Category Archives: Politics

Income Tax in WA State

Economics, Politics
by Mike Clements

Many people say that income tax in WA state violates the state constitution. This is incorrect, but that doesn’t mean that proponents of the income tax can rejoice. They are also wrong. To understand this issue, one must first understand two parts of the state constitution:

Definition of Property

The WA state constitution defines property in a general way. It says, “The word ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.”

Clearly, people own their income so it is property as defined by the constitution. And for nearly 100 years, the state supreme court has ruled that this means what it says.

Limits on Property Taxes

The WA state constitution also requires that when property is taxed, the taxes must be uniform and no more than 1%.

Constitutionality of Income Tax

Income tax would be legal in WA state, under two conditions: the same uniform rate must apply to everyone and all income, and that rate cannot exceed 1%.

Of course, this is a poison pill for people who want higher taxes on “the rich”. Their proposed income tax violates both of these constitutional provisions. It is non-uniform, since it applies only to income above a certain threshold. And it is greater than 1%.

The Bigger Picture

The bigger picture is that in WA state, for several years government spending has been growing faster than the economy. In the long term, no amount of taxes can ever pay for that. Until the state gets spending under control – by “control” I mean government spending grows no faster than the economy – the state will go bankrupt no matter what tax policy they enact.

Not surprisingly, passing an income tax only encourages the legislators to spend even more – they’ve already identified additional spending for the revenue they expect from the income tax. And of course that estimated revenue is grossly inflated, which means they will spend more than the tax returns. So not only is the income tax unconstitutional as proposed, it will also make the state’s budget problems worse, not better.

In short, WA state has a spending problem, not a revenue problem. When the state cannot control its spending, giving it more money does not solve the problem, but only makes it worse.

The History

In the past, WA state acknowledged that the constitution must be amended in order to have a graduated income tax. And over the years, voters rejected these constitutional amendments several times: in 1934, 1936, 1938, 1942, 1970, and 1973.

Voters have also rejected multiple income tax ballot initiatives: in 1944, 1975, 1982 and 2010.

Now, the state wants to ignore and circumvent the constitution, prior supreme court decisions, and the will of the voters.

Ethics and Respecting the Law

Every legislator takes an oath of office stating they will uphold the state constitution (among other things). Thus proposing unconstitutional laws can be seen as violating their oath of office — they took an oath to uphold it, not to undermine it. If legislators believe that a graduated progressive income tax is good public policy, the ethical and legal way to pursue that is to first amend or change the state constitution. This is nothing more than what the WA state supreme court has said before.

IRA to Roth Conversions

Economics, Politics
by Mike Clements

Introduction

An IRA is a savings account with privileged tax status. There are essentially 2 kinds:

  • Traditional IRA: taxes are deferred. Contributions and growth are not taxed. Distributions are taxed as income.
  • Roth IRA: taxes are paid up front. Contributions are taxed as income (made from after-tax dollars). After this, no taxes are ever due again. Growth and distributions are not taxed.

Henceforth, the term “IRA” will mean a traditional IRA.

An IRA takes several forms (such as 401K) and anyone can contribute to them. A Roth is more restricted – people who make too much money cannot contribute to them.

A Roth conversion means moving money from an IRA to a Roth. Anyone can do this, at any age. Even if you are young enough that you would pay penalties for taking distributions from your IRA, those penalties don’t apply to Roth conversions. Even if you make too much money to contribute to a Roth, you can still convert IRA to Roth. For tax purposes, a Roth conversion is treated like any other IRA distribution: the money is taxed as income and adds to any other income you may have.

One important aspect of this discussion is the RMD: Required Minimum Distribution. Starting in your 70s, every year you must take distributions of around 4-5% of all of your IRAs, whether or not you need the money. This is how the government ensures they will get the taxes that have been deferred for years.

One might ask, “Why is this a problem, since you intended to use that money for retirement anyway?” And the answer may well be that it’s not a problem. Yet it may become a problem if you saved so much money that the RMDs force you to withdraw more than you need. And since it’s all income, due to progressive income brackets, taking a little more money than you need can mean paying a lot more taxes.

Why Convert?

Death and Taxes are inevitable and inescapable. Neither IRAs nor Roths are tax-free but they are taxed differently. People convert IRA to Roth for many reasons, but they all boil down to tax optimization in one form or another.

Multiplication is Commutative

Multiplication is commutative, so if your future tax rate is the same as today, there is no difference between a Roth and a traditional IRA.

