At least three controversies have caught me by surprise while blogging: stimulus, climate change adaptation and dividend policy.
In each case I felt like I offered a pretty straightforward quasi-obvious take on an issue that was brushed aside in favor of a food fight.
Stimulus
I was obviously a non-player in the larger stimulus debate but the fact that no one echoed my sentiment seemed strange to me as it looked like the basic starting point for a conversation.
In late 2008, early 2009 the economy was crashing and lots of families, businesses and institutions were reporting serious cash flow concerns. Either they were running short or were afraid they would run short. Relatedly credit was rapidly drying up as collateral values were falling and unsecured credit was becoming very difficult to obtain.
So, here is an idea. Lets give people a bunch of cash. They say they’re afraid they won’t have enough cash. We have a cash making machine. Lets use our cash making machine to make cash and then give it to people.
If you care about the weeds of these type of things then I would have suggested that we suspend the payroll tax yet have the US Treasury issue IOUs to the Trust funds of roughly $1 Trillion to cover the approximate value of lost revenue. Everyone still gets their credits.
If you want to be horribly weeds-y then you can say we will have the Treasury deliver $1 Trillion in 13-week notes to the Federal Reserve. The Federal Reserve will then enter $1 Trillion into the Treasury’s account, which will then be used to clear transactions from the Treasury’s account to the account of banks processing payments from Treasury to vendors, employees, retirees, etc.
Yet, the core idea is pretty basic. We use our cash machine to print cash and then we give it to people.
I would expect someone to say: I hear where you are coming from Karl but . . . . and that would be worse than where we are now.
The closest someone came was when I brought it up to Peter Schiff on his radio show and he said “well if that’s such a great idea why not give people $1 million”
To which I replied, “ultimately that would create a lot of inflation”
To which he said, “well then won’t this plan?”
To which I said, “Yes, but 300 times less”
To which he said, “Oh so you think a little inflation is good. I happen to think no inflation is good”
And, that I think, was a conversation with a meaningful endpoint. Peter essentially argued that any inflation was worse than what we have now. I argued that some inflation would actually be better than what we have now.
Yet, most of the argument went like this: Saltwater! Freshwater! Multipliers! Keynesians! Liquidationists! Big Government! Dark Ages of Macro! Pretense of Knowledge! Trains, Yeah! Trains, Booh! Aggregate Demand! Regime Uncertainty! You’re an Idiot! You’re an Ass!
But, the core strategy of looking at a problem, taking the most obvious solution and then at a minimum trying to explain exactly why it won’t work was largely bypassed.
Even if you know the simple answer is a bad answer I think its worth going through this process just so everyone can be on the same page and be sure that they are in agreement as to why the simple answer won’t work.
People will say that this was an ideological problem, but I am skeptical as I’ll explain below.
Climate Change
One of the core ideas behind climate change is that if humans continue to burn fossil fuels then the earth will become warmer.
As it stands there are some places on earth that are so hot that no one wants to live there. There are also some places that are so cold that no one wants to live.
A baseline guesstimate might be that if the earth got warmer then the number of places that were too hot would expand and the number of places that were too cold would contract.
A possible strategy then would be for humans to move from the places that are newly too hot to the places that were formerly too cold.
Now this may very well be a horrible idea. In which case I would expect someone to say: I hear were you are coming from Karl but . . . . and that’s why that plan won’t work.
I’ve received a lot of email and tweets on this issue. I have tried to go through them all. So far I haven’t seen one that comes at it like that. Lots of folks mocked me. Some were kind enough to send along information on exactly how hot the too hot places might get and what the consequences of excess heat might be.
Yet, so far, nothing addressing why moving to cooler places won’t work.
Again, even if we are certain this won’t work its probably worth stepping through exactly why it won’t work. At least so everyone can be on the same page.
Dividend Policy
I’ve made what I assumed to be the banal observation that a key part of how firms compensate their owners is by transferring command of goods and services to those owners. In practice, that is to say, giving the owners cash.
