Consulting by RPM || Free Advice Blog

Corporate Welfare Polka

I’m not sure this woman would even want my endorsement–should I send her a free copy of the Politically Incorrect Guide to Capitalism?–but I heard this on the low-budget indie station in the car and thought it was worth re-posting. (Note the audio was better in the version I heard, but this gets the idea across. If you don’t want to hear her preamble just move to the 0:40 mark.)

Know the Word

Today in church they went over one of my favorite Bible stories, when a 12-year-old Jesus was found asking questions of the teachers of the Law. I love that story because it indicates that Jesus didn’t come out of the womb omniscient, but was fully man and had to grow into His role.

This reminds me of another point I’ve been meaning to mention, which is the importance of the Law. I confess that when I decided to roll up my sleeves and read the Bible cover to cover (after becoming a born-again Christian), I had a hard time getting through Deuteronomy. The other stuff was fun, albeit with some slow parts, but come on Deuteronomy just seemed like an agonizing list of arbitrary rules. And yet look what happened when Jesus faced off against Satan himself:

1 Then Jesus was led up by the Spirit into the wilderness to be tempted by the devil. 2 And when He had fasted forty days and forty nights, afterward He was hungry. 3 Now when the tempter came to Him, he said, “If You are the Son of God, command that these stones become bread.”
4 But He answered and said, “It is written, ‘Man shall not live by bread alone, but by every word that proceeds from the mouth of God.’”[a]
5 Then the devil took Him up into the holy city, set Him on the pinnacle of the temple, 6 and said to Him, “If You are the Son of God, throw Yourself down. For it is written:

‘ He shall give His angels charge over you,’

and,

‘ In their hands they shall bear you up,
Lest you dash your foot against a stone.’”[b]

7 Jesus said to him, “It is written again, ‘You shall not tempt the LORD your God.’”[c]
8 Again, the devil took Him up on an exceedingly high mountain, and showed Him all the kingdoms of the world and their glory. 9 And he said to Him, “All these things I will give You if You will fall down and worship me.”
10 Then Jesus said to him, “Away with you,[d] Satan! For it is written, ‘You shall worship the LORD your God, and Him only you shall serve.’”[e]
11 Then the devil left Him, and behold, angels came and ministered to Him.

Footnotes:

1. Matthew 4:4 Deuteronomy 8:3
2. Matthew 4:6 Psalm 91:11, 12
3. Matthew 4:7 Deuteronomy 6:16
4. Matthew 4:10 M-Text reads Get behind Me.
5. Matthew 4:10 Deuteronomy 6:13

So notice two things. First, Satan quotes Scripture in an attempt to trick Jesus, so you’d better know it inside and out. Second, all three of the passages that Jesus uses to defend Himself come from the book of Deuteronomy.

It’s a good thing that 12-year-old had a longer attention span than I do.

Weekend Reading Assignment on Option Pricing

Back in high school I was a Star Trek geek. I remember one episode where they capture one of the Borg and come up with a plan to feed him a brain teaser that’s so complex that it will cause the Borg collective mind to explode. (Picard eventually quashes the idea because he apparently believes moral principles apply even when the fate of humanity is at stake.) I think of this episode whenever I go to Steve Landsburg’s blog.

The latest example is his post on option pricing. I am going to be a paternalist and “nudge” you to read it by posting the meat of it here:

When I was young, the pricing of stock options and other derivatives seemed like an obscure black art. Then one day Don Brown showed me a simple example that made everything crystal clear. Today I’ll share an even simpler version of Don’s example.

Imagine a stock that sells for $10 today. A year from now it will be worth either $20 or $5. (Yes, I know that real-world stocks have a wider range of possible future prices. That’s why I called this a simple example.) What would you pay for an option that allows you to buy the stock next year at today’s $10 price?

You might think you’d need a whole lot more information to answer that question. You might expect, for example, that the answer depends on the probability that the stock price will go up to $20 rather than down to $5. You might expect the answer to depend on how much traders are willing to pay for a given dollop of risk-avoidance.

But the amazing fact is that none of that matters. The only extra bit of information you need is the interest rate.

Let’s assume, for example, that the interest rate happens to be 25%. (Yes, I know that’s unrealistic.)