Put mathematically, suppose you have

  • P = $100k, the princpal you have invested
  • G = 6%, the expected return on investment (CAGR = compound annual growth rate)
  • T = 15%, your expected tax rate
  • Y = 20, or number of years you are comparing

Then the future value of investments

  • The after-tax value of a traditional IRA is P x (1+G)^Y x (1-T)
  • The after-tax value of a Roth IRA is P x (1-T) x (1+G)^Y

All we have done is re-order the terms. Multiplication is commutative, so the result is the same:

  • IRA: 100,000 x 1.06^20 x .85 = $272,606.52
    • You invest $100k pre-tax, it grows at 6% for 20 years, afterward you pay 15% on it when you take it out.
  • Roth: 100,000 x .85 x 1.06^20 = $272,606.52
    • You pay tax on $100k and invest the remaining $85k, it grows at 6% for 20 years, afterward you take it out tax free.

Marginal Tax Rates

Every dollar converted to Roth is “income” on top of the normal expenses you are already paying, and the US income tax brackets are highly progressive. Thus Roth conversions are taxed at your marginal (highest) tax rate, and they can also kick you up into higher tax rates.

For example, your normal cost of living might put you in the 12% or 20% tax bracket. But that doesn’t mean you’ll pay that same rate on Roth conversions. They can kick you up to higher tax brackets unless you plan carefully and limit the amounts you convert.

Present vs. Future Value

The present future value of money is often ignored, but it is an important factor. Even if you pay the same dollar amount today vs in the future, it’s more expensive today.

This weakens the case for commutativity. If the tax is the same either way in absolute dollar terms, better to pay incrementally over the next 20 years, than pay up front today.

However, taxes work in percentages. Those future taxes are bigger amounts in absolute dollar terms even if they are the same percent of a bigger number. And vice versa: when you pay taxes up front with Roth, you pay on the money before it grows from investment so the same percentage is a smaller sum of money – you forego the earnings those taxes would make.

For example, consider the above commutativity analysis. The Roth has $15,000 in taxes while the  IRA has $48,107. It seems the Roth is far better with less than 1/3 the taxes. But the Roth taxes are paid up front while the IRA taxes are deferred for 20 years. That $15k grows to exactly $48,107 over 20 years. So these amounts are exactly equal considering the present vs. future value of money.

The overall impact is that Roth conversions are not as advantageous as they appear at first glance because the taxes are paid up front with present money. Even if you pay less in absolute dollar terms, they are “bigger” dollars worth more today than they would be in the future. Roth conversions still may be advantageous despite this (or not). To determine this, the comparison must consider the big picture with compounding interest and inflation.

Annual Average Tax Rate

Using annual average tax rates is misleading because the income amounts aren’t the same every year. To make it realistic you’d have to compute the income-weighted averages of each year.

Here’s an obvious example to illustrate the point: suppose you have an IRA worth $1M and your cost of living is $85k per year.

Case 1: you convert in a single year and due to progressive income tax brackets, this has an effective overall tax rate of 30% or $300k. This leaves $700k remaining which will last for just over 8 years. Your tax rate is 30% in the first year then zero for the next 7 years. The average of (30, 0, 0, 0, 0, 0, 0, 0) is 30 / 8 or 3.75%. But you paid the 30% on a huge amount ($1M), and the 0% on only $85k each year.

Case 2: you take $100k per year paying 15% on it. It’s only 15% instead of the 30% above because income tax brackets are progressive and this is a smaller amount. That’s 15% every year, so your annual average tax rate is 15%. That’s 4 times higher than the above 3.75%! But it’s applied to smaller amounts so you actually pay less tax and keep more of your money. After 8 years you still have $200k or just over 2 years of money remaining. Even though your annual average tax rate was much higher, your actual taxes were lower and your money lasted a few years longer.

If you compute the income-weighted annual average tax rate, it is the same as computing the total tax paid: $300k versus $150k. This is on the same total amount, so you doubled your taxes by converting all at once. And due to present vs. future value it’s even worse than that, since you paid $300k up front to avoid paying $150k over 10 years.

Total Value vs. After-Tax Value

The total value of IRA vs Roth accounts is often compared, which is misleading because it is the after-tax value of accounts that matters. This applies not only to you during your lifetime, but also to those who will inherit your money.

Simply put, if you have $1M in a traditional IRA, it’s not entirely yours. The government owns a portion of it through taxes. If you have $1M in a Roth IRA it is entirely yours and thus worth more. Of course, it cost you more to get $1M into a Roth than $1M into an IRA, since you paid the taxes up front.