At the same time Apple has sent repeated signals that it does not intend to transfer command of goods and services to its owners.
Now to the extent these signals are accurate I think they would cast some doubt on the potential for Apple’s owners to be compensated by Apple.
Now again you might say: I see where you are coming from Karl but . . . . and that’s how Apple’s owners will be compensated by Apple.
I even have some ideas on how this could happen.
Yet, and its still early, I believe not a single response has addressed this issue. Most have centered around estimates of my IQ. Some have addressed how Apple’s current owners could be compensated by future owners and a few have suggested that Apple is a great company because it does not intend to compensate its owners.
Again though, we haven’t stepped through exactly how the Apple compensation process might work. And, I think its worth doing so that at least everyone can be on the same page.
Now my take on this is that it extends from over-chunking. People try to take on ideas to aggressively rather than cutting them up into tiny pieces. I watch folks around me do this all the time. I even watch them get into bitter disputes over the answer. However, the larger the dispute gets the bigger chunks people try to take. They say, well you just don’t get XYZ where XYZ is some vastly complex set of ideas.
Rather, I would suggest we say ok, lets start with something everyone agree on. Then slowly, bit-by-bit, lets make our way to the point of disagreement. Once there we will often find that the nub of contention is quite small and that the answer is trivially obvious.
Indeed, this is so often the case, that my primary concern is making sure that once we get to the nub the obviousness of the answer does not serve as a source of pain and embarrassment for the person arguing the opposite.
There are a lot of ways to avoid this but one helpful technique is once you get close to the nub act as if the answer is going to be what the other person believes. Then act surprised to find that it’s the opposite and importantly don’t mention that this now proves your point. Simply continue on constructing the argument until the other person says, “You know actually I think you may have been right.” At which point you’ll want to change the subject as soon as convenient, so the other person will not have to ruminate on their wrongness.
There is always plenty of time later for pointing out how awesome and brilliant you are, but if you do it in the middle of a serous discussion it will only serve to hurt the other person’s feelings.
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Saturday ~ January 7th, 2012 at 6:51 pm
Ben
Your stimulus idea would work, but it’d be better to spend that money on public infrastructure and R&D. Those are things that will promote future growth and also put money in consumers pockets.
Sunday ~ January 8th, 2012 at 3:58 am
anon
But it has the big upside that such a radical tax cut – while ballooning the deficit – bridges very real political constraints.
Also, what makes you assume that excess money given to citizens won’t (in part) end up supporting public infrastructure and R&D?
Third, future larger tax revenues due to an economy not in free fall would sure help infrastructure and R&D, right?
Saturday ~ January 7th, 2012 at 6:59 pm
maxw3st
With regards to Apple, or more accurately, its stock and those who own it: Apple has repeatedly made it quite clear that they have no intention of paying a dividend. In other words, they feel no obligation to share their income with their primary owners (the shareholders). As an owner of their stock that leaves only one avenue for recovery of your invested cash. Sell your Apple stock. That would be my advice in any event, but the same applies to the stock of any company that doesn’t pay a dividend, or doesn’t adjust its dividend as income increases. You’ll notice that companies never have a problem the other way, and are generally quick to reduce dividends, or suspend them altogether, when income is declining.
There are only two reasons to buy a stock. 1. you expect the stock will increase in price so you can sell it at a higher price than you paid for it. 2. you expect the stock to remain relatively stable (and hopefully increase some) and pay you a regular dividend. Any notion of participating in the fortunes of the company as an owner (through your stock holdings) is truly whimsical and naive in today’s market.
Saturday ~ January 7th, 2012 at 7:14 pm
GabbyD
“Yet, so far, nothing addressing why moving to cooler places won’t work.”
migration restrictions. people from warm/hot climates have been migrating to cooler/temperate climates for a long time.
Saturday ~ January 7th, 2012 at 9:19 pm
The
I can’t help thinking that if you really put your mind to it… moving to Siberia would be achievable.
