Archive for April 2010
You hear about “moral hazard” a lot when people are talking about finance. It’s an interesting topic, currently being (somewhat contentiously) edited on Wikipedia.
The less contentious part of the article consists of the opening paragraphs:
Moral hazard is a special case of information asymmetry, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.
Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully than it alternately would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.
Okay, here’s the interesting bit, to me. Fiscal conservatives often cite moral hazard as a reason against government intervention in the economy. On the face of it, it’s certainly a plausible theory, although I’ve never seen convincing evidence that moral hazard itself is actually a pervasive cause of risk taking. Standard disclaimer, I’m not an economist, so I can hardly claim to be well read in the literature.
However, something I’ve never heard a fiscal conservative mention is that the entire concept of a corporation is fraught with moral hazard. There’s a reason a corporation is a distinct entity from a partnership, it enables the investors to absolve themselves of some of the liability involved with doing business.
If you’re really all a-fired convinced that moral hazard is such a horrible concept, why aren’t you for the dissolution of the corporation and the limited liability company as legal entities, and a change to partnerships or sole proprietorship businesses as the only legal business entities?
Sure, it would murder our GDP, destroy the entire mechanism of the 401k and 403b as retirement vehicles, result in a complete destruction of Wall Street (hm, that could be argued as a plus, there), put a severe damper on liquidity… all of those things are pretty bad outcomes for economic growth. So I suppose that one can make the case that moral hazard has some place in our economy, right? Sometimes, amortizing risk across a population increases risk taking, but innovation is a risky thing and we like and benefit from real innovation, so maybe subsidizing this can sometimes be justified?
So if that’s the case, can we at least come up with some other substantive objection to government intervention in the economy as a main talking point? Allow me to digress into non-finance related current affairs. Indulge me, for a moment.
Taxpayers are likely going to be paying for a substantial portion of the cleanup of the Deepwater Horizon. That’s a GAO PDF link in the middle, there. See, when the Exxon Valdez spill occurred (ostensibly to prevent oil companies from being sued into oblivion and/or remove the economic externality of an oil spill depending upon the degree of your pro- or anti-business stance), the government passed the Oil Pollution Act of 1990. A tax was imposed on each barrel of oil, and the funds were deposited in a cleanup account. Then liability limits were set on each type of vessel that might spring a leak, and if a spill occurred, the oil company owning the vessel only had to pay up to the limit of liability, the rest was covered by the fund.
Hm, doesn’t that create a moral hazard scenario? We limit liability for each individual corporation, and if the amount of a spill exceeds what we have available in the cleanup fund, well, who is going to pay for that, I wonder? Certainly not the corporation, it’s been absolved.
Hey, who was President in 1990, again? Well, that’s not entirely fair, those pesky Democrats were in charge of Congress. I’m sure that the Republicans fought tooth and nail to prevent such a horrid piece of government intervention in the marketplace. I didn’t know Congress was so lopsided in 1990, only 5 Republicans in the House and none in the Senate? Amazing. One would have thought the numbers were more balanced!
From that GAO report:
A catastrophic spill could strain the Fund’s resources: Since the 1989 Exxon Valdez spill, which was the impetus for authorizing the Fund’s usage, no oil spill has come close to matching its costs.42 Cleanup costs for the Exxon Valdez alone totaled about $2.2 billion, according to the vessel’s owner. By comparison, the 51 major oil spills since 1990 cost, in total, between $860 million and $1.1 billion. The Fund is currently authorized to pay out a maximum of $1 billion on a single spill. Although the Fund has been successful thus far in covering costs that responsible parties did not pay, it may not be sufficient to pay such costs for a spill that has catastrophic consequences
One of the reasons that the Fund might not be sufficient to pay such costs? From 1994 to 2005, our delightful Congressional representatives did not collect the tax that put money into the fund. Say, who held majorities in Congress from 1994 to 2005?
If this spill, or any other spill in the near future, exceeds the ability of the fund to clean it up, would you care to make a small wager as to what will be said on Meet the Press or Face the Nation by the Republican representative the next week? Undoubtedly something about the government being incompetent and being incapable of handling this sort of thing.
Now there is a moral hazard for you, ladies and gentlemen of the taxpaying public. You don’t hold your elected officials responsible for the votes they cast. You don’t stand up for your principles, and write your congressperson and tell them when they’re blatantly going back on funding the services that you asked them to create.
To be fair, I’m pounding a lot on Republicans in this post, and I do believe that the idea of moral hazard has some weight and ought to be considered. However, it seems obvious to me that moral hazard is a rhetorical weapon used only when it is convenient, and I for one am really tired of hearing it trotted out right now…
NASA Goddard has a flickr stream, and this photo is actually a picture of the Earth. It’s grainy and small, so why so cool? Because it was taken from the surface of Mars.