Now let’s price the option. The key is to focus on my imaginary cousin Jeter, who never buys stock options. Jeter happened to wake up with $12 in his pocket today. Then he went out, borrowed $8, and used his $20 to buy 2 shares of stock.

A year from now, one of two things will happen. Either Jeter will get lucky, sell his 2 shares for $40, use $10 to repay his debt ($8 plus $2 interest), and pocket $30. Or he’ll get unlucky, sell his 2 shares for $10, use that $10 to repay his debt, and pocket $0.
…
I, on the other hand, bought 3 stock options today. A year from now, one of two things will happen. Either I will get lucky and use my 3 options to buy 3 shares of $20 stock at a price of $10 each, pocketing a $30 profit. Or I will get unlucky and the stock price will plumment, in which case I will throw my option away and pocket $0.

In other words, Jeter and I are guaranteed exactly the same outcome next year. Either the stock price goes up, and we each pocket $30, or it goes down and we each pocket $0. In that strong sense, Jeter’s strategy and mine are perfectly interchangeable.

Jeter’s strategy costs him $12 out of pocket. Therefore my strategy must also cost $12 out of pocket — otherwise, nobody would ever pursue the pricier strategy. Since buying 3 stock options costs $12, the price of a single option must be $4. Problem solved.

I submit that there’s something really fishy with the above argument. In particular, I claim that Landsburg is wrong when he says that you can correctly price options without caring about the probability of a stock’s future prices or the risk tolerance of investors.

But the fallacy/hidden assumption is tucked very deeply into Landsburg’s demonstration, such that halfway through writing my Mises.org critique of it–which will run Monday–in a moment of panic I actually thought Landsburg was right.

But then I came back to my senses and finished the article.

So, in the meantime, ponder the above and see if you come to the same conclusion by Monday.

Army Uses Jedi Mind Tricks on Al Franken

Robert Wenzel tips us off to this incredible story from Rolling Stone:

The U.S. Army illegally ordered a team of soldiers specializing in “psychological operations” to manipulate visiting American senators into providing more troops and funding for the war, Rolling Stone has learned – and when an officer tried to stop the operation, he was railroaded by military investigators.

The orders came from the command of Lt. Gen. William Caldwell, a three-star general in charge of training Afghan troops – the linchpin of U.S. strategy in the war. Over a four-month period last year, a military cell devoted to what is known as “information operations” at Camp Eggers in Kabul was repeatedly pressured to target visiting senators and other VIPs who met with Caldwell. When the unit resisted the order, arguing that it violated U.S. laws prohibiting the use of propaganda against American citizens, it was subjected to a campaign of retaliation.

“My job in psy-ops is to play with people’s heads, to get the enemy to behave the way we want them to behave,” says Lt. Colonel Michael Holmes, the leader of the IO unit, who received an official reprimand after bucking orders. “I’m prohibited from doing that to our own people. When you ask me to try to use these skills on senators and congressman, you’re crossing a line.”

I’ve got a great idea. Look at the part I put in bold above. Now, one of us should call up Lt. Colonel Michael Holmes, pretending to be Lt. General William Caldwell, and then order him to use psy-ops on President Obama. See what he says.

Bryan Caplan Must Be Stopped…No Matter the Cost

[UPDATE: I took the ellipses out of the URL so now you can comment.]

(That is an old school Transformers movie reference…)

Not only has Bryan continued to preach his doctrine that “parents don’t matter” at EconLog, he now wants to elevate his views to penumbra status:

In one of my talks at the 2011 International Students for Liberty Conference, I argued that the my views on parenting and kids can and should enter the libertarian penumbra.  Yes, a perfectly good libertarian could believe that nurture is the key to child development, or that kids inevitably make us miserable.  But not only are these views false; it is both realistic and desirable for my views to become conventional wisdom among libertarians.

Don’t let Bryan’s description fool you; it is a Trojan horse. What he is here selling as “kids don’t make us miserable” is in fact the claim that “you can’t affect how your kid turns out, so stop worrying about being a good parent.”

My kid doesn’t make me miserable, but I still think I have a huge influence on how he turns out. I realize I can’t do more until I dive into the twin/adoption literature that has seduced Bryan. But I want to go on record as saying that I don’t think these views should become hip.

(Out of curiosity, how many of you who are libertarians, have libertarian parents / grandparents? Because Bryan thinks your views are genetically determined.)