People who inherit an IRA typically have 10 years to liquidate the account and pay income taxes on it. If your inheritors are adult children, they may be in the same or higher tax bracket than you are, and thus pay more taxes on that money than you would have.

Taxes are Interconnected and Complex

Our tax system is so complex and parts of it are so ambiguous, even accountants, lawyers and the IRS sometimes disagree on what it means. The cynical among us would say this complexity and ambiguity is a “feature” not a “bug”, as it gives the IRS flexibility in interpretation for selective enforcement or to bully or threaten taxpayers. However, one doesn’t have to be cynical to understand that the tax code is complex enough to make it difficult even to comply, let alone to optimize.

Income tax brackets are progressive, and other kinds of taxes such as Social Security, Medicare and long term capital gains have different rates that depend on each other, based on several different definitions of AGI (adjusted gross income) and MAGI (Modified AGI). Furthermore, some investments have returns that are impossible to predict, and even if you could predict them you still couldn’t predict how they impact your taxes.

For example, suppose you own shares of an index fund in a brokerage account. That fund has capital gain distributions that depend on turnover within the fund to track the index. This level of turnover depends on how different stocks increase or decrease in value which is unpredictable. And whether those gains are long or short term is also unpredictable. Furthermore, some of the stocks in the fund’s index pay dividends. The balance of funds changes, and companies change their dividend payments, so you can’t predict how much dividends you will get. And you can’t predict how much of those dividends are qualified (thus taxed as capital gains) or non-qualified (thus taxed as income).

Another example: you decide to do Roth conversions to fill the 22% tax bracket, which in 2025 has an upper limit of $206,700. Due to the standard deduction of about $30k, you actually take $236,700 to hit that limit. But that’s above the Medicare IRMAA threshold, so it triggers more taxes there. And you were meeting your cost of living by selling taxable brokerage investments, which would have had no tax because your income would have been below $100k after deductions, but the Roth conversions raised your income so now you owe 15% on those. But wait, the dividends on your brokerage account took your MAGI high enough that you also pay the NIIT of 3.8%. And because your income is so high, you also end up paying taxes on your Social Security. That’s 4 nasty surprises springing from not understanding the interconnected complexity of our tax code. The Roth conversion you think is optimal may trigger a “tax tornado” that makes it counterproductive.

Another fact: if you’re younger than 59 1/2, you pay a penalty for any IRA withdrawals that you don’t transfer into a Roth. This means if you withhold taxes from the IRA distribution that you convert, you’ll pay a penalty on that portion of it! For example, suppose you convert $10k in the 20% tax bracket. You’ll owe $2,000 in taxes. If you take $12,500 from the IRA to put $10k into a Roth and withhold the remaining $2,500 (send it to the IRS), they will charge you a $250 penalty, which is 10% of the amount you took out of the IRA and didn’t put into a Roth. The only reason you didn’t put that $2,500 into a Roth is because you sent it to the IRS, but they don’t care and that doesn’t matter. The better way to do this is take only $10k from the IRA and convert to the Roth, then pay the $2,000 tax from other funds. This saves you $750!

What makes matters worse is that many of the tools people use to plan retirement don’t account for all of this complexity, so they end up making bad suggestions, usually erring on the side of conversions that are too big and trigger nasty tax surprises.

Decisions and Scenarios

Due to the above factors, some people make ill-advised or sub-optimal Roth conversion decisions.

Some Roth conversion scenarios are easy no-brainer decisions:

  • You are certain that your taxes today are lower than they will be later.
  • There are several variations of this, and here is a common one: You retire early and live from after-tax investments. For the next few years, you have no “income”, but only long term capital gains, which are taxed at lower rates, and you could have a zero tax bill. You know that you will have “income” in the future, whether you want it or not – Social Security, RMDs, pensions. That income stream will raise your tax rates so now is the time to convert IRA to Roth while you’re in the lowest tax bracket.

Some Roth conversion scenarios are more speculative or subjective.

  • You believe that tax rates must inevitably increase in the future, due to today’s historically high levels of government debt.
  • You want your inheritors to get your estate free and clear, without burdening them with taxes that may be even higher than you would have paid if you had lived longer.
  • You want the satisfaction or confidence of knowing your future retirement will be tax-free and you’re willing to pay up front for this even if it ultimately costs you more.