The good doctor is in the news, with a quote apparently taken from his new Discovery show:
He suggests that aliens might simply raid Earth for its resources and then move on: “We only have to look at ourselves to see how intelligent life might develop into something we wouldn’t want to meet. I imagine they might exist in massive ships, having used up all the resources from their home planet. Such advanced aliens would perhaps become nomads, looking to conquer and colonise whatever planets they can reach.”
Of course, several bloggers the world round have weighed in with various positions.
Let’s look at this from a resource management view. Any alien race which has the need to raid to sustain its resource consumption would probably be better off gathering supplies from celestial bodies other than our own little ball of dirt.
The first reason for this is that our ball of dirt actually isn’t so little. Any resource that you want to gather from the Earth’s surface and schlep up into some sort of mothership in orbit requires you to break the gravity well of the Earth. This is not cheap, at least, not using any sort of engine that requires reaction mass.
You need hydrocarbons? Get them from Titan, which has much less of a gravity well than Earth’s and oceans of hydrocarbons. The asteroid field has lots of nice loose chunks of industrial metals and would be far easier to mine than the Earth’s crust for anybody that has the capability of interstellar travel (it’s very nearly easier for us, and we don’t even have interstellar travel). Earth trumps all the local system bodies for liquid water supplies, that’s certainly true, but Triton and Charon both have water ice on them, they’re farther away from the gravity well of the Sun. This makes them easier to get to from outside the solar system (and away from, assuming your nomadic reavers are actually nomadic).
You have to get the supplies up onto the ship, and that takes some sort of energy, presumably. Even the heavy elements like thorium and uranium are present elsewhere in the solar system.
On the other hand, if your technology is advanced enough for interstellar travel, you might not care about reaction mass… but if you don’t care about reaction mass, you probably don’t need to raid planetary bodies for supplies. Whatever your technology looks like, you’re capable of violating a few of our understood laws of physics.
It’s likely that anybody that might want to drop by for a visit has to be some distance away… where “some distance” == “really, really far”. There’s only so many candidates for likely life-supporting environments within 50 light years of our little ball of iron (and of course, it goes without saying that if your lifeform isn’t sufficiently like ours, you probably don’t regard liquid water as a necessary resource).
I dunno, Professor, I’m thinking that the likelihood of roving bands of aliens is pretty far-fetched, logistically speaking.
I’m not quite happy with this post, but I’m throwing it up anyway because I haven’t posted in a while, and I might be able to make this into something usable with feedback. Please, rip me one in the comments 😉
Safety engineers engage in the practice of failure mode and effects analysis. Basically, they look at life-safety systems, analyze them to find what sorts of faults may occur, what the results of those faults may be, and how to mitigate them. Engineers also practice risk analysis, attempting to identify weak points in a project schedule so that they can compensate for potential problems (manpower shortages or delivery issues, etc.) Business people do essentially the same thing, which they also call risk analysis, although the emphasis is more on cost/benefit or ROI instead of “can we get this thing done”. Engineers assume, more or less, that getting the thing done is a foregone conclusion. Security practitioners in IT build threat models for a similar purpose; to identify weak points in a security system.
In a more general systems sense, these activities are all more or less linked. What you’re attempting to do is expose a class of exception scenarios inside a complex system.
Doing this badly in the security field leads to what Bruce likes to call “Movie Plot Threats“, by focusing on mitigating a single instance of a possible break in a system. Doing it badly in the economics field leads to large economic meltdowns like the one we’re currently enjoying, when very large impacts are discounted as unlikely or independent in a model where they are instead both likely and linked.
One reason for this is abstraction. If you do not properly abstract a class of exception scenarios from a collection of particular exception scenarios, you build a bad failure analysis. You spend too much time (or not enough time) pursing mitigation methods that aren’t at the same layer of abstraction.
For example, if you focus too much on the strength of the lock on your front door, you may wind up buying a lock that is very good, and very expensive, and easily avoided by breaking a window. We see this sort of bad abstraction in politics all the time.
“If we just secure the border, the illegal immigration problem will go away!”
The statement may or may not be a truism, but the conclusion only follows from the premise if the premise is possible (in the particular case of the U.S., it’s not). So attempting to alleviate the exception scenario (illegal immigration) with the mitigation methodology (securing the border) is largely a waste of time and money.
