What does Net Nuetrality Mean?

There is a big fight going on the Washington right now about whether what is apparently the current policy of  Federal Regulations, "net neutrality" should be changed to allow Internet pricing according to use.   I've been getting periodical emails from outraged folks claiming this is a Comcast, ATT, Verizon power grab - that we are all going to be pawns of these big corporations extorting money from us.

It is complicated and hard to understand what it is all about, and it is not helped by the term "net neutrality" which seems to have been chosen to be one of those nice sounding buzz words that will create a positive perception without regard to what it is actually about.

Then I heard the other day that some enormous percentage of the band width in the entire world is used up by Net-flix.  It was a mind boggling number, I want to say somewhere around 50% of all the worlds bandwidth is used by Net-Flix, apparently one of the biggest opponents of "Net Neutrality".   It began to make sense to me, I believe.  I could reduce it to a simple, easy to understand principle I could use to make a decision, to wit:

That people that use the net pay in proportion to the how much band width they use.

This changed my whole view of the argument, from leaning toward supporting net neutrality toward being pretty dubious of it being a good thing.  I basically believe good economics requires that the people that use something need to pay for it in proportion to their use, and that not following that system warps both behavior and economics for the worse.

It appears to me that the supporters of Net Neutrality are people who enjoy an unfair economic advantage under the current system, who want to keep it.  Internet entertainment companies can offer entertainment options at prices so cheap people use them much more than they would if they had to pay more to reflect how much they are hogging the bandwidth.  The people whose whole lives revolve around the net and electronic media are riding on the backs of all the companies and people that use the net as a part of their business, or life, but not the central part.

Not being well versed in the law Congress enacted that provides the underpinning for the current regulation of the Internet, beyond the perception it is nonsensical and way to complex, I have no way of knowing if the proposed rule would give an unfair benefit to Comcast, AT&T, Verizon, or other companies through whose system the Internet operates.  But if it does I think we need to address that unfair benefit with oversight of their activities rather than continue to enshrine a rule based on a fundamentally wrong principle as a basic operating premise of the Internet.

Maybe net neutrality was justifiable in the early days of the Internet to jump start use of the Internet.  It kept prices low to encourage people to take advantage of the benefits of the Internet.  But the Internet is no longer a fledgling, the biggest companies in the world are now tech companies largely built around the Internet.  Time to start letting market forces make decisions, not regulators.

Global Warming and Nuclear Power Plants

Nuclear Power plants require enormous amounts of water to cool reactors.   So engineers often put them at or near sea level, often literally at the seashore, where abundant water can be drawn in and discharged.

What happens if the sea level rises 200 feet?   Despite the scientific certainty of the early 50's, we have never developed a safe process for getting rid of spent nuclear fuel rods, our best solution is burying them miles under a mountain out in the desert somewhere.  What will happen to the Nuclear Power plants located near sea level all over the world if the sea levels continue to rise?  How will we deal with all the fuel rods?  Will the physical structure that is the reactor core become a source of radiation in sea water?

Here in California I am thankful we have largely rejected Nuclear Power development over the years.  Within the State there is only one active Nuclear Power Plant, Diablo Canyon on the Central Coast near San Luis Obispo.  Attempts to locate Nuclear Power plants at Bodega Bay, Sun Desert and on the Stanislaus river were defeated before construction was begun.   Plants at Humboldt Bay, San Onofre, Rancho Seco and Vallecitos were built and operated for some period of time, but decommissioned after mechanical problems (typically problems with getting cooling water to the reactor core) generated a lot of bad publicity.   Rancho Seco was closed after approval of the voters of a ballot proposition which pretty much closed the door to future efforts to locate Nuclear Power plants in California.

But virtually every one of the power plants in California were at low elevation, and are near major urban areas.

What is the risk?  Will the closed Rancho Seco contaminate the bay that will created in the area around Sacramento?  Will the closed San Onofre plant contaminate the shoreline that will be where much of coastal Southern California is now?  Will Diablo Valley contaminate the coast from Hearst Castle down to San Luis Obispo (beachfront property with a 200 foot sea level rise) Pismo Beach and beyond.