Some Roth conversion scenarios are just a bad idea:

  • If your entire savings is in IRA accounts, you have little to gain and much to lose from Roth conversions.
    • While working, any amounts you convert add on top of your salary and are taxed at the highest marginal rates – higher than you’d pay if taking those distributions in retirement.
    • After you retire, any amounts you convert add on top of whatever you take to meet your cost of living, so the same applies – it’s like inflicting RMDs on yourself early and unnecessarily.

Conclusion

Roth conversions can be a useful tool to reduce taxes but they aren’t for everyone. Getting it wrong can can trigger a tax tornado. It seems to me that everyone is talking about Roth conversions, but they are rarely beneficial for most people. Before making Roth conversions, don’t make some of the common mistakes mentioned above, but do make sure you understand your reasons for doing it and the full tax implications across all sources of income.

The 2nd Amendment, Round 3

Politics
by Mike Clements

Round 1 was DC v Heller, in which the SCOTUS found that the 2nd amendment means what it says. It guarantees a civil right of the people, like the rest of the Bill of Rights.

Round 2 was MacDonald v Chicago, in which the SCOTUS incorporated the 2nd amendment, making it binding on states and local government. This gave it parity with the rest of the Bill of Rights.

Round 3 (New York Rifle & Pistol v Bruen) is happening today at the SCOTUS. It is about how much this civil right can be regulated for public safety, without infringing the civil rights of gun owners.

First, let’s cover the notion of whether public carry is covered by the 2nd amendment. The 2nd amendment says, “the right to keep and bear arms”. Keeping is in your house. Bearing is on your person in public. One of the material questions of this case (New York Rifle & Pistol v Bruen) is whether this means what it says, in simple plain language.

Update: Thu 6/23: The SCOTUS decision is released, and says yes, the 2nd amendment means what it says.

Most states have laws that require people to get a permit before they can carry firearms in public. This kind of regulation is entirely lawful and reasonable, as it protects the public from criminals, the insane, and others who cannot exercise this right responsibly, and would be a danger to others. The point of contention is that in New York, California, and a few other states, the permits are “may issue”. This means state or local authorities have discretion to grant, or deny, a permit for any reason, or for no reason. In other states, like WA, FL, AZ etc. the permit process is “shall issue”. This means they define disqualifying criteria in writing, local authorities have no discretion, every person “shall” be issued a permit unless a disqualifying criteria applies. Furthermore, some of the states (like NY) require a permit applicant to show “proper cause” why he wants to carry a gun in public.

The 2nd Amendment is a civil right, not a privilege. If we have to show “proper cause” to get permission to do something, and local authorities can deny it for any reason, then it is a privilege, not a right. The government cannot ask us to show “proper cause” before we can exercise our right to free speech, to worship the religion of our choice, to peaceably assemble, or any other civil right. The 2nd amendment is no exception.

The argument from the anti-gun perspective is that every locality must have the power to regulate public safety in the way they see best. This is true, yet their case does not follow. They do have the power to regulate this right, but they do not have the power to use regulation as a pretext to rescind it.

  1. No regulation can violate people’s civil rights, even if it achieves a public or social benefit. A local law allowing police to search anyone on the street without cause or suspicion might reduce crime. But local governments do not have the power to do this because it violates people’s civil rights.
  2. State and local governments do have the power to regulate the right for people to carry guns in public. But they must do it in a way that is consistent, treats everyone the same way, and preserves the civil rights of every-day law abiding people.

So how can New York, California and other states make their carry laws constitutional?

  1. Switch from “may issue” to “shall issue”. Local authorities do not have discretion, but follow written law.
  2. Eliminate “proper cause” as a requirement for public carry permits. It is inherently subjective and restrictive, weakening the right to carry into a mere privilege.
  3. Disqualifying criteria must be objective and define the exceptions, not the norm. Criminal or violent history, mental instability or insanity, under age, etc.
  4. Places designated as “sensitive” or “no carry” zones must be objective and define the exceptions, not the norm. Jails, courthouses, etc. Not the places that people go every day.
  5. Many states have requirements for training. These are constitutional, as long as the training is not burdensome and is accessible to any applicant.

Social Media and Section 230

Politics, Tech
by Mike Clements

Section 230 refers to US Code, Title 47, Chapter 5, Subchapter II, Part 1, Section 230. This is an important part of federal law that essentially says two things:

  1. (c) (1) No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.
  2. (c) (2) No provider or user of an interactive computer service shall be held liable on account of any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected.