Saturday ~ January 7th, 2012 at 7:26 pm
Dave
Mind if I take a stab?
Climate– Moving to cooler places would likely not work due to difficulties in migration. The world does not currently have an equal population distribution of people over land largely due to constraints by nation-states on immigration. Typically those restrictions have been by the favored restricting the unfavored. There is little reason to expect this would change in the climate change case. Even if it did, as shown in the EU, language knowledge can be a huge barrier to moving even among highly-developed societies without any legal restrictions. While this might not be an issue in large polities such as the United States it’s far from clear to me that many people in the developing nations would have anywhere they could feasible move to in the “too cold” parts of the world.
Apple– AAPL is worth its future earnings, plus its cash hoard. Suppose AAPL were to become unprofitable. At that point shareholders could pressure for its dissolution, and, its cash hoard would be distributed– it has no debt, so its assets must be paid to equity holders. Now suppose AAPL remains profitable. Then there is no reason to liquidate, and the company continues to exist, the hoard continues to grow, and shareholders get paid from new shareholders, who in turn have a claim on the hoard. In each case, you have a claim on the cash hoard. Where I think you go wrong is your assumption is that an unprofitable AAPL would maintain a no-dividend policy while losing money, burning through the cash even until debt and liquidation. The current no-dividend policy is maintained by a very profitable company such that investors maintain confidence in management of their cash assets. Were investors to lose that confidence they could always use their votes to change the policy.
Saturday ~ January 7th, 2012 at 7:30 pm
Pat L
The answer to your point on global warming is transition costs, surely? The costs of relocating several hundred million people to Siberia and upper Canada while constructing all the appropriate infrastructure must be immense.
Saturday ~ January 7th, 2012 at 7:31 pm
Andy Harless
Karl, I think you are misunderstanding the problem with climate change, because you are focusing on the word “climate” rather than the word “change.” The problem isn’t that hot places will get hotter; it’s that all places will get different. The costs of adapting to change are roughly quadratic in the rate at which the change happens. As climate change accelerates, the costs of adapting to that change will become very high. Under some scenarios, they will become so high that they exceed all our available resources, and our species will become extinct. Under more plausible scenarios, the species won’t become extinct, but the world will just suck, because we’ve spent thousands of years (and more intensively the last couple of hundred years) adapting to a world that was a certain way, and all the benefit of that adaptation will be lost when the world ends up being a different way.
Sunday ~ January 8th, 2012 at 4:09 am
anon
This.
Humans are specialized to their current environment in crazy ways, as Kathrina has shown. It is part of the human condition – one which will likely not change in a million years – and even if radical gene technology was available today it was probably too late.
Karl, iif you think killing a billion people just to make that point obvious to a generation (and be promptly forgotten by the next ones) then you could equally say that WWII was useful, because it taught humanity that blind extremism triggered by a deflationary world economic crisis is bad … Do you really think that point came across?
Sunday ~ January 8th, 2012 at 4:16 am
anon
The other argument Karl is missing that burning all the coal that was stored in a hundred million years could push the planet into a thermal feedback loop that will be an extinction event for all of humans.
We as a species are a lot more fragile than it seems – 75,000 years ago we came very close to total extinction, with only 10,000 humans left. It’s been a remarkable comeback since then, but our biological constraints have not improved much.
Saturday ~ January 7th, 2012 at 7:44 pm
Alex Godofsky
“Again though, we haven’t stepped through exactly how the Apple compensation process might work. And, I think its worth doing so that at least everyone can be on the same page.”
I suggested on that same post that the cash is at least partly held against the possibility that the tax rate on dividend payments falls.
Saturday ~ January 7th, 2012 at 7:59 pm
Chuchundra
I think your stimulus plan is fine.Matt Ygelesias talks about this sort of thing all the time. He calls it “dropping money from helicopters”
From a stimulus point of view, it’s probably better than what we got because it’s a much larger amount of money and it ramps up much more quickly. A full-on payroll tax holiday misses two things, though. State governments and the unemployed. Sadly, state governments can not print up money and most aren’t allowed to run a deficit, so the economic crunch causes them to shed workers, which is anti-stimulative.