Murphy vs. Famous Keynesian

Ah, but it’s the poor man’s Krugman, Brad DeLong. (At this point I can’t be accountable for jokes at the expense of DeLong, since I can plead insanity in my defense. I couldn’t help it, guys. Voices are telling me to rip on him, honest.)

Anyway, I was foolish and decided to defend Sasha Volokh from DeLong’s psychoanalysis when it comes to libertarian rights theory. (Be careful to read my endnotes in the article; I’m not so sure I would be happy with Volokh’s views in general.) Specifically, Volokh said he thought it would be immoral to tax people, even to stop an asteroid that would destroy the earth.

DeLong said that this stance was proof that America’s libertarians were “completely insane,” so naturally I jumped in.

DeLong then repeats his claims in a follow-up post, making sure I understand what he and the rest of economists think on the matter. (I actually learned about lexicographic preferences when I got my PhD in economics from NYU, but it’s good that he doesn’t assume anything on the part of the reader.)

I actually tried twice to clarify my position in the comments, but I’m prepared to move on with my life.

Sasha, if you want to buy a little Seasteading plot, where we can live free from DeLong’s astronomical tyranny, make me an offer.

UPDATE: Oh I forgot to mention: On three separate occasions I was sure someone was rushing to my defense in the comments at DeLong’s site. First up was Daniel Kuehn. “OK Daniel probably doesn’t agree with me, but he’ll at least tell DeLong to stop with the mere assertions and name-calling, and grapple with my arguments, right?” Nope: “Brad, Keynes had it right eighty years ago when he wrote of Hayek that he provided an “example of how, starting with a mistake, a remorseless logician can end up in Bedlam”.”

Then I saw Jonathan Catalan, who posts at Mises.org all the time. Surely he would come to my aid! Nope: “Second, and this is in support of Professor DeLong’s overall point, the obvious argument against Dr. Murphy is, “Do you seriously believe that people will oppose spending on the construction of a device that could potentially protect the human race?”” (No Jonathan I don’t. That’s why you don’t need taxes to fund the project. Apparently DeLong et al. think there might be a serious possibility of such opposition, and that’s why they want to make darned sure we have the option of taxation at our disposal.)

Finally, I saw Alex Tabarrok. OK here we go, at last, someone who will say, “Stop the lynching! Let’s at least address some of the various points Murphy raised in the article!” Well, not quite: “You will be happy to know that in our textbook Tyler and I use blowing up asteroids as our primary example of a public good.”

Hmmph, I see how it is. Sasha, call me.

Institute for Energy Research Publicly Calls to End Fossil Fuel Subsidies

Some of my energetic critics often claim otherwise, but for the record, IER is against all government subsidies to energy sources, whether fossil fuels or “alternatives”:

In order to truly level the playing field and allow entrepreneurs to serve consumers with the best and cheapest energy options, the federal government doesn’t need to give handouts to all technologies. Instead, the government needs to stop trying to steer the energy sector altogether. By all means, cut funding for fossil fuel sources, but cut funding for their competitors as well.

Those who oppose subsidies for “alternative” energies don’t have a vendetta against renewables, nor do they harbor a grudge against the climate. The simple fact is that fossil fuels are currently the most efficient means of delivering energy to American consumers and businesses in a convenient form, in most applications. The government doesn’t need to ratify this fact; it needs to stand back and let market forces decide which technologies are viable, and which are truly immature and therefore should not yet be deployed.

Now that we’ve cleared that up, I imagine Tokyo Tom will sing my praises. Who wants to wager?

Ac-cent-tchu-ate the Positive: The Fed’s Obscure Rule Change

Today at Mises I walk through my understanding of the Fed’s January 6 accounting rule change. My take is that the Fed’s description sounded like no big deal, because they implicitly focused on the treatment of earnings. What they didn’t mention was that their rule change shielded them from losses.

One thing: Some analysts have claimed that the Fed’s rule change would move losses on assets “from the left side of the balance sheet to the right.” I don’t think that’s correct. I think they will still mark down their assets, but instead of making a corresponding debit to their capital (on the right hand side), they will put in a negative entry under their liabilities (also on the right hand side). So the action is on the right hand side, moving something from one category to another. I don’t think the rule change affects the treatment of the left side at all.