (in the TCE meaning of that term). Technology is incredibly dynamic, and needs shift dramatically over time as new threats emerge. This all means that organization and the allocation of control rights matter. A lot.

And perhaps most importantly, organizational choices will be made in a politicized environment, and will affect political bargaining in the future. This will inevitably distort current choices (e.g., whether a space force will be created in the first place, what assets it will control) and future choices as well. It also makes it very difficult to sort through the debate on the topic, because everybody involved is a political player with its own political interests.

That makes it all the more important to establish a relatively objective and rigorous intellectual framework in which to analyze these questions. I think that transactions costs economics and property rights economics hold out great promise as the basis for such a framework.

January 5, 2019

Vox Populi v. Vox Domini Super Eos Electos

Filed under: Economics,History,Politics — cpirrong @ 7:27 pm

For weeks France has been wracked by the “gilets jaunes” protests directed at President Emmanuel Macron. The protests had slackened recently, but today they flared up again, perhaps due to the arrest of a gilets janues leader. (Was this just stupidity, or does Macron want to stoke the protest? Dunno.)

The French protests represent yet another battle in the global war between the hoi polloi and the elite. The catalyst for the French protests was a quintessentially elitist policy initiative: a tax on motor fuel, with the stated purpose of combating climate change.

Even on its own terms the tax is stupid. Even assuming a very high temperature sensitivity to CO2, the reduction in emissions resulting from the tax would have a vanishingly small effect on global temperature. Furthermore, like most of Europe, French gas taxes are extremely high, and almost certainly far above the level that would efficiently address externalities arising from motor fuel consumption.

The protestors may understand that the tax does not make sense as a way of addressing climate change. But their interests are far more down-to-earth. This is another tax imposed on the most heavily taxed country in the OECD. Further, it falls most heavily on the rural population, and the working population, and has little impact on the metropolitan elites. It is, in a sense, the straw that broke the camel’s back.

With consummate tone-deafness, Macron galvanized the protestors with remarks that would make the fictional Marie Antoinette (“let them eat cake”) blush. Hey, if driving costs too much, just carpool! Or take the bus! Yeah. He actually said that (unlike Marie and the bit about the cake).

After the initial shock, Macron caved, and shelved the tax. But the protests continued, with varying degrees of violence around the country (e.g., torching toll booths). This is because the tax’s significance was more symbolic, relating to the excessive taxation in France, and the sneering indifference of the elite to the fate of non-elite France, which Macron has personified all too well. So, as is often the case in coordination games, once people became aware of each others’ dissatisfaction, the protests took on a life of their own even after the initial catalyst was removed.

Today the protestors gathered in front of the Paris Bourse, demanding Macron’s resignation. Surely, he won’t, but his evident unpopularity will hamstring his ability to govern for the remainder of his term.

The government response has been somewhat amusing. One tack was that police resources were inadequate to deal with both the protests and terrorism. “France Doesn’t Have Enough Cops.” That is, the government of the most heavily taxed advanced economy in the world cannot perform the primary duty of the state: to secure the safety and property of its citizens. So don’t protest, because that make it impossible to combat terrorists.

But of course they should be given more money and power.

In the United States, there is also an outcry against the president, but it is the inversion of the one in France. Whereas in France it is the ordinary people taking to the streets in opposition to the governing elite, in the US the governing elite is taking to the media and the bowels of the state to oppose Trump.

There are no widespread protests on the streets of the US (Antifa freaking out in Portland doesn’t count), and especially lacking are protests by ordinary citizens against Trump. And why should there be? For most Americans, the last two years have been pretty good insofar as bread-and-butter issues are concerned (as epitomized by yesterday’s job report, both on the number of jobs and wage growth). No, the frenzy in the US has focused on issues that ordinary Americans don’t give a rat’s ass about, but which drive the governing class into paroxysms of fury–e.g., alleged (but completely unproven) allegations of “collusion” between Trump and Putin/the Russians.

These allegations are merely useful cudgels with which to beat Trump. The fury of the governing class really stems from his running roughshod over their presumptions and privileges. He’s just not one of them. He insults them. He tramples their amour-propre. He does not worship their idols. Indeed, he trashes them. Icky people like him.

So whereas the ordinary French have taken to the streets, the governing class has taken to pulling the levers of its power–the FBI (even before the election), the American star chamber (aka the Mueller Investigation), incessant and hopelessly biased media coverage, and now, threats of impeaching “the motherfucker.” (To which I say–be my guest. Look at how well that worked out in 1998-99.) There are even those who have advocated a coup.

I daresay that the governing class in the US sees what is going on in Paris and other places in France, and shudders. It shows how deeply loathed the governing class is, and how a seemingly small spark can ignite a political firestorm against them. They have certainly questioned the protests’ legitimacy, at times in their desperation succumbing to the last refuge of the idiot–blaming it on the Russians. Case in point, the pathetically hilarious Max Boot (hey, Max, can you do a pushup?) who at one time pined for an American Macron, only to be subjected to ruthless–but completely warranted–ridicule when the French protests erupted. In a nauseating attempt to rationalize the complete popular repudiation of his man crush on Macron, Max insinuated that although the Russkies may not have caused the protests, they fanned the flames through their diabolically clever exploitation of social media.

The condescension here is palpable, and reflects a pattern that I’ve pointed out going back to 2015. Rather than acknowledging that widespread popular dissatisfaction with the elites–as epitomized by Brexit, the Trump election, various European elections, and now the protests in France–were due to repeated elite failure unsullied by any success, they add insult to injury by accusing their opponents of being stupid, unwitting pawns of their current bête noire.

It is indeed amazing to see that an incessant barrage of attacks from the governing classes have not moved the needle on Trump in the slightest. If anything, they have bound him and his supporters more tightly, because the latter recognize that an attack on Trump is just as much an attack on them.

The most common divide in polities around the developed world right now is between the governing and the governed. The self-conceived and self-congratulatory elite vs. the ordinary. France is just the most recent battleground. It wasn’t the first, and it won’t be the last. The battle is becoming more intense because the objects of popular disdain refuse to acknowledge any responsibility for creating the conditions that have spurred popular discontent.

The same thing happened in France, 230 years ago. The nobility in the ancien regime stubbornly and righteously clung to their privileges, and their conviction in their own superiority. Worked out swell for them, right? But some people never learn.

Powered by WordPress