Your plan, combined with block grants for states and extended unemployment insurance would be a fine one.
With regards to climate change, as others have pointed out, moving from hotter climes to colder ones isn’t an option for most people. A lot of those people in equatorial regions don’t have the resources to pick up and move to Canada or Greenland, assuming those nations would actually have them. Moreover, many of those people don’t want to move. They like where they live.
Secondly, climate change is going to have negative effects on those of who don’t need to move. We could certainly see all sorts of bad things happening due to changes in weather patterns all over the globe. Floods, droughts, extreme weather events, etc.
Lastly, and most importantly, we have no idea what the end state of global climate change is going to look like. We can only guess and some of those guesses are pretty frightening. There’s a real chance that the CO2 we’re pumping into the atmosphere will eventually cause runaway global warming, an extinction level event for we poor, misguided homo sapiens.
Saturday ~ January 7th, 2012 at 8:30 pm
Mr. Violet (@EuropeanViolet)
I perfectly agree with your global approach. I thought to write something about it even on my own blog. My approach would have been more epistemological, I mean, that one of the achievements we got by science is that the “host” of a theory (model, idea, argument, etc.) doesn’t need to die in order to prove the theory wrong (or right…).
This is a reasoning I read in Karl Popper’s works, it’s not mine, but I agree with it. The core of his argument, as I understood it, was that we do not need to completely identify with our own ideas, so criticizing an idea (theory, model, argument, etc.) doesn’t automatically entail any will to harm the person who is proposing that idea. What follows is that it becomes easier to find mistakes and get a better representation of the world, bit by bit nearer to the truth (without believing to have find any Truth). More recently we would have called it “opening to feedback”.
This also imply that it doesn’t matter what this or that scientist “really” thought or “really” understood, it’s enough focusing on the theory at hand and trying to work on it, in a form as better formulated as possible: it doesn’t matter if the this or that scientist formulated it well or not, we can try to reformulate it better if we can.
With this in mind, I think the reputational game-blame can distort the process and prevent us from getting nearer to the best “truth” we are able to get at present, because the reputational game-blame can re-create the incentive to identify with our own theories against the others identified as well with their own theories, thus bringing the whole system in a sub-optimal equilibrium more focused on fight and controversy then on truth searching.
Saturday ~ January 7th, 2012 at 9:14 pm
Johnnie Linn
I was just wondering where all the carbon was before it was laid down in the Carboniferous Era. If we were to exhaust all Carboniferous deposits, we would seem to have no less likelihood to survive than the planet had before the deposits were laid down.
Sunday ~ January 8th, 2012 at 4:21 am
anon
That is similar to saying that you could easily survive being irradiated by a 1,000,000 watts UV-lamp for 10 minutes, in which you receive the amount of sunburn that your body absorbed naturally, over the course of a single year.
Are you willing to take part in that experiment?
Sunday ~ January 8th, 2012 at 10:32 pm
Johnnie Linn
Nice touch with the sunglasses. But is the heat released from combustion of Carboniferous deposits the cause of global warming, or the atmospheric greenhouse gas increase the cause?
Saturday ~ January 7th, 2012 at 9:43 pm
Lord
Stimulus: Giving money to everyone would be great. Unfortunately, it is a non starter. People are afraid someone else will get more than them. People are afraid it devalues their effort and money. People with money look upon it as an opportunity to prosper at the expense of others and blame them for their situation. When people are threatened in their own situation, they are not amenable to remedying that of others.
Climate change: People can adapt. People can move. The huge problem is how the rest of the biosphere can adapt or fail to adapt. A tragedy is unfolding while we do nothing. Nor will we adapt or move for the same reasons we won’t do stimulus. That is something for someone else to do for themselves. We only want our own.