Part (1) makes internet social media possible. Without it, companies could be prosecuted (criminally or civilly) or held responsible for the content their users publish. No company could risk that liability, so it would destroy social media as we know it.

Part (2) enables companies to filter or censor content without losing their liability protection granted by part (1). Without it, internet social media could become a cesspool of illegal and offensive material. You think it’s bad today? Just imagine if part (2) didn’t exist!

The $64,000 question: what exactly does part (2) protect? That is, how much filtering can companies apply before they lose their liability protection?

Surely, if they use too heavy a hand, cherry picking only certain kinds of content, they are effectively defining the platform’s content and it is “user-generated” in name only. The platform no longer represents the views of users, but of the platform owners themselves. For example, 3 months before an election they suppress all content promoting candidate A and allow only content promoting candidate B. In this case, for all practical purposes they have become the content publisher and should lose their part (1) liability protection. Clearly, part (2) was never intended to allow this.

If, on the other hand, they use too light a hand, then they lose control of their platform. It would be impossible to create certain types of socially beneficial spaces, whether family friendly, or forums for discussing religious, political, personal, economic or other sensitive yet important and relevant topics. Section 230 specifically allows filtering and censorship for this purpose.

The problem with today’s discussion about section 230 is that it is treated as an all or nothing thing. Either section 230 allows any amount of filtering and censorship (ignoring its own words that it is limited), or section 230 should be rescinded entirely. In my view, these views are both wrong. Section 230 is necessary and beneficial. Deciding exactly how far part (2) goes in allowing filtering and censorship is messy hard work whose outcome will never please everyone. But real-world application of law is never clean or easy, and Section 230 is important enough that this work is worth doing.

Survey Bias

Economics, Politics
by Mike Clements

With Census 2020 coming around, the topic of survey bias will certainly arise. Drafting neutral surveys free of bias requires understanding in several disciplines from math, to language, psychology, demographics, and a quite a bit of experience & judgement. Here are some of the more obvious forms.

Sample Bias

People living in the same neighborhoods have some common demographics and common opinions on certain topics. This also applies in the virtual world: people who visit certain web sites (say, New York Times, Wired, and Wall Street Journal).

Sometimes sample bias can be unintentional and subtle. The people you surveyed had something in common that you didn’t know about.

Framing Effect Bias

People respond differently to questions depending on how you ask them or “frame” the question. This is one of the most important biases.

For example, 93% of students registered early when a late penalty fee was assessed. But only 67% registered early when the fee was called a discount for early registration.

Another example: suppose 600 people have a deadly disease. Treatment A is predicted to result in 400 deaths. Treatment B is 33% likely to have no deaths, but 67% likely for all 600 to die.

When framed positively: A saves 200 lives, and B has a 33% chance of saving all 600, and 67% chance to save nobody.
Here, A was preferred by 72% of people.

When framed negatively: With A, 400 people will die. B has a 33% chance that nobody will die, and a 67% chance that all 600 die.
Here, A was preferred by 22% of people.

In the long term, outcomes from A and B are the same. Yet how the question is framed made a huge difference in which people preferred.

Response (and non-Response) Bias

This is similar to sample bias. Different people have different rates of response to your survey. Here, you can get burned either way. If you sample every group at the same rate, the uneven response rates can bias your data. If you sample groups at different rates, you can introduce a new bias. Eliminating this kind of bias requires measuring the different response rates and carefully targeting your sampling.

Question Order Bias

The answers people give to early questions influence how they answer later questions. Thus, questions can be ordered to lead people to answer later questions in certain ways. In multiple choice surveys, this also applies to the order in which each question’s potential answers are provided.

Gun Culture: NYT Op-Ed

Politics
by Mike Clements

Today the NYT published an Op-Ed by David Joy. I enjoyed reading it and share some of his observations. About 3/4 of the way through he suggests an AR-15 is somehow different from other rifles in the store, saying, “the idea of owning a rifle designed for engaging human targets out to 600 meters just never interested me.” He asks a friend why he owns an AR-15 and is unsatisfied with his friend’s response. Here is mine.

First, David’s belief that the AR-15 is somehow different from other rifles in the store, is not justified by the facts.  The AR-15 is a semi-automatic .223 caliber rifle. It is less powerful than most common .30 caliber rifles, like the Savage .308 David uses to hunt deer. These more powerful semi-auto rifles are just as accurate, often have longer range and are commonly used for sport, hunting and self defense.