I don't know, and the problem is even sincere efforts by science to predict the risk have to be taken with a grain of salt.  Far too often science has made pronouncements about reality that turn out to be false.  Scientists, like all of us, are prone to forgot that, paraphrasing the immortal words of Donald Rumsfeld (quoting others before him) - we don't know what we don't know.

Do Low Tax Rates Really Encourage Investment?

Now that Republicans have taken control of both houses of Congress there is once again talk of boosting the economy by cutting taxes.

It made me realize that in the 20 years or so I have been reading the Economist I have regularly seen the assertion that low taxes encourage investment, sometimes by the Economist quoting Republicans, sometimes by the Economist theorizing or editorializing.  But I have never seen any data to support the assertion.

Looking back over the last 40 years I have a harder and harder time accepting that assertion as true, and am certain it is not true for all situations.

Recent economic history has made it pretty clear that the theories of human motivation that the science of economics has been rooted in is to reality what a stick figure drawn by a 5 year old is to the reality of human anatomy.  This assertion that low taxes encourage investment is beginning to look to me like economic theory based on this stick figure understanding of human motivation.  It assumes every person is motivated by money above all, and that nobody ever feels like they have enough money to focus on other things.

This assumption doesn't square with my life experience or research findings I have seen.  

A research study from a couple years ago found that for most people about $70,000 a year is enough, beyond that figure money doesn't  motivate them.  I'm sure there are people who want far more, but I can't imagine that there is anyone that doesn't have a point where they feel their needs and wants are met, at least in what money can buy. So for most humans who reach the point where they have enough, if they continue working it is not for the money.

So what is it?  I think there are lots of potential explanations.

I came out of law school just about the time Ronald Reagan took office.  Within a couple years he started the rash of tax cuts that have characterized the last 40 years of government policy.  When I first started practicing law lawyers expected to make good money, but it was only part of the reward.  As they built up their practice they hired staff so they could work reasonable hours and have a life as their practice expanded.

I left the practice of law nearly thirty years ago, but am in touch enough to know the practice has changed dramatically.  It is all about money.  To compete big law firms require their lawyers work incredibly long hours.  The have downsized the amount of support staff enormously.  In the law business it is pretty clear to me the primary result of tax cuts has been longer hours for those driven to succeed, layoffs of the staff that used to lighten their load, and more money in the pockets of the most driven individuals.

For the lawyers in big firms I don't think it is all about the money.  It is about prestige, accomplishment measured against your peers.  To the extent it is about the money its not fundamentally about what they want to buy, it is that how much money you have is the marker of how successful you are.  

Back in the early 1950's, partly to pay off the debt of WW II, Congress created really high tax rates for people that made a lot of money.  If you were hauling in vastly more than most other people each year the dollars at the top end your pile of money were taxed at 70, 80 or even 90% of what you took in.

The logical response of the very wealthy at that time was to limit the amount of money they took in personally, so they focused on building empires.  They hired lots of people, started new companies.  Instead of paying high taxes to Uncle Sam they plowed money into building for the future.  The following couple decades are now viewed by economists as the golden years.  Low unemployment, high wages, a health economy.

Contrast that with the last couple decades of boom and bust and asset inflation.  Big companies are currently rolling in money but they are generally not hiring or starting new businesses, they are kicking out the money in enormous salaries for the top executives, or using stock buy-backs to pump up their stock price, making both the top management and shareholders wealthier.  Low taxes on individuals make this an economically rational choice.

Individual wealthy people also generally aren't starting new businesses and hiring people.  They are trading in stock, real estate, art, classic cars - building their personal wealth and in the process inflating asset prices.  The assets aren't improved, no value is added.  The price just keeps going up because the people with lots of money are swapping them back and forth, both as an easy, low maintenance way to store your money, and as a way to  evidence their high status in society.  But it is not generating productive economic activity.  

It seems to me our tax cutting policies of the last 40 years have stood motivation on its head.  The 1954 Tax Code, with its high marginal rates discouraged what I would describe as frivolous earning and spending to encourage people to invest in real productive activity.  The 1954 tax code also had a provision called income averaging, so the people who were just making lots of money for the first time could average their income over the last five years for tax purposes.  This provided a ladder for people to get up to that position of comfort before the really high tax levels kicked in.   Income averaging disappeared with the Reagan tax cuts in the mid-1980's.