What should be a company’s response to investors over valuing them? Any attempt to reward them will just lead them to increase their over valuation. Ironically, acting contrarily and not rewarding them merely make them more valuable. It is best to view them as a charitable trust whose rewards falls on all its customers and society as a whole and its investors as donors. There are far less worthwhile charities.
Sunday ~ January 8th, 2012 at 3:34 am
Recall
“A baseline guesstimate might be that if the earth got warmer then the number of places that were too hot would expand and the number of places that were too cold would contract.”
And an actual understanding of paleoclimatology would tell you that what would actually happen is unimaginably worse.
Your baseline guessimate that everything will be basicly fine is absolutely worthless. There are scientists who study this stuff for real, and they’re flipping the fuck out trying to get willfully ignorant people like you to care about their data.
Sunday ~ January 8th, 2012 at 7:46 am
John
On the subject of climate change, while the idea of moving/adapting to the new warmer climate might be technically possible, it’s a bad idea because it’s economically infeasible and would incur untold costs on humanity. Humans historically have moved from place to place with the tides of environmental/political change, but change has heretofore been either localized in scale or glacial in speed, for the most part. A change that you’re talking about, even if it took place over several decades, would be both faster and wider-scale than anything humanity has experienced. When you think of the parts of the world that would have to be abandoned due to a changing climate, you’re talking about the largest and most populous parts of the planet. If human history is any guide, massive migrations to more habitable climates usually cause serious disruptions in global food supply, initiate territorial conflicts, and result in untold amounts of death and human suffering, which is historically coupled with centuries-long setbacks in human knowledge and development. As mentioned before, governments are notoriously recalcitrant to migration, and they would likely become especially so in case of such massive movements. Positing that such a migration could be safely or easily accomplished would be naïve at best.
Not only that, moving to areas like Siberia and northern Canada with no infrastructure would seriously set back economic development. Even our currently fragile economies in places like Europe and the US are built on centuries of development in transportation, agriculture, irrigation, urban development, etc. Move economic activity into the Russian/Canadian tundra where there is little to no infrastructure, and you’ll see a disastrous setback in development. On top of such considerations, the great frozen north is not only inhospitable to agriculture because it’s too cold to grow there, it’s inhospitable to agriculture because it gets very little sunlight for half of the year. Climate change will not change the axis of the Earth. I used to live in northern Russia, where there were several days of complete darkness in the winter; believe me: growing sufficient food to feed a population of 7 billion, or even 2 billion, would be next to impossible if the only arable land on the planet was in the furthest northern/southern reaches. Moving habitation into these zones would mean accepting a serious setback in human development.
In addition, we don’t yet know exactly what other changes could be wrought by a warming Earth; warmer ocean temperatures could seriously increase the incidence of catastrophic storms and make yet more parts of the world unlivable than we previously thought. There’s really no guarantee that any of the currently inhospitable places will become any more habitable. Yes, a massive migration to more habitable climates is possible, but it’s about as appealing a scenario as nuclear holocaust. In my view, it’s best to keep this in mind when weighing the costs of climate change prevention/control measures and not even consider migration as a viable alternative to positive action.
(then again, perhaps I’m a bit biased living in the Netherlands, a sub-sea level country likely be one of the first victims of any serious climate catastrophe)
Sunday ~ January 8th, 2012 at 10:45 am
Rick
Without diminishing the importance of reducing carbon emissions in an attempt to slow or limit climate change I think it as important to have the discussion of ways to cope with it. Coordinating reduction of emissions historically appears to me to be not working for various reasons. The migration strategy that Karl brings up is a good start. People and populations have frequently migrated when placed under stress. If not humans would still be confined to Africa. Frequently these migrations have been done with great hardship and in the case when the migrating population encountered an indigenous population conflict and even outright war has resulted. Consider a current and local example. Under some models (like NOAA’s) central america and the US southwest will become drier. There is already migration northward. Witness the hue and cry in the current political discussions about illegal immigration. Supposing the models are correct and agriculture and economies in central america deteriorate further then the migration pressures will become greater and greater.