Now, of course, this is oversimplified. You can mitigate *some* illegal immigration by putting *some* border securing methods in place, but you only want the barrier so high (due to cost). The more difficult you want to make it for someone to get across the border, the more money you have to pay, and in almost all cases these costs don’t scale linearly. Once you hit the inflection point where your cost curve starts to skyrocket and your return starts to diminish rapidly, you’re doing what I like to call, “circling the drain”.
Again, from a political standpoint, both parties like to circle the drain quite a bit. Not because circling the drain is fun, but because most political positions are framework arguments dealing in absolutes, and when you deal with absolutes the idea of diminishing returns is quite often conveniently ignored.
The point? Everything breaks. All models are incomplete, all engineering can only account for assumed stresses. Having things break isn’t necessarily a crisis of any sort, the question is, “what sort of crisis are we looking at?”
John Scalzi is rebooting H. Beam Piper’s classic, Little Fuzzy.
You better get this one right, John. Like, Peter Jackson does “The Fellowship of the Ring” right, not Peter Jackson does “King Kong” right.
Hi, my name is:
Pat or Patrick
Never in my life have I been:
The one person who can drive me nuts is:
The one? Holy cow, *one*?
Wasn’t like we all think we remember it was.
When I’m nervous:
My children are doing something actually really dangerous.
The last song I listened to was:
Rush’s “Witch Hunt”
If I were to get married right now my best man/maid of honor:
I’m already married. ‘Twas my bruvver.
My hair is:
Getting more gray every day.
When I was 5:
I had the most memorable birthday cake of my life.
I realized that I don’t really want anything anymore, except time.
I should be..:
When I look down I see:
The floor. Duh?
The happiest recent event was:
Can’t remember exactly. I have a happiest moment at least once a day. I have the world’s greatest wife and the world’s greatest children. Even on days when one of them is driving my bonkers, the others lift my heart.
If I were a character on ‘Friends’ I’d be:
I’m not dorky enough to be Ross, and I’m not funny enough to be Chandler. Probably Mr. Geller.
By this time next year:
I will be one year closer to my Ph.D.
My current gripe is:
The world is not a meritocracy. Why are so many idiots adroit at playing interpersonal politics?
I have a hard time understanding:
People who actively try not to learn.
There’s this girl I know that:
Really needs to find herself a good man. I wish I knew more of them.
If I won an award, the first person I would tell would be:
Depends on the award. Probably Kitty, of course, but Megan’s answer is apropos.
Take my advice:
Get a second piece of property, preferably north of California. Everybody I ever knew who was looking forward to retirement when they were 55 and not freaking out about it had two pieces of property. Also, southern latitude geography is going to get warm.
The thing I want to buy:
A house with at least 1500 square feet (1800 would be better), a large backyard, a garage with an attached workspace, solar panels, a big kitchen, and a bathtub I can actually soak in. Oh, and lots of closet space.
If you visited the place I was born:
You’d be surprised how alike it still is, and what’s different.
I plan to visit:
Ireland. And Italy.
If you spent the night at my house:
You’d agree with me on the “thing I want to buy” question.
I’d stop my wedding if:
There was a terrorist attack? Can’t think of much else.
The world could do without:
5,500,000,000 people. Give or take. Not that I’m saying people are bad or that I’m suggesting we go on a crazy killing spree, there’s just way too many of us at the moment.
I’d rather lick the belly of a cockroach than:
This is a question? I’d rather eat a cockroach than lick it, for crying out loud.
Most recent thing I’ve bought myself:
OK Go’s “Of the Blue Color of the Sky”
Most recent thing someone else bought me:
I can’t recall. Stuff isn’t really going to lodge in my head, for the most part.
My favorite blonde is:
My wife. Yeah, really. She’s HOT.
My favorite brunette is:
Both of my sisters are pretty cool. They tie.
My favorite red head is:
Red hair always makes me look twice. “And her with the freckles and a temper. OOOoh, that red head of hers is no lie.”
My middle name is:
In the morning I:
Drink about a gallon of coffee.
The animals I would like to see flying besides birds are:
I like Megan’s answer – me!
Once, at a bar:
I don’t really have any good bar stories. Plenty of good drinking stories, mind you, I just never wanted to have to get home from a bar while loaded.
Last night I was:
Awakened five times. Different sources each time.
There’s this guy I know who:
Really needs a vacation. A good vacation.
If I was an animal I’d be:
Assuming nonhuman, probably a sea otter. They’re smart and goofy.
A better name for me would be:
Gustav Salamakian (inside joke)
Tomorrow I am:
Going to the dentist, calling the doctor, going to work, emailing a group about a research project, contacting the head of campus security about a neat crisis management project, and probably drinking a beer when I get home. Or four.
Tonight I am:
Hopefully getting more sleep than last night.
My birthday is:
Right smack dab in the middle of the year.