I think if we really want to rebuild an economy that works for everyone we need to start looking at high personal tax rates that kick in at some point on the income scale to make overbuilding your short term personal fortune less attractive than building long term investments.

The Problem Isn't God

For decades the Middle East has been full of dedicated warriors of God convinced God wants them to fight non-believers.   That mind-set has now developed to what is perhaps its logical conclusion.  ISIS, the self proclaimed Caliphate of the Levant, essentially kills or enslaves anyone who disagrees with them.

In India millions have been killed since the country achieved Independence as different religious sects wrap themselves in their religious beliefs and attack others with different beliefs.

In the US, for last couple decades politics has been dominated by people who believed God wanted them to punish homosexuals, even though their religion reveres the ultimate man of tolerance and peace.

The transparent injustice of people wrapping themselves in religious belief to judge and punish others causes some folks to reject the whole notion of God.  But the void left by the rejection of God is often replaced by other ideologies that, in the end become logic obsuring naked self interest.  ISIS is oddly reminiscent of the Kymer Rouge in Cambodia a couple decades ago, who slaughtered all those of who did not accept their rule in the name of communism, a doctrine that explicitly rejected God.

The problem isn't God, it is our hubris.  A basic truth is that we cannot know the exact nature of reality, we can only infer from what we can perceive about the world.  Even with Science we regularly see yesterdays truth superseded by a different and more nuanced reality.   But imprecision can spark indecision, so we follow leaders whose personalities reject imprecision by adopting a plan that creates rules for action.  God becomes the logic that fills the void to the personal advantage of the leader (and by association the like minded followers).  God becomes a tool for pushing those who are not us down for the benefit of us.

All the major religions have enjoyed periods of peace and tolerance.  But when times get tough our tendency to frame our view of God in a reflection of our own needs and desires produces persons impatient with inaction who rally others of like mind to political action, or violence.

Ironically, the most dedicated religious folk often reject the notion that Darwin described reality with his theory of evolution.  Then they adopt religious views that are in essence a reflection of Darwin's fundamental tenant, survival of the fittest.  Life is a battle and God is on our side, we are chosen to lord it over others.

If one believes the history of the evolution of human society reflects the influence of God it becomes obvious that whatever force it is that we call God favors, above all else, that we cherish and respect our differences, instead of using them as catalyst for battle.   Societies based in survival of the fittest among competing religious groups tend to foster turmoil and conflict, societies based in respect and cooperation tend to foster peace and prosperity.

Democracy is in one sense fundamentally consistent with the notion God favors respect and tolerance.   A functioning democracy requires a degree of respect and cooperation.  Like the proverbial canary in a coal mine, if democracy is wobbly, or cannot survive it is a reflection of the fact the society is still fragmented into groups in survival of the fittest mode.

Global Warming - Why We Won't Muster An Effective Response

One of the reasons I am operating from the assumption no significant response will happen to slow down global warming is because almost any response by individual countries will be ineffective if it isn't simultaneously adopted in every major industrial country in the world.  That won't happen due to the realities imposed by countries economically competing with one another.  An example is the proposed Carbon Tax intended to encourage a reduction in greenhouse gases.

Here's a hypothetical:

USA.Inc and China.Inc both manufacture widgets.  It costs both $1 to produce each widget.

The US imposes a carbon tax that adds $.05 per widget to USA.Inc's cost per widget.  The US also imposes a border tariff on incoming widgets of $.05 per widget, so USA.Inc and China.Inc, in theory, remain equally competitive within the US.

But USA.Inc is no longer competitive anywhere outside the US, because their fixed cost on every single widget they manufacture is now $1.05 and China.Inc's fixed cost per widget is $1.00.  So USA.Inc's market share outside the US will plummet, while their market share inside the US will remain static, so they will sell fewer widgets.  This undermines their economies of scale, over time driving their fixed costs per widget up even higher.  At the same time China.Inc's market share is rising, they may be experiencing greater economies of scale so their cost per widget may continue to come down over time.

USA.Inc won't just stand by and sink into bankruptcy.  Their only real solution will be to move their manufacturing facilities to another country so they don't have to pay the tax, and only pay the tariff on widgets sent to the US.