Second, David mis-characterizes the AR-15 when he describes it as “a rifle designed for engaging human targets out to 600 meters”. For engaging human targets out to 600 meters, look at what military snipers use. They use a rifle that is more powerful, more accurate, and has longer range than an AR-15. This rifle is the M-24, which is a .30 caliber bolt action Remington Model 700 with a 5 round capacity, the same kind of rifle your Grandpa carried through woods, still carried by thousands of hunters across the USA. Later, Army snipers switched to the M2010, which is another .30 caliber bolt action rifle with a 5 round magazine.

In short, according to the US Army, a rifle like David’s Savage .308 is more effective than an AR-15 at “engaging human targets out to 600 meters”. But that’s not a fair comparison; the Army doesn’t even use the AR-15.

People who don’t know much about guns believe, incorrectly, that the AR-15 is a military rifle. They believe this primarily for cosmetic reasons. Instead of steel and wood, it is black with lots of plastic and resembles the M-16 that US soldiers carry. Yet it is unusual to see an experienced gun owner like David make this mistake. The military M-16 is not an AR-15. The M-16 can fire in full automatic mode (a machine gun) which has been strictly regulated since 1934. The AR-15 fires one bullet each time you pull the trigger.

So when David says, “My friends see no difference between the guns I own and their ARs,” this should come as no surprise. The only material difference is magazine capacity.

To David’s final point, there are several good reasons to oppose an assault-weapons ban.

  1. The term “assault weapon” is pure fiction. They’re not machine guns; those have already been virtually banned since 1934. The guns named as “assault weapons” are based mainly on cosmetic features; they’re not functionally different from common sporting and hunting rifles.
  2. The AR-15 magazine holds 30 rounds. This is more than most other rifles in common use and makes it the only functional difference between the AR-15 and these other rifles. It is worth debating whether restricting such high capacity magazines might reduce crime or improve public safety. Yet our country has already had this debate, and more; see below.
  3. The Federal Govt banned “assault weapons” for 10 years, from 1994 to 2004. This included a ban on magazines in any firearm holding more than 10 rounds. Serious academics (such as the National Academy of Sciences) and the Dept. of Justice comprehensively studied the law and found it had no effect on crime, accidents, suicide or public safety.

In short, an assault weapons ban has already been tried, studied, and found to be ineffective. And the reason why is obvious: true “assault weapons” — machine guns — are already banned and have been since 1934.

Note: I don’t own an AR-15 simply because I find other guns to be more useful for sport, hunting or self defense. However, having used one, I don’t believe there is anything about it that makes it more dangerous than other rifles in common use today. I don’t see the AR-15 as a sign of a rift in gun attitudes or culture. The gun owners I know are responsible citizens, whatever kind of rifles they prefer.

Honoring our Past

Politics
by Mike Clements

Sometimes both sides are wrong – people do things for the wrong reasons, yet those who protest the action miss the point and oppose it for the wrong reasons.

I find this to be the case in the recent kerfuffle about removing the statue of Robert E. Lee in Charlottesville. Lee is an important figure in our country’s history. We can honor him and the role he played as leader of the Confederacy military, without honoring, indeed while rejecting, the shameful practice of slavery.

We are all human, every person has flaws. Thomas Jefferson owned slaves. But nobody protests the Jefferson Memorial claiming it honors slavery. It honors Jefferson’s achievements and his role in our history. If perfection is the standard, if we judge people by their mistakes rather than their achievements, we’ll have to tear down all the monuments. Also, it is better to openly acknowledge our past and honor those who played a major role in it, even when difficult or uncomfortable, than to whitewash it with political correctness. Those who don’t understand and acknowledge history are doomed to repeat it.

In short, in removing the statue the city did the wrong thing for the right reasons.

However, many of the people protesting the removal of the Lee statue are racists (I’m not casting aspersions, many openly self-acknowledge this) for whom the Lee statue represented not his important role in our history, but the legacy of slavery. These misguided people want to unwind decades of social progress, hard-earned over the backs and blood of brave people who stood up and changed things for the better. It is difficult to take the same side as these racists. But taking the same side does not mean agreeing with them. Indeed, I reject their views as backward and hateful. They took the right side of the issue completely accidentally, for the wrong reasons. But that makes it hard to defend the position since it has been tainted by their association.

In short, in protesting the statue removal they they do the right thing for the wrong reasons.

Thinking: Static vs. Dynamic

Economics, Politics
by Mike Clements

The concept of static vs. dynamic thinking is a useful contrast. Much of the foundation of our world-view perspective depends on it. As I discuss the key differences it may bring some political, economic, and social schools of thought to mind.