Sunday ~ January 8th, 2012 at 11:34 am
Global Warming Is Bad Because We Don’t Even Know The Half Of It « squarelyrooted
[...] Smith, who is very smart, is still stunningly dense on climate change: One of the core ideas behind climate change is that if humans continue to burn fossil fuels then [...]
Sunday ~ January 8th, 2012 at 11:47 am
John
The stimulus idea is from simplistic economic theory, which glosses over the complexities of the real world. Obviously, directing funds to sectors that have a higher multiplier and a higher return will improve the chances of positive impacts. If you simply give people money, they will spend it at Wal-Mart and it goes directly to China–i.e., the multiplier is trivial and lower positive effects in the short run. And they will spend it on consumption rather than investment–i.e., lower positive effects in the long run. And of course, this ignores the very real questions of political feasibility of your argument–i.e., it’s not on the table because it doesn’t pass the red face test.
You Climate Change argument is taken almost verbatim from Bjorn Lomberg. I agree there is a need to rationally balance mitigation and adaptation, and that policy focus needs to pay more attention to the latter. But that is not doing nothing, as your argument suggests. Indeed, your argument is a simple thought exercise, and while it provides some insights, it also misses fundamental issues. This is a repeated game and there is no end point for the impact of GHG emissions. It doesn’t reach a state of ex-post change and stop, the effects will continue to increase in severity and the consequences will continue to increase as well. So we can’t just accept climate change as if it is a new state of the world, rather it is a continually degradation of the climate (or more accurately our ability to survive in it). Further, contrary to simple thinking, it is not linear. There are real possibilities of threshold effects that can present unforeseen consequences and costs.
The point is that the energy market is inefficient due to an enormous negative externality–what many have called the largest externality in history. Are your really suggesting that an inefficient market will lead to greater social welfare? Are you suggesting that government should not correct the market failure?
I suspect you are a young economist that is still reeling from the simple view of the world that economists are disciplined to have in graduate school–e.g., your stimulus sounds like the simplistic logic presented in grad school that the fed drops money from helicopters, ignoring that where it lands and how it is used matters a great deal. Read more broadly, across disciplines, and you will begin to see the world with a more complex and deeper understanding.
Sunday ~ January 8th, 2012 at 11:59 am
rjs
hansen thinks we’ll have a sea level rise of 5 meters by the end of the century…so while moscow will be OK, moving manhatten & miami to siberia will be more difficult than you seem to believe…
Sunday ~ January 6th, 2013 at 1:59 pm
Many
Karl, I can see from the comments your points have mostly fallen on deaf ears. However I want to chime in and agree with your main point; that people mostly agree.
I applaud your attempt to raise the bar, however the way we currently approach the medium as a food fight does not lend itself to your suggested level of discourse.
I expect that at some point we will come to the realization that by focusing on what we agree on; the leftover disagreement is smaller than we imagined and the solutions are more obvious. Perhaps it will be when we finally purge all the lead from our systems
Mass migration in times of catastrophic change have happened in the past and there is no reason they would not happen again. The problem I see is accomplishing large migrations in as an orderly manner as is possible.
APPL has declared a dividend since and the stock price has fallen over 20%. Not sure the two are related, but I bought some anyway because the risk/reward seems better at $520 than at $700.
The majority of the stimulus monies are in bank reserves which can be pulled back by the Fed if inflation is deemed to be too onerous. At this point, stimulus is less of an issue that the withdrawal of it. The real test will be how successful the Fed is in identifying the rate of withdrawal of the excess liquidity when the time comes. The difficulty I see is that the Fed has to get it right twice in the face of enormous political and social pressure; first when the stimulus is applied and second when it is withdrawn.
Cheers
Saturday ~ March 23rd, 2013 at 10:42 am
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