So the net effect of a unilateral carbon tax adoption by the US will be more US companies moving operations out of the country, fewer jobs in the US, and a slowed down economy, while boosting the economy of countries that are not addressing global warming.

If we adopt a carbon tax will other nations also adopt one out of the goodness of their heart or to avoid our tariff?  Short answer is No.  It is hard for me to imagine, for example, China's leadership, having suddenly been handed the gift of a huge industrial competitive advantage over wide swaths of US industry would upset that situation.  (Or our Congress doing anything if China suddenly made their industries less competitive).  They would take about it, and might eventually, dawdling around for 10 or 15 years to let their industries get thoroughly entrenched as market leaders, but by that time the damage to the US economy will be considerable, and probably very little will have been accomplished in reducing greenhouse gases.

So in essence to effectively address the problem we have to get much of the world to agree to the solution, simultaneously.   Will Russia, a oligarchy built on oil wealth, or any country whose political stability depends on selling petroleum to the rest of the world, jump on board?   Will teetering governments in developing countries who would have to tell their people they have to wait to achieved the access to stuff they see on electronic media be able to put the whole country on the path of delayed gratification?

I hope to be proved to be an excessively cynical old Grinch, but I put that hope in the same category as my hope to discover the fountain of eternal youth.   

A Republican Congress - Here we go again?

I don't consider myself particularly partisan or ideological, so whoever wins an election I am hoping for the best.  But I must admit having the Republicans take control of Congress (again), in light of the past history of Republican's controlling Congress, doesn't leave much room for optomism about a good result.

In the last 100 years this will be the fourth time Republicans have controlled both houses of Congress.  The first time was 14 years from 1919 to 1933.  The second time was short, one congressional session, from 1953 to 1955 when they rode into power on Ikes coattails.  The third time was the 12 years from 1995 to 2007.

Of course the long periods of time Republicans controlled Congress, 1919 to 1932 and 1995 to 2006 both ended with the US in two of the worst economic crisis in recent history.  The Great Depression and the Great Recession.  As I have noted previously when exploring the striking similarity between those two time periods, Republicans pursued similar policies with similar disasterous results.

However, the two year session from 1953 to 1955 does offer a little bit of hope.  They did manage to pass the 1954 Internal Revenue Code that was the rules of the game for the next 30 years of relative prosperity.  (Of course we did sink into a bad recession a little after the Democrats replaced them).  

But my cautious optomism is tempered by the differences between 2014 and 1953.  In 1953 Ike was the President.  As the hero of WW II Ike was enormously popular.  He was a moderate Republican, which coupled with his popularity and his inclination to compromise tempered the power of Conservatives in Congress.  Today, with Obama the President, the most hardline Republicans seem to control the agenda, and they seem to care more about crushing Obama than doing good things for the country.

I think back to a couple years ago, after the Fed's announcement of QE3, which was followed by a jump in the stock market, Republicans objected to QE3, sparking comments from some stock traders speculating that Republicans really did not want the country to succeed.  

The Republican objections were partly based on economic theory but mostly seem to rest in their current ideological fixation that Government is necessarily always bad and should never tinker in the markets.   My personal take is that Republicans would be offended by the suggestion they don't want the country to succeed, but from where I sit it appears they have a different idea of success for the country, coupled with a real attraction to simple, easy to understand ideology's so they don't have to deal with facts, which tend to be messy and difficult to sort out. 

In general Republicans represent the people who have done well the last couple decades.  A simple truth of psychology is that for most of us, when things are good, we resist change that moves away from the habits to which we have become accustomed.  This makes people tend to ignore facts that are inconvenient, and the older we get the more resistant we are to change. Two years ago a lot of people were noting that when the camera panned across the audience at the Republican Convention that chose Mitt the delegates were overwhelmingly white and older.  What we have been doing for the last 30 years has worked for them, so they don't want to change it, even if it hasn't worked so well for much of the country.

Another factor is a lot of Republicans work in the defense industry, which is partly why they have done so well personally the last 20 to 30 years, because for nearly 30 years we have been incurring debt primarily to fund our huge defense outlays.  It is very convenient for them to pretend that our deficit is a function of food stamps and welfare so they can ignore the fact we incurred most of our deficit by almost dollar for dollar increases in defense spending coupled with simultaneous tax cuts.