Static Thinking

Static thinking is zero-sum. For every winner there must be a loser. The pie is fixed in size, there’s only so much of it. Competition is each person scrambling to gather for himself the most he can, leaving less for others.

Static thinking is Malthusian. Each extra person is that much more drain on our resources: water, space, food. It focuses on costs, not benefits.

Static thinking is risk-averse. It follows the precautionary principle, which is non-scientific because in avoiding harm, it takes status quo for granted, failing to weigh the harm of inaction.

Static thinking is dogmatic. Taking status quo for granted with fixed values shuts out alternative perspectives and scenarios. It leads to the naive arrogance (or fatal conceit) that complex systems can be centrally manipulated and optimized.

Dynamic Thinking

Dynamic thinking is positive-sum. Winners win by creating something new, growing the pie. Competition is each person finding new ways to contribute, each creating more overall.

Dynamic thinking is Boserupian. Every limitation creates the incentives to overcome it. Necessity is the mother of innovation. Ingenuity outpaces demand. Each extra person increases the potential for the next big idea.

Dynamic thinking is opportunity seeking. It is scientific optimism: taking calculated risks weighted against benefits using available knowledge.

Dynamic thinking is idealistic. Applied to methods as well as to goals, it encourages thinking outside the box about what is possible. Yet dynamic thinking tempers this idealism with respect for the limits of knowledge that comes from realizing that well-functioning complex systems, both physical and social, are decentralized.

Net Neutrality is Misguided

Economics, Politics, Tech
by Mike Clements

This article in Tech Crunch sums the argument in favor of Net Neutrality:
https://techcrunch.com/2017/05/17/defend-net-neutrality/

Everyone agrees on the end: we want an open internet. But there’s more than one means to that end. We disagree on the means, not the end. The Senate Democrat perspective assumes that ISP companies will infringe the speech of their customers or restrict their traffic flow, unless government regulators prevent this. So they conclude we must grant government this new power.

This perspective is misguided in two ways. First, it assumes new government powers are the only way to prevent ISP companies from restricting content or traffic flow in ways that harm consumers. Second, it ignores the risk and cost of these new government powers.

These assumptions are based on an idealistic perspective of government. This can be seen in some of the comments from proponents of Net Neutrality, like “its [the FTC] effectiveness may be a matter of opinion, but count on it: we’re better off with the FTC than without it”, or “that meant more paperwork to be sure, but consumers were safer”. This idealistic perspective ignores that fact that government agencies are just another type of large corporation, having their own self-perpetuating motives and are often used by entrenched companies to create barriers to competition & service that harm consumers in the name of “protection” and “safety”.

This highlights two nearly opposite alternatives to achieve the common goal of an open internet: regulation versus competition.

Net Neutrality regulation means rules controlling how to handle data content and movement. These rules must go through multiple approvals and public comment. They are necessarily reactionary and lag technology and innovation. They are also detailed and complex by nature. This attracts rent seeking and lobbying for loopholes by big entrenched companies, which makes the rules even more complex and inefficient, weaponizing the rules against competitors and hiding this fact under layers of complexity. This increases the complexity and cost of doing business, which reduces innovation, rewards established companies and deters new providers from entering the market. That means higher prices and less consumer choice.

For one example, consider T-Mobile’s zero-rating video data. Most of their customers loved this service, and the ones who didn’t could opt out at no charge. Yet providing this service got T-Mobile hauled in front of the FCC to explain themselves to regulators. They were exonerated, but this positive outcome was not preordained. It cost them thousands to defend themselves and they could have been subjected to service prohibitions and massive fines. When ISPs get hauled in front of the FCC to testify every time they do something regulators (or their competitors!) didn’t anticipate, say goodbye to innovation.

An example the Senate Democrats use is “fast lanes” vs. “slow lanes”. This is a red herring. Some kinds of traffic, like video, consume far more bandwidth than others. For the internet to function properly, these different kinds of traffic must be handled and routed differently. In short, there already are “fast lanes” and “slow lanes” —  it’s a technical necessity. The question is how we pay for them. Blanket rules like Net Neutrality risk creating a tragedy of the commons, where everyone uses bandwidth but nobody invests in developing it, or forces everyone else to pay the costs of heavy bandwidth users, which encourages over-consumption, reducing quality of service for everyone.

Yet the Senate Democrats do have a certain logic. With only a handful of monolithic ISP companies, there is no real competition thus in its absence some form of regulation like Net Neutrality becomes necessary. However, as citizens and consumers, we should not accept the inevitability of having only a handful of monolithic ISP companies. And we surely should not pass new regulations like Net Neutrality that will promote and lock in this dystopian future. Net Neturality is self-actuating and self-perpetuating. It creates and exacerbates the very problems it intends to prevent, as it purports to solve them.

In short, it is naive to believe:

  • That Net Neutrality regulations will stay ahead of fast-changing technology and creative interpretation by ISP companies.
  • That a big federal bureaucracy will make better decisions about how to allocate bandwidth and handle traffic, than ISPs directly negotiating with each other and seeking customers.
  • That Net Neutrality rules will be immune from rent-seeking, carved-out loopholes and other forms of regulatory capture by the biggest entrenched companies.
  • That these complex rules won’t raise the cost of business, restricting innovation, competition, and consumer choice.

Consider the alternative that the Senate Democrats ignored: competition. With competition, if one provider does something you don’t like, vote with your wallet and switch. You can switch at any time, for any reason: terms, privacy, cost, etc. Your vote hits the ISP where it counts: financially. Complex rules don’t bother them or protect you; their lawyers and lobbyists are better than yours, and are helping draft those rules.

Under competition, the rules we need are simple: prohibit fraud and establish property rights for access. There is no need for complex rules micro-managing data content and movement. This reduces rent-seeking and lobbying and keeps the cost of doing business low. Without complex rules dictating how to run their business, companies are free to innovate in technology and service to differentiate themselves, much like T-Mobile did for telecom.

But this works only under real competition. That means every person has a choice of several providers (not just two, a duopoly is not a market) and can switch between them quickly, easily, and cheaply. Unfortunately, we don’t have this in the USA. Why not? Primarily because multiple layers (local, state, federal) of complex regulations lock in existing ISPs and make it expensive for new companies. The reason some ISPs get away with bad behavior, like famously bad customer service and high prices, is because their customers have no alternative. Over-regulation protects them from competition. Adding even more more layers of regulation (e.g. Net Neutrality) will fix this like throwing gasoline on a fire.

To a large extent, the problem is local, not federal. Many of the restrictions that make it expensive and time-consuming for ISPs to compete are municipal and local rules and regulations about property access. Comcast and phone companies like CenturyLink love this – they’re already in there and the rules block competitors from entering the market. Net Neutrality does nothing to address this. It just adds even more regulation at the federal level.

Far better to address the root cause. Unwind the layers of regulations and municipal property access rules that lock in ISP companies and block competition. ISPs already are too much like utilities. This is the problem, not the solution.

Thoughts on the Dark Forest

Economics, Politics, Tech
by Mike Clements

I recently read Cixin Liu’s Three Body Problem and Dark Forest. This blog entry is a spoiler, so you may want to stop reading this if you plan to read these books.

Fermi’s Paradox is a key concept and plot element, particularly one explanation for it called the Dark Forest, tied to character Luo Ji’s axioms of life in the universe:

  1. Life’s goal is to survive
  2. Resources (matter & energy) in the universe are finite
  3. We can never be sure of alien life’s true intentions
  4. Distances between stars impair communication

Conclusion: (3) and (4) create a chain of suspicion making conflict inevitable.

I am not convinced. This is fixed-mindset, zero-sum thinking, similar to the flawed economic thinking behind Malthusian doomsday predictions and protectionist trade policies here on Earth. The above rules are not unique to outer space. The same could be said of different cultures here on Earth – every man presents a threat to all others as they must compete to secure the limited means of survival, leading to inevitable conflict. During some historical periods – primarily in pre-agricultural tribal societies – this was true. Yet today it is false. We have Human societies of size, complexity and interdependency that would be unimaginable to prior generations. Why?

Two key factors. First, the increased productivity of division of labor. Second (and a part of the first), Ricardo’s theory of Comparative Advantage. It was not love or enlightenment that caused Humans to stop fighting each other over the limited resources Nature provided (as animals do), and instead cooperate to create new resources making everyone better off. It was recognition of these fundamental economic facts.

The same applies to space exploration, even more so. Cixin Liu misses this point entirely and falls for the simplistic zero-sum thinking that has duped many before him. Items 1-4 are true, yet the conclusion does not necessarily follow. He’s missing an important 5th axiom: The potential benefits of cooperating with alien life are so tremendous they cannot be measured. When balanced against risks (3) and (4), conflict is no longer inevitable. The result may end in conflict or cooperation, depending on the situation.