(That's not to suggest there aren't Democrats who aren't set in their ways, but the Republican party seems to rely much more on older folk than the Democrats.)

One of the big differences between the Great Depression and the Great Recession was the Great Recession never got near as bad as the Great Depression.  In part that was due to the GW Bush economic team steering him away from classic theories of Republicans that the markets will fix everything, and pushing him into initiating the (hold your nose) bank bailouts.  After the 1929 stock market crash, Herbert Hoover had three years left as President, and Republicans continued to control both houses of Congress for the next three years.  Hoover and the Republicans sat on their hands believing the markets would correct themselves.  By 1932 around 5000 banks had failed, unemployment was near 25%.  Franklin Roosevelt and the Democrats swept the Republican's aside and Republicans were really a minority party for the nearly 50 years, Democrats controlling both house of Congress for 24 straight years in the 50's, 60's and 70's.    It was very clear to most voters whose policies caused the Depression so Republican ideological arguments made little headway (there was even such a thing as a moderate Republican during those years). 

Unfortunately for the Democrats (and the country in my view) after the policy mistakes had been made and we were just beginning to slide into the Great Recession the Republicans began losing control when the Democrats won the house in 2006, and then in 2008 won both houses and the Presidency just as the bottom was completely falling out of the economy.  The Democrats in effect stepped in just in time to take the blame for the mess the Republicans created, at least in some voters minds.  That allowed Republicans to do nothing but obstruct for 6 years to make Democrats look bad, and their obstruction has now rewarded them with control of both houses of Congress again.

There may be some Karma at work here.  There are a lot of indicators that the recovery everyone has been expecting momentarily for the last 6 years is not only not arriving, but the US and world economy are probably going to get worse before they get better.  Maybe just in time for the Republicans to step into control of Congress and take some well deserved blame.

Global Warming - the Politics of Winners and Losers

Accepting the projected rise in sea levels of 216 feet in the next 100 years as at least a useful working number, here are some elevations for the seat of Government for various political entities.

California:  All but two of the major cities in California are at elevations below 216 feet.  Sacramento will be 150 feet under water.  Move the capitol to San Francisco or Los Angeles?  Both will also be largely inundated, as will Oakland, Stockton, Santa Rosa, Eureka, much of San Diego and Santa Barbara.  The only major cities that will not be underwater will be Fresno and Bakersfield.  California potentially has a big problem with rising sea levels.

The United States.   All the major cities on the Eastern Seaboard are barely above the current sea level.  A rise far less than the projected 216 feet will swallow up much of  Boston, New York, Baltimore, Washington DC and Coastal cities all the way down to Florida, a State almost entirely lower than 216 feet.   On the gulf New Orleans is already under threat, most of Louisiana will disappear, Shreveport will need dikes to survive.  Houston is at 50 feet above current sea level,  On the west coast Portland will be 50 feet under the inland bay that runs down the Willamette Valley, much of the greater Seattle area will be underwater.

Internationally:  Of our two greatest rivals in the last half century, Russia and China, Russia's seat of government is in no direct physical danger from rising sea levels.  Moscow is at about 550 feet above sea level.   Beijing on the other hand is about 150 to 200 feet above sea level, below the maximum projected rise of 216 feet.   London is only about 78 feet above the current sea level, Paris about 115 feet.  Berlin 112 feet.

Much of Central and South America will be relatively unaffected, the seats of Government for many countries are far up in the mountains.  Buenas Aires is only 82 feet however, while Brasilia, on the other hand is nearly 4000 feet.

So What?  So what does this suggest about how the world will respond to rising sea levels.  It seems to me that a lot of people are going to be desperate and angry as the sea level starts swallowing up their homes and businesses.  It is going to create enormous political unrest.  It would be a very difficult, potentially explosive time in the best of circumstances, but it will be exacerbated by the disruption of Government institutions being displaced.  It could be a time where what many of us hoped would be the rising tide of democracy will become a rising tide of militaristic despotism.

Ironically, Central and South America, whom the rest of the world has often viewed as one of the most politically unstable areas of the world, could become the worlds most politically stable areas, along with Central Asia.

Next:  Why we won't muster an effective response to